To extend student loans we must reduce student debt

by Andrew Norton

Published at The Conversation, Monday 7 April

A Grattan Institute report I co-authored highlights student debt costs, with the finding that the government could save $800 million a year by retrieving unpaid debts from deceased estates and students who have moved abroad.

The report Doubtful debt: the rising cost of student loans found that 17% of the A$6 billion a year lent through the Higher Education Loan Program (HELP) is likely to be doubtful debt – loans that are not expected to be repaid. Total doubtful debt could reach $13 billion by 2017.

These debts have been building up since Australia pioneered income contingent loans for students with HECS in 1989. Unless people with student debt earn more than a threshold amount — $51,309 for 2013–14 — they don’t have to repay their loan. These loans aim to reduce students’ financial risks while keeping government education expenditure under control.

The success of HECS led to new income contingent loans schemes for full-fee higher education students, student amenities fees, study abroad and some vocational education students. Ultimately it all ends up as Higher Education Loan Program (HELP) debt.

Extending income contingent loans to student income support has often been suggested. According to one survey, a majority of full-time undergraduates would be interested in taking out a HECS-like loan to increase their income. A loan could improve their living standards while studying, and perhaps help them work less and study more.

Although it is stalled in the Senate, there is already a proposal to convert Student Start-Up Scholarships to a HELP-like loan. While this change would not give students extra cash compared to now, it would create a scheme that could easily be adapted to do so.

During the 2013 election campaign, the Coalition promised a HELP-like ‘Trade Support Loan’ of up to $20,000 to finance “everyday costs” for apprentices in vocational education Certificate III and IV courses.

In principle, new uses for income contingent loans are welcome. They are a good policy option for people who are unlikely to have low lifetime incomes, and so do not require a subsidy, but do have a cash flow problem.

Despite the policy attractions of income contingent loans, HELP is turning into an expensive program. On the government’s current estimates, 17% of new HELP lending will not be repaid. For 2013-14, that means $1.1 billion of the $6.3 billion in new HELP loans is likely to be doubtful debt. By 2016-17, as HELP lending increases, that figure will approach $1.5 billion.

These numbers suggest caution in new uses for income contingent loans.

With income support loans students would borrow more overall, decreasing their chances of paying back all their debt. The full-time workforce participation rate of female graduates starts declining in their late 20s and early 30s. As less than 20% of part-time jobs pay more than the HELP repayment threshold, any debt remaining by this time may not ever be repaid.

The extension of loans into the vocational education sector through VET FEE-HELP and the proposed Trade Support Loan could also increase HELP’s costs. Although some tradespeople earn six-figure sums, generally vocational education qualification holders earn less than university graduates. That would translate into lower repayment rates.

In the Doubtful Debt report, we suggest ways of reducing HELP’s costs while still protecting students from financial hardship.

The quickest way of reducing doubtful debt would be cutting the income threshold for repayment, but the report recommends caution on this idea. When the threshold was slashed in 1997-98, demand for university education from mature age people fell. Many of them work already and would have to repay while still studying. That conflicts with the goal of HELP encouraging people to study.

The threshold was increased in 2004, but the report suggests that it could be indexed to the consumer price index instead of increases in average weekly earnings. This would slow its rate of growth, and over time more people would make repayments.

Some HELP doubtful debt is caused by people living overseas. The report recommends a flat annual HELP repayment for people outside Australia, but on its own this would not make a major difference to doubtful debt. Most overseas HELP debtors eventually return and repay.

The change that would make the biggest financial difference is ending the current practice of writing off HELP debt in deceased estates. Almost all other debts, including those owed to the government, must be paid from the estate.

Most people who die without fully repaying their HELP debt will do so in their sixties, seventies or eighties. Although their personal incomes will not have been high enough to trigger repayment of all their student debt, this does not mean that they were poor. Many of them will have been in high income households. About 40 per cent of partnered female graduates earning less than threshold have partners who earn $100,000 a year or more.

The main beneficiaries of the HELP deceased estate write-off are likely to be the adult children of HELP debtors. This makes the write-off very poorly targeted social policy. If HELP was repaid from all estates worth $100,000 or more it would focus expenditure on families that are more likely to be genuinely needy.

If HELP doubtful debt costs can be controlled, there would be more scope for new uses for income contingent loans. Under current repayment policies, the level of doubtful debt suggests that governments should be very cautious about lending students larger amounts of money.

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