Tackling doubtful debt: How to keep the student loan scheme viable

by Ittima Cherastidtham

Published by The Asia and the Pacific Policy Society, Tuesday 15 April

Australian Education Minister Christopher Pyne’s higher education bill to deregulate university fees was voted down for the second time last month. This is no surprise – a bill that could lead to students paying higher fees was never going to be popular. And while the Government is right to be concerned about higher education’s financial viability, it failed to consult widely or properly explain the bill’s intention and benefits. Unsurprisingly, its public reception was mostly negative.

Yet whatever the fate of the Government’s deregulation agenda, the bill contains other measures that will help the higher education system address its serious budget pressures. These measures, which have been overlooked, deserve the Parliament’s support.

The Higher Education Loan Program (HELP) has enabled many Australians to benefit from higher education. But it has costs. The largest cost to the government is doubtful debt – student debt that is not expected to be repaid. About 20 per cent of new HELP lending – $1.5 billion this year – falls into this category. These costs can and should be reduced.

Under current laws, HELP debtors who earn below the initial threshold of about $53,000 are not required to repay. The bill proposes to reduce the threshold to $47,000 in today’s dollars, so that more debtors would have to repay. The lower threshold would in particular recover debt from many women who leave the full-time workforce in their early 30s and do not repay their loans.

But reducing the threshold is just one measure to address doubtful debt. Grattan Institute’s 2014 report, Doubtful Debt, suggests three ways to reduce the cost of HELP. Together these measures would reduce doubtful debt from $1.5 billion to $600 million, without causing hardship to debtors.

At present HELP’s thresholds are indexed to average weekly earnings. This indexation rate is more generous than the rates found in most other forms of government benefits, which are indexed to the Consumer Price Index (CPI). If HELP were indexed to the CPI, as we advocate, the minimum threshold would be $48,600 in today’s dollars.

Since growth in wages is currently slow, fewer workers with HELP debt are passing the minimum threshold and therefore doubtful debt is unlikely to significantly drop in the short term, even if the threshold were indexed to CPI. Yet over the medium term, as real incomes grow more workers will pass the threshold and start to repay their debt.

Another way to reduce doubtful debt is to require HELP debtors who live abroad to repay. At present they do not do have to do so, even if their income exceeds the repayment threshold. A flat fee for debtors living abroad that is equivalent to the minimum required payment under HELP – about $2100 a year – would remove this discrepancy.

The biggest impact will come from ending the provision that allows debt to be written off at death. Grattan data show that many debtors who earn below the threshold when they are alive are in high-income households. Their earnings are below the threshold because they choose not to work – perhaps because they are raising children or have a partner who earns well. Few are suffering from entrenched disadvantage and most will die with estates larger than $100,000. The main beneficiaries are their adult children, and there is little justification for a taxpayer-subsidised inheritance scheme.

HELP is the only liability that is not recovered from people’s estates. Unpaid taxes, fines, money owed to government agencies, and outstanding bills are all recovered. Removing the debt write-off from estates with assets above $100,000 would retain the broad benefits of HELP while saving as much as 58 per cent of doubtful debt.

The cost of HELP is significant and rapidly growing as the number of students in post-secondary education increases. Reducing the initial HELP threshold is a good start. But it is not enough.

Without fee deregulation, the total amount of doubtful debt is likely to reach $13 billion by 2016-17. With fee deregulation it would be much higher. Indexing HELP thresholds to CPI, collecting HELP debt from overseas debtors and removing debt write-off at death are necessary and fair. Together they could more than halve the amount of doubtful debt. Recovering this money from graduates who have the capacity to repay is vital to keep the government’s longstanding student loan scheme viable.