Opinion & Commentary
One cap does not fit all in HECS debt
Any lender writing off 20 per cent of its loans has a serious problem. So it is not surprising that the federal government is worried about its student loans system - 20 per cent of the higher education contribution scheme (HECS) debt is classed as "doubtful". That's about $2.6 billion Australian taxpayers may never see again.
Nevertheless, in 2003 the federal government decided to extend its student loans scheme to full-fee paying undergraduates and to students at private higher education institutions. Without price controls or restrictions on student numbers in the private sector, the potential increase in lending under the new FEE-HELP scheme was large.
To avoid a major escalation in bad and doubtful debt, the new loans for full-fee students were capped at $50,000, which after indexation is now just under $51,000.
Doubtful debt will be lower with a cap than without. After all, the government cannot lose money it does not lend in the first place. Unfortunately, it reduces doubtful debt by seriously undermining what FEE-HELP was set up to do.
FEE-HELP was intended to help students access their preferred courses by ending the "inequitable" situation of having to pay for full-fee courses upfront.
This year, however, with the FEE-HELP cap there are more than 300 undergraduate courses with total fees exceeding $51,000. The cap biases the loans scheme against courses that are long, have high costs, or both.
This means that there are no full-fee courses in medicine, dental science or veterinary science that can be entirely funded by FEE-HELP. The recent announcement of a special $80,000 cap for medicine makes no difference since all medical courses cost significantly more than this. Only three law courses come in at under $51,000, and just one engineering course. The inequitable situation remains for these courses.
While the federal government's concern about doubtful debt is legitimate, it needs ways of controlling it with fewer negative consequences.
The most effective way of reducing doubtful debt is not lending to people who probably won't repay. Older people starting undergraduate degrees aren't likely to spend long enough in the workforce to pay off their education debt, so with a credit-risk based system they would struggle to get loans. But a bright young person who wants to be a dentist is a low credit risk, and should be lent the full cost of his or her course.
Right now this is probably too big a change. The government lacks the capacity to assess individual credit risk. Lending caps are simple alternatives - provided they are set at the right levels.
The basic principle should be that students can borrow enough to complete at least one degree. The loans could cover both the student contribution amounts paid to universities by people in commonwealth-subsidised places and the fees paid for entirely unsubsidised courses. This means that FEE-HELP would merge with HECS-HELP, the loans scheme for commonwealth-supported students. With the existing separate borrowing limits for FEE-HELP and HECS-HELP, students can increase their total debt by taking both types of courses. Combining the two loan schemes gives students more flexibility as to whether they enrol in full-fee or subsidised courses.
The starting point for setting an appropriate cap should be current fees. The wide range of fees suggests that more than one cap is desirable, so that the high cap needed to fund expensive courses in human and animal health does not finance perpetual students in other disciplines. A maximum of $95,000 would cover existing full-fee undergraduate degrees apart from human and animal health courses; those latter qualifications should have higher maximums of $160,000.
To minimise the expense of increasing the cap, the government should explore several other ways of cutting doubtful debt.
Under the system at present, postgraduates are treated more favourably than undergraduates. If an undergraduate borrows through FEE-HELP, a 20 per cent debt surcharge is added to the loan to pay for lending costs and to encourage upfront payment. Oddly, there is no equivalent for postgraduates. There should be.
Like HECS debts, FEE-HELP debts are written off on death. This is a major cause of high doubtful debt, since people who earn little never pay under income-contingent systems like HECS-HELP and FEE-HELP.
However, since doubtful debt is a major obstacle to increased lending, this write-off puts the interests of the dead above those of the living. The policy ought to be changed. The tax commissioner should retain his discretion to not demand repayment where it would cause serious hardship, in this case to the deceased's beneficiaries.
Finally, the government should collect student debts from people working overseas. While collection rates will be lower without the tax system's enforcement mechanisms, in New Zealand they successfully collect repayments from more than half of their expatriate student debtors.
With tens of thousands of young Australians in the professional occupations leaving Australia for long periods each year, requiring repayment could raise many millions of dollars.
Andrew Norton's paper "HELPless: How the FEE-HELP loans system lets students down and how to fix it" was released today by The Centre for Independent Studies, www.cis.org.au
