How selling off student debt will affect students: it won’t

Would selling the student loan debt really be such a bad thing?

The cost of the national student loan debt held by the federal government has gathered pace to pop the A$30 billion mark, perpetuating rumours that a debt sale could be on the cards. Should that happen, it wouldn’t be a bad thing for students.

We first need to understand how the cost of the debt has grown so large. Australia recently removed the cap on the number of undergraduate university