|Image source: WA Dept of Commerce|
This move is the end of the line for two incentives that have been whittled away over the past ten years. Abolishing them is expected to save $230 million.
Higher Education Loan Program (HELP)
The Higher Education Contribution scheme (HECS) was first introduced in 1989. Its purpose was to provide income contingent loans to Commonwealth supported students.
In 2005 there was a major overhaul of the scheme. Additional loans were added to create a stable of loan options under an expanded Higher Education Loan Program (HELP). HECS became HECS-HELP and was joined by new income contingent loans: FEE-HELP for students who pay full fees to study and OS-HELP for students studying overseas for one or two semesters.
These were followed by VET FEE-HELP (in 2007) for students studying higher level vocational education and training courses and SA-HELP (in 2011) for payment of student services and amenities fees (student union fees). The legislative basis for HELP is the Higher Education Support Act 2003.
There are currently two financial incentives to encourage upfront or early repayment of debt:
- Upfront payment discount
When HECS was first introduced a 15 per cent discount on upfront payment was introduced with it. The discount was increased to 25 per cent in 1993, reduced to 20 per cent in 2005 and reduced again to 10 per cent from 1 January 2012. That is, if a course costs $10,000 the student (or student’s family) who chooses to pay upfront only has to pay $9,000.
- Voluntary repayment bonus
In 1995 the government introduced a bonus for voluntary repayment (of $500 or more) of HECS debt. The voluntary repayment bonus was initially set at 15 per cent, reduced to 10 per cent in 2005 and reduced again to 5 per cent from 1 January 2012. That is, if a student repays $1,000 a loan repayment of $1,050 would be recorded by the Australian Taxation Office.
Upfront payment discounts work, sort of
When the discount for upfront payment of HECS was raised from 15 to 25 per cent, there was a gradual increase in the proportion of students paying upfront from one in five in 1990 to one in four students by the mid 1990s. Then upfront payment commenced a slow but sustained decline.
There was no unusual drop in upfront payment when the discount was reduced from 25 to 20 per cent. But when the 20 per cent discount was cut to 10, the Department of Education, Employment and Workplace Relations anticipated that half of the students paying upfront would commence deferring.
In 2010 less than 17 per cent of students paid upfront (taking advantage of the discount), 80 per cent took out a HECS-HELP loan, and 3 per cent paid upfront and weren’t eligible for the discount.
The case for removing discounts
To some extent, removal of the discounts may be defended on equity grounds. Discounts provide an advantage to those who have the capacity to pay upfront, that is, typically wealthier students or their families. The government wrote in 2011 that ‘These discounts advantage those with the capacity to pay their fees upfront. Analysis of the upfront discounts provided in 2009 showed that only around 12 per cent of these students came from low-SES postcodes.’
Short term solution, long term problem
Removal of the HELP payment incentives doesn’t actually take money out of the higher education system. Some students will, for whatever reason, continue to pay upfront and/or make voluntary repayments. In that sense, removing the discounts is taking money from those (able-to-pay) students, not from higher education. On the face of it, the government saves money.
But many more students will simply defer the entirety of their loan repayments until their taxable income reaches the repayment threshold (in 2012-13 this is $49,095). Converting Student Start-up Scholarships into student loans will also add to HELP debt.
In a recent report, the Grattan Institute reported that by mid-2012 accumulated HELP debt stood at $26.3 billion, or $19.4 billion in ‘fair value’ terms. (The government writes down the value, reflecting the hidden costs of lost interest and doubtful debts. Up to 17 per cent of HELP debt is not expected to be repaid by those whose income is too low, who move overseas, or die.)
The measures announced recently will add to HELP debt that is already high and rising. So what is a savings measure in the short term is something that will ultimately cost quite a lot.