Pearls and Irritations

As you may have noticed, the Government has announced changes to student loans and debts, subject (eyeroll) to their re-election. Tick; even the Greens are taking credit.

But, and here’s the but, they do little about how the current system, and I am moderating my language for publication, screws over students by burdening them with stonking big debts. Doing something more than just fiddling at the margins would be very, very, expensive. Fixing decades of using a group as a cash cow tends to be that. If Governments and pundits don’t want to bear the expense, OK, but in that case stop pretending to care about students past, present and future.

Some preliminaries. First, I used to run HECS (sic) for a living, but as a Delta-caste program person mostly away from policy. Secondly, Michael Keating has written on these matters, but I have some different views.

In 1989 when HECS (not sic) commenced, I had hair and a motorcycle and was studying, and a full year of study cost a flat $1800. That’s about $4700 in today’s dollars or about five per cent of Average Weekly Ordinary Time Earnings (AWOTE), which is pretty much smack on $100,000. Back then repayment started with incomes over 85 per cent of AWOTE. Compulsory repayments were one to three percent of total income. The deal was intended to be, if you paid your debt, good, if not, fine, either way, no biggie.

Today fees range from about four per cent (lower than 1989, but there’s a twist coming) to sixteen per cent of AWOTE. Repayment thresholds, having been gradually fiddled and then thrown down a flight of stairs in 2019, start at about 55 per cent of AWOTE. Repayment rates are from one to ten per cent of total income.

Starting to see the problem?

The Government has promised to increase the repayment threshold to about 65% of AWOTE on commencement. 7.5/10. They’ve also promised to change how compulsory payments are calculated. This is EMTR wonkery and Andrew Norton has written an explainer (he also has a red hot and pretty good go at explaining costings of the 20 per cent measure), but the thing here is that it further cuts compulsory repayments for people on lower incomes. This synergises (sorry) with the base-threshold increase.

The Government has also promised to take 20 per cent off the top of all outstanding student debts. Mr Keating thinks this a bad use of public money. Senator Henderson, Shadow Minister for Education, agrees and thinks it’s unfair because it tends to benefit better off people which is totally against anything the Coalition has ever done. And economists blah blah who cares this is social policy not a Friedmanite efficiency masquerading as morals issue.

I think this is a red herring, if a costly one. If the Big Debt Problem is going to be fixed, some kind of retrospective action would be desirable for equity. If not, then I would argue that it is badly targeted to the relevant population rather than a terrible idea in principle.

A person earning about AWOTE now will pay about $5500 a year towards HECS, or about eight percent of their income after tax, Medicare levy and super. A fair slice. If they have a $50,000 debt it will take them ten years to pay off; maybe six to eight if they significantly improve their financial circumstances over time.

For an $80,000 debt that might be ten to fifteen years. Ignore references to average debts of twenty-something thousands of dollars, that’s an apple not an orange. It is very easy nowadays to graduate with debts of $50-100,000. Or more.

Did I mention that the changes to repayment thresholds and repayment calculations would mean that lower-income individuals will have bigger debts for longer? That’s another issue with only giving the problem surface treatment.

“Crippling”? With current costs of living and especially costs of housing, for many people: yes. Because of the Jobs Ready Graduates reforms and indexation, as Senators Henderson and Faruqi argue? A bit, but not really. It’s mostly because of steady increases of fees over time. Take a guess which side of politics did that; though it’s not like they were in power the whole time. Anyway …

The lightning-rod for high fees is the Jobs Ready Graduates package (JRG). JRG was a cunning plan of the Morrison Government to reduce fees to encourage students towards study in worthy areas (nursing, teaching, STEM) and increase fees to dissuade study in less worthy areas (arts). This is why the range of fees in JRG world is so wide, and why the bottom rate relative to earnings is lower even than in 1989.

It failed completely because, well, there are no price signals under HECS. Oops. It just hammered students, especially arts students whose fees more than doubled.

In 2020, before JRG, fees for a full year of study ranged from $6684 to $11,115 in 2020 prices; or from about eight percent to about16 per cent of AWOTE.

Hence reversing JRG is a good start but just scratches the surface of persistent and longstanding high fees.

But undergraduate fees are not the only driver. People are studying more. It is easy, but lazy, to complain about ‘professional students’, but people need to keep learning in the modern economy. The private higher education sector is growing and students in this sector usually don’t get a direct subsidy and so pay more. Increasingly, professional qualifications are being undertaken at the Masters level. Not only is that more study but universities can also charge what they like and frequently they do. Outrageously so.

The Government is kicking JRG reversal down the road to a fabled higher education commission thingamy, and doesn’t seem to have turned its mind at all to overall prices, at least publicly. But if the PM wants to deliver on his earnest that HECS debts are not meant to be lifelong, Government needs to grab this by [insert preferred metaphor here].

Editors’ note:

This article was prepared prior to the Greens’ recent announcement about student debts.

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