You mean introduce a wonderful system like the US which has a Trillion dollars of student loan debt and of that I believe that $250billion is in appears. nothing like creating a massive millstone for people.

Absolutely not. HECS is an interest free loan paid back when the person earns enough money to afford the loan.

Indeed one way the USA can get out of its current predicament is for their government instead of printing money and giving it to the banks is to print money and buy all the student loans and turn them into Interest Free Contingent HECS loans.

Patrick,

Your parent thread, second paragraph. Having individual Universities administer debts owed to them is pretty infeasible given how disorganised most unis are already. There is no way they could be responsible for the paperwork involved with all the debts involved let alone actually negotiating terms. At the end of the day they are meant to be educational institutions so steering clear of writing financial contracts, debt collecting, modelling repayments, etc. seems like a pretty good idea if you are the dean looking over such a proposal.

Hugo,
Not sure which paragraph or thread you are referring to. I'm not and haven't advocated decentralisation of the administration of higher education debt collection. I believe this is Kevin Cox's proposal.

I couldn't agree more that universities should not be involved in the collection of such debts. I agree wholeheartedly with the comments of Gavin Moodie as to the ATO being responsible for collecting income-contingent loan repayments. My key concern with decentralisation is the increased cost of borrowing for students that is likely to result. Perfect information in the market is no substitute for security for a loan.

Apologies that was Kevin's thread I was referring to.

The tax office involvement does not simplify and cheapen the process. It may have been true 20 years ago but today there are much much cheaper more efficient ways of collecting repayments.

Private loans are not the same as HECS loans. Private loans are not income contingent and they impose interest charges.

With HECS most people take them out and there is little adverse selection. The default rate for Australian residents is low. If the Universities take over the existing portfolio of income contingent loans they will have the funding to support new loans and they will have the means to collect repayments from non residents.

Ok, so assume that a university arranges a loan for 1 of its students. How would it know the student's income from which to calculate the amount to be repaid? It would need some way of verifying the student's statement of their income, presumably by inspecting the student's tax assessment. But why move from the current system where all this is handled by the Australian Tax Office to another system which would require multiple handling by a university, student and the tax office?

Having assessed a student's liability the university would have to invoice the student, collect the payment and verify the payment. This would have to be repeated for each payment - annually for some students but more frequently for others. Each university would have to establish its own collection system. But why go to this expense and trouble when the Australian Tax Office already has a system for assessing, collecting and verifying payments?

Again with defaults. The Australian Tax Office has very strong coercive powers which make enforcement of Hecs debt relatively simply. In contrast a university - or more likely, its debt collection agency - would have to track down a student debtor, issue a writ, sue on the writ and then enforce the judgement. The cost of this is indicated by the heavy discounts at which debt collectors resume debts.

Aside from the matter of enforcement and regardless of whether the loan provider is the university or a private lending institution, how are students going to provide security for private loans? There is not in Australia a lending culture of providing long-term loans to students as there is notably in the US. This has become a roadblock that the Melbourne Law School and University of Melbourne have hit in trying to provide a solution to the FEE-HELP deficit for Juris Doctor (JD) students. The deficit affects 50% of JD students and 30% of medical (MD) students at the University of Melbourne and is increasingly problematic at other universities increasing their post-graduate numbers (Monash, RMIT and UWA to name a few).

The FEE-HELP deficit between the $89 706 loan limit (this is the limit for all higher education 'clusters' other than Medicine, Dentistry and Veterinary Science where the FEE-HELP limit is $112 134) and the actual cost of the degree has undermined accessibility which is a principal virtue of the income-contingent loan structure. The cost of the Juris Doctor at the University of Melbourne, where law can now only be studied at the graduate level, will be over $103 000 for the cohort entering this year (see - http://mulss.com/fee-help). The cost of the Juris Doctor degree is also increasing well above the rate of inflation. This gap of $13 000-$14 000 itself has crossed the threshold to a level where unsecured private loans are inaccessible. The issue is exceedingly worse in the medical faculty with the cost of the degree upwards of $230 000 (see - http://www.theage.com.au/victoria/doctor-dream-at-a-nightmare-230000-20110416-1ditb.html). This deficit would require nothing short of a house as security for a private loan.

Income-contingent loans have made an invaluable contribution to the accessibility of higher education for all Australians. This has now been undermined by the proliferation of FEE-HELP places and the FEE-HELP loan limit not keeping up with the cost of higher education.

