Don’t sell off HECS: reforming student loans could bring in real savings

Potential changes to the ownership of student loan repayments could make reform of the system more complicated. Student loan image from

According to the budget papers, Australian students and former students could owe the government more than $40 billion in unpaid Higher Education Loan Program debt by 2017.

Unsurprisingly, HELP, formerly known as HECS, is starting to attract political attention. Education minister Christopher Pyne has said that the Commission of Audit, which is currently looking for savings in the federal budget, is going to look into whether “securitising” this debt would be better than leaving it on the government’s books.

HELP does have financial problems, but securitisation – selling the rights to future income streams from student repayments – does not of itself solve them. The danger is that it could create additional political problems that make reforming HELP harder.

HELP has two main financial issues, high doubtful debt and interest subsidies. The budget papers estimate that 19% of new HELP debt will not be repaid. There are interest subsidies because the government indexes HELP debt at inflation, but itself borrows at higher rates. As a result of the issues, the estimated market value of HELP debt is much less than its face value.

The $26 billion HELP debtors owed in 2012 is written down to $19 billion in the government’s balance sheet.

As these numbers imply, HELP is generous to students and former students. They don’t pay anything unless they earn at or above $51,309 a year, and this threshold is increasing in real terms as it is linked to average weekly earnings. If HELP debtors go overseas they don’t pay anything, and the debt is written off if they die. No other publicly available loan has such soft terms.

Put in annual terms, HELP’s costs are estimated to be $1.7 billion a year by 2016-17, equivalent to nearly a quarter of what the government expects to spend on tuition subsidies. The higher education cuts announced by the former government earlier this year that caused so much angst in the sector would be unnecessary if HELP’s costs were brought down.

The cost of HELP is also a potential obstacle to further uses for income-contingent loans. The Universities Australia student finances survey found that most full-time undergraduates would be interested in a HECS-like loan for living expenses.

In principle this is a good idea, but aside from it directly replacing Youth Allowance – as is happening with the Start-up Scholarship – it is hard to see the government agreeing to it on HELP’s current arrangements.

Securitisation does not of itself solve these problems, although it would mean that private investors incur the risk of doubtful debt being worse than forecast by the sale price. What it could do is create pressure from the finance industry to increase the value of future HELP repayments.

Opposition higher education spokesman Kim Carr objects to selling HELP debt for this reason. Private investors would want repayment rules less favourable to students and former students. But another way of looking at this is that securitisation would make it more difficult to reform HELP.

History tells us that it is hard enough to reform higher education finances when the beneficiaries are other students or other government priorities. HECS was bitterly opposed by many when introduced and still remains opposed by some, despite its success in expanding access to higher education. That the proposed higher education spending cuts were to fund schools did not save the then government from near-universal condemnation.

Reducing HELP’s costs to increase the profits of investors would be a near-impossible political sell. After all, the finance industry does not attract public sympathy.

There are also many potential changes other than securitisation that are worth considering. These include lowering the threshold at which HELP repayment starts, collecting from HELP debtors working overseas, charging real interest, and removing the death write-off of remaining HELP debt. Other countries with similar loan schemes already do the first three things on this list, and we could too if the public believed the savings would be well spent. A Grattan Institute project is looking into these options in more detail.

Selling HELP debt to private investors could give the government billions of dollars in the short term, but reforming HELP could lead to billions more in repayments over the long run.