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Deregulate HECS already!

Deregulating HECS would encourage choice and flexibility Monash University

Last week’s story on The Conversation saw HECS architect Bruce Chapman bemoaning lost tax revenue from graduates who flee overseas away from the clutches of the Australian Tax Office (ATO).

Here’s an idea: how about deregulating HECS loan repayments?

After all, utilities have already been deregulated, resulting in the emergence of private markets for gas and electricity retailing throughout Australia. Utilities retailers obtain energy supplies from wholesalers. Consumers simply choose their retailer according to price and service. If you want a better deal, dump the retailer at no cost and sign a contract with a new one.

Credit cards work in a similar fashion. Vendors offer products differentiated via incentive schemes (interest rates; balance transfers; interest-free periods; reward points; annual fees).

HECS could operate in a similar fashion, and there would be benefits for all arising from market deregulation.

Instead, the Federal Treasury and ATO (as debt collector) operate an inflexible, virtually-integrated upstream monopoly, where the Commonwealth owns virtually all of the suppliers and sets all prices.

The Commonwealth government already does it

Remember when David Kemp privatised the employment agency functions of Centrelink? A certain T. Rein made a fortune out of it, just in case you’ve forgotten. I haven’t come across anyone arguing that Centrelink should re-assume this responsibility because they did such a great job.

And while the Commonwealth delivers Medicare, it also co-exists alongside a subsidised, profitable private health insurance industry. And no one’s arguing that the Feds should re-regulate health insurance, abolish private providers and assume full responsibility for all health care, are they?

What’s the business model?

Clearly, the ATO would have to wholesale HECS to the retail sector at a price that is lower than the current market rate, so that HECS providers could operate profitably. So the wholesale floor price for HECS debt would need to be x per cent below the retail price.

But the ATO benefits. Why? Because HECS retailers will buy debt wholesale and pay up- front to the ATO.

HECS providers could bundle incentives into their products

And if HECS providers want to charge higher prices by partnering with corporations to sell ‘beyond-the-box’ products, that could deliver real value to students, good. Like phones, car loan discounts or bundled (very pricey) chemistry or law textbooks. The sky is literally the limit. And the ATO can deliver none of these things, partly because it lacks the imagination.

Students benefit

How? By having the right to choose the most competitive and attractive HECS provider for their course. To protect students, the Federal Government would need to regulate maximum prices (just as it does now by setting the cost of subjects and courses) to prevent retailers from price gouging, collusion or cartelisation. Regulation would fall within the ACCC’s purview. That’s what they’re paid for.

University admissions criteria remain the same

This is not a cunning scheme so students can obtain back-door admission to medicine or law without gaining the ENTER score. Students will still need to gain admission to their course of choice and then choose a HECS provider.

The ATO can still play

If students choose to go with the ATO as their HECS provider, fine. That’s what it’s all about: choice. And choice is good, wouldn’t you say?

Incentives plus

Assume the HECS retailer wants to build market share and customer loyalty. What better way than to give discounts, or even free subjects? Full time students might take 8 subjects per annum. Sign up for 16 subjects (2 years) and receive the cost of the 16th subject free. Or at a discount for paying up front (just as HECS operates right now).

Make it flexible

Do you want to make extra repayments of your HECS debt at any stage? Go right ahead. And firms can introduce incentives to encourage voluntary additional or early repayments. This is a lot better than the route the Commonwealth is travelling: HECS bonuses for voluntary repayments over $500 were reduced from 10% to 5% on January 1st, while HEC price discounting has decreased from 20% to 10%. Typical market behaviour of…monopolists.

What if HECS retailers go bust?

Happens all the time in the retail sector. The natural tendency of firms under imperfect market conditions is to gravitate towards an oligopolistic market, with only 3 or 4 players left after a few years. More successful retailers would take over business failures. If no firm is willing to merge or take over a failed retailer, then the ATO could simply assume responsibility for the HECS contracts. After all, they’ve already got that firm’s money.

But…but…it’s inequitable

No, it’s not. Until 2012, wealthy people got a steep 20% discount if they covered their kids’ tuition costs. They still get 10% off. Deferred repayments would kick in when taxable income reaches $47,196 per annum. Just like it does currently.

Critics of inequity should target the ATO, which also king-hits graduates who choose careers in the non-profit sector: charities and the Red Cross, for instance. To attract qualified graduates, non-profits pay lower-than-industry salaries, but offset this utilising salary packaging, meaning a portion of an employee’s income is taxed at a lower rate. But the ATO creates an entirely illusory world where it calculates HECS repayments on the basis of the employee’s ‘purported’ salary. And they also hit these employees with FBT. Touché.

Tertiary education should be free

Sorry, but we are not living in the People’s Republic of Brown, despite widespread evidence to the contrary. Education costs real money and the Commonwealth subsidises the real cost of tertiary education anyway.

That said, the Commonwealth only pays approximately 40% of the recurrent funds going to universities. The rest comprises fees, research grants and consultancies. Don’t kid yourself that the Feds are still living in the Whitlam era. They’re not. And your HECS repayments go directly into consolidated revenue.