Gavin,

The trend in all information systems is towards what is called User Managed Systems. What this means is that the principles of the supermarket are moving into the provision of financial and other information services. What this can mean is the individual gathers together all their information - including their tax returns and presents to "a HECS system". The amount of repayments is calculated and deducted from their bank accounts or salary. It is very difficult for people to cheat such a system as the same information they have given to the tax office is given to the HECS system. They can only cheat if they cheat the tax office.

Indeed I would go further and suggest that we abolish the role of the tax office as an agency for collection of tax and contract it out to private companies to collect tax. The tax office can then act as an auditor, policy setter, and enforcer of tax laws. It doesn't have to be in the business of collecting tax. The tax office is already outsourcing much of its tax collection through PAYG, GST tax collections, etc. If it out-sourced the whole of collections this would save the community large amounts of money.

In the case of student loans the community benefits from increased tax on the increased income of trained people. This means the community as a whole can afford some defaults on those people who die before they can repay their debts or who never earn enough income to be in a position to repay their debt.

Patrick,

If the Universities were in control of the loans then they could increase the HECS loans for different courses. HECS is a great system. It can be made better and more flexible by taking enforcement and collection of repayments from the tax office and giving it to the Universities.

@Patrick

This is a very interesting post and you raise an interesting and important question. I, also, think the US experience is informative.

However, I suggest that most loans in the US were private not because of any cultural difference, but because the federal government guarantees and subsidises private loans - at great expense, incidentally. But private loan funding evaporated with the global financial crisis and now all formerly private loans are by the federal government's direct lending program.

This doesn't solve the US' problems with financing its higher education, however, because the US federal loan which is available to all students (there are several different federal loan schemes) is uncapped. So US universities can and do charge extraordinarily high fees knowing that students can cover them with a federal loan. Clearly no one would wish that nonsense in Australia.

The University of Melbourne charges $102,897 for each of the 3 years of its graduate entry law program. Had that program remained undergraduate entry the university would have been restricted to $11,286 per student per year. So the university's graduate entry program is 9 times more expensive than the undergraduate program. I'm not sure that it is strictly relevant, but even taking into account the fact that undergraduate law programs are 4 years still makes the University of Melbourne's graduate entry program 3 times more expensive than undergraduate programs.

I think the University of Melbourne's graduate entry programs should be supported because they offer a valuable alternative what what has long been the standard arrangement, an example that is now being followed by the University of Western Australia. But I don't think the government should subsidise the enormous price premium that the university is charging its law students.

But why is 40 universities collecting data and calculating and deducting payments more efficient than 1 agency, the tax office?

Gavin, I appreciate your response to my tangential comment and thanks for the insight on the US system. To clarify, the $102 897 figure is the total cost of the JD program over 3 years. The fee is $4287 per course with 24 courses. The cost has been increasing above well above inflation. The University has offered the troubling assurance that it will not increase the fees above 10% in any one year but at the last increase of 8.3% it doesn’t mean much.
How can the graduate programs be supported without the government subsidising them to a degree? If income-contingent loans continue to be a feature of higher education accessibility in Australia, isn't the government subsidising universities to a significant degree in that they accept the differential between the total loan debt and the fair value of that debt?
I do understand the consequences of increasing the FEE-HELP loan limit to cover the cost of the programs, or offering a FEE-HELP loan that is mandated to be equal to the cost of the program undertaken, in that universities will have the incentive to increase their prices again and maintain the cross-subsidisation practices that sustain a broad base of higher education disciplines. I’m interested to hear your thoughts on what can be done for the students that are now staring down the barrel of a debt that is significantly larger than the FEE-HELP limit. Presumably this represents the coming of a storm rather than an isolated shower.

Kevin, I am not sure if this is your proposal. Do you propose that income-contingent-loan limits are set by the same institution that sets the fees? If so, wouldn’t that create price spiralling in Australia that would dwarf the US higher education financing issues?

The user is the individual not the University. The University sets the rules for repayments, and monitors that they are made.

There millions of users (students and alumni) all collecting data, calculating, and making payments - but they all use the similar systems that administer their own loans.

With modern technology we can replicate systems easily and we do it once and millions or billions then use the same system. Our current economic systems are designed around the idea of having intermediaries like tax offices, or universities or banks doing things for us. Instead of thinking of a University or the tax office managing our loans we can think of individuals managing their own loans.

Once we start thinking this way then many things that were once impractical or inefficient or risky become doable.

For example, the lender of the funds does not have to be the University. It could be a parent's self managed super fund. It could be a special fund set up for those from disadvantaged back grounds. It could even be funded by governments "printing money" on which zero interest is paid without running the risk of the printing of money causing inflation.

Thanx for your clarification.

The Australian Government already subsidises fee help by not charging a real rate of interest. It increases the outstanding debt by the consumer price index to maintain its present value but does not charge for the provision of funds. The Australian Government also subsidises fee help by not charging for its write off of unpaid loans.

The answer to your question depends on what fee premium one thinks it is reasonable for the Australian Government to underwrite and subsidise. If $102,897 is the total cost of the University of Melbourne's graduate entry law program that works out at $34,299 per equivalent full time year, which is 3.0 times the maximum rate at which undergraduate programs are funded.

The current fee help limit would allow a university to charge $29,902 each year for a 3 year program, which is 2.6 times the maximum undergraduate rate. It is a matter of judgement, but my own view is that a premium of 2.6 times the maximum undergraduate rate is enough and that the public shouldn't underwrite and subsidise a higher fee premium.

Compare the University of Melbourne's graduate entry law program with its graduate entry teacher education program. The University of Melbourne charges full fee paying domestic students $19,829 per equivalent full time year for its graduate entry teacher education program, which is 31% higher than the maximum undergraduate rate and well within the fee help borrowing limit.

The difference between the University of Melbourne's 31% premium for its graduate entry teaching program and its 300% premium for its graduate entry law program suggests to me that the university is setting its graduate entry law fee by what it thinks the market will bear.

In my view the better response to this is not to pressure the Australian Government to subsidise and underwrite the University of Melbourne's very high law fee premium, but to expose the university to market forces. Other universities offer very good law programs for lower fees and of course most law programs are offered for maximum Hecs. I would transfer to one of those.

So now you want 1 software system but managed by 40 universities. I still don't understand how this is more efficient than 1 system managed by 1 body, the Australian Tax Office.

Instead of having loan funds provided from 1 source (consolidated revenue) you want them provided by 40 different sources, each managed separately. Instead of having funds provided at the Government borrowing rate you want them provided at a private borrowing rate. Even the most secure of privately sourced funds have much higher borrowing costs than the Government.

Gavin,

I will write an article for the Conversation explaining the architecture of modern information systems. You see the principle at operation with EBay, PayPal, Google, Wordpress, Twitter. The difference from these systems and a HECS loan system is that there will be many software systems providing HECS loan services and competing for students and Universities. Who oversees the systems does not matter providing the rules of operation ensure loan repayments are honoured.

The current monetary system is flawed because of the way credit is introduced into the system. There are other ways of increasing the money supply than lending against other loans (which is what happens today). Your can lend against existing assets which happens today or you can lend against future assets. One way to do this is to give credit to students to be used for education. That is the HECS system. The loan funds can be provided to students through a body such as a University or some other organisation that has an idea of the value of an education so knows how much is safe to lend. In the case of HECS most of the funds for new loans can come from repayments of existing HECS debt and the government will allow the Universities to create a limited amount of extra credit if there is the demand and the capacity of the education system to absorb the extra demand. If Universities get most of their funds for new loans from repayment of existing loans then they have incentive to get the repayments and not to make loans that will not be repaid.

But who oversees the Hecs system is crucial for the cost of funds since Government capital is much cheaper than private capital. It is also crucial for the cost of collection because the Australian Tax Office has inspection and enforcement powers much greater than private bodies.

No one lends against future assets without either security or a high premium for risk. Since slavery was abolished there has been no security for human capital, in which case lenders charge a very high premium for unsecured loans, as Patrick Easton is finding for graduate entry law.

Do you expect the price ceilings mentioned by Davis (http://www.theaustralian.com.au/national-affairs/opinion/love-child-of-milton-friedman-and-vladimir-lenin/story-e6frgd0x-1226292568414) would match the FEE-HELP loan limit and both of which would be set by the government? And is the ceiling likely to differ depending on the discipline cluster?

Thanks for your time Gavin.

Australian universities are dominated by students from high and high-medium socio economic backgrounds. So ending Hecs would be regressive in transferring resources from low ses to high and high-medium ses people.

There is no evidence that Hecs reduces higher education participation by any socio economic group, including people from a low socio economic status background.

So nothing would be gined and much would be lost by ending Hecs.