Student debt should be tweaked, not sold

by Andrew Norton

Published by The Drum, Monday 4 November 2013

With its relaxed repayment requirements, student debt was never meant to be a money spinner, and by selling it the Federal Government would just lose even more, writes Andrew Norton

After the 1990s privatisations, student debt is one of the Federal Government’s few remaining saleable assets. After weeks of speculation, Education Minister Christopher Pyne has confirmed that the Government will look into whether it is “sensible” to sell it. The Commission of Audit will look into the details.

The Commission will almost certainly find that the Government should not sell the debt or rights to future repayments. Partly by intention and partly through design flaws, Higher Education Loan Program debt could only be sold for much less than the amount originally lent. The Government would be better off reforming HELP and increasing its future repayment revenues.

When HELP’s predecessor HECS was introduced in 1989, the government never expected to recover all it lent. There is no credit check. Any Australian citizen can borrow if accepted into an eligible course. The current threshold for repayment of HELP debt is $51,309. Below this, HELP debtors pay nothing for their education; above it, they pay at least 4 per cent of their income until their debt is repaid.

An income threshold is integral to the policy goals of HELP. It is supposed to help students and graduates spread their income and expenditure over time, and to reduce the risk of study not paying off financially. But other aspects of HELP seem unnecessary to these goals, and greatly reduce its value as a government asset.

The government writes down the value of HELP significantly because it cannot collect outstanding HELP debt from deceased estates. Death write-offs are not yet a frequent occurrence because HELP is used mainly by young people and started less than 25 years ago. As of 2011, fewer than 10,000 of the 2.7 million people who had taken out a student loan had died without fully repaying. But the Government predicts that 19 per cent of new loans will not be recovered, and death before repayment is the reason.

Another major cost of HELP is interest subsidies. HELP debt is indexed to inflation, but because the government borrows at a higher rate, there are substantial costs in holding student debt. New Zealand and England also have income-contingent loans and use real interest rates on at least some of their student debt.

Principally because of the death write-off and interest subsidies, HELP debt is already valued by the government at much less than its nominal value. As of 30 June 2012, its nominal value of $26 billion was written down to $19 billion.

Realistically, investors would pay much less than $19 billion to buy the HELP debt. Even if they take a more optimistic view than the government of the long-term risk of non-repayment, they face a greater cost of capital than the Government. Any price they would pay would have to reflect that cost.

Grattan Institute analysis using corporate bond rates suggests that the government could expect to receive $12-13 billion for the HELP debt currently valued at $19 billion, losing $6-7 billion of its reported book value.

The government publishes only limited information about projected future HELP debt, but we know that lending is escalating rapidly. This reflects increased enrolments in public universities after previous caps on student numbers were lifted and making HELP loans available to students in vocational education. During the election campaign, the government promised new loans for apprentices to cover their “everyday costs”. If these new loans were taken into account, the long term costs of selling HELP debt would be even higher.

Selling HELP debt relieves short-term budget pressure by moving future income into the current period. But it would make the government’s medium and long-term finances significantly worse.

The Commission of Audit is likely to quickly realise that holding the HELP debt is the right choice, and that reforming the HELP repayment rules is the way to improve the government’s finances.