The Commonwealth only pays 40% of the recurrent funds going to universities

The transaction costs

Treasury may need to take a financial hit in the longer term, as the cost of HECS retailers buying blocks of debt today (at current prices) may impact Treasury’s longer –term revenue stream, bearing in mind the rate of CPI indexation, which currently applies to HECS debt. HECS is 100% interest-free.

The upside for Treasury is that it gets the revenue now in current dollars from the HECS retailers, not 5 or 10 years down the track (ergo, dollar depreciation, which almost always outpaces CPI). Grads who head overseas have already signed up with a HECS provider (sure, they may opt to sign with the ATO, but that’s Treasury’s problem).

Think big

And, while we’re on this, why not a deregulated market in overseas student fees? Over 430,000 international students were enrolled in Australia in 2010. They’re worth $18 billion to the Australian economy in a good year, and education is by far our largest services export. What could be better than firms marketing Australia’s education system globally (and I don’t mean the bored, subcontracted Oz uni spruikers at international education expos), particularly as this market has become especially cut-throat since 2008, as the US and UK ramp up their product marketing ever more aggressively.

It will never happen

Possibly true. The ATO has its fat fingers so deep in the till that it’s impossible to extricate them. But as virtually every state and Commonwealth government has dealt itself out of ownership of everything from airlines to banks to utilities, it’s difficult to defend the proposition that the Commonwealth needs to play monopolist with HECS.

Now taking bets on whether the ATO audits me this year…

Join the conversation

9 Comments sorted by

  1. Andrew Norton

    Program Director, Higher Education at Grattan Institute

    From a student's perspective, the advantage of the ATO scheme is that the government is prepared to spend/lose huge sums of money on the HELP scheme, currently estimated at around $1.4 billion a year. That's about $600 million in doubtful debt and about $650 million in interest subsidies, and a few other smaller costs like the discount Remy mentions (the policy rationale was that it was better to offer the discount than to pay the interest subsidy or take the risk of non-repayment, but in reality…

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  2. Misha Ketchell

    Managing Editor at The Conversation

    What a fascinating post. The level of possible complexity is a little frightening, but the idea of a free market for HECS debt is one I've never heard before.

  3. Gavin Moodie
    Gavin Moodie is a Friend of The Conversation.

    Adjunct professor at RMIT University

    The author's proposal would make Hecs much more expensive because private borrowers pay more for funds than government borrowers and because private lenders don't have the coercive loan enforcement powers of the Australian Taxation Office.

    The author seems to want to introduce to Australia the private student loan market that existed in the US before it was wiped out by the global financial crisis. Like health insurance, it was very expensive, very inefficient and heavily subsidised by government. Australia's experience of private health insurance is why it should avoid introducing a similar mess for financing tertiary education.

    The author proposes 'a deregulated market in overseas student fees' but Australia already has a deregulated marked in fees for international students.

    1. Remy Davison

      Jean Monnet Chair in Politics and Economics at Monash University

      In reply to Gavin Moodie

      Thanks very much for your comments, Gavin. A couple of points in reply:
      1. The HEC providers' loans would still be collected via the ATO. The ATO would simply repay the providers. I am not proposing establishing a new debt-collecting class.
      2. True, Australia deregulated international student fees. But, as you're aware, this was a 'soft' or minimalist deregulation where there is no relationship between markets (demand/supply) and course cost. On average, international fees subsidize domestic places…

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    2. Andrew Norton

      Program Director, Higher Education at Grattan Institute

      In reply to Remy Davison

      I don't think there is anything 'soft' about the international student market - it is very competitive, and this is reflected in the wide range of prices observed. Some brands can charge more for very similar products, but this is common in many market -clothes, cars, etc. They make a trade-off between volume and price to maximise profits and prestige. Other unis charge less to ensure that they attract more price sensitive students.

      After the cost data reported in the base funding review, I think we need to be cautious about the cross-subsidy argument. It is true in some disciplines (eg business courses) but not generally. What profits from the internationals mainly do is prop up the teaching-research employment model of universities.

    3. Gavin Moodie
      Gavin Moodie is a Friend of The Conversation.

      Adjunct professor at RMIT University

      In reply to Remy Davison

      I agree with Andrew that competition between Australian institutions for international students is robust.

      There's no restriction on domestic students changing institutions.

      International students are generally not permitted to change institutions within their first 6 months of enrolment. This is to stop sharp and exploitative practices by some agents and their institutions. It was examined in detail in Knight's (2011) review of the student visa program 2011 but retained notwithstanding its restriction on students' flexibility. However, they are free to move after 6 or 12 months.

  4. Richard Huysmans

    logged in via LinkedIn

    Definitely a thought provoking article. What of the implications of encouraging private debt collectors to go after students and/or moving students into other debt associated products such as credit cards and personal loans?

  5. Marcus

    logged in via Twitter

    You seriously think that the privatisation of utilities and Centrelink has been a success??? Consumers cannot "simply choose their retailer according to price and service". It is an extremely convoluted process and almost impossible to determine what the actual price will be. In the end all providers have pretty much the exact same prices and service, just worded/calculated differently. And you cannot "dump the retailer at no cost" because most people will be on a 24 month contract that involves cancellation fees. And don't even get me started on the 'job network'. You have obviously never been inside one, or tried to change your electricity company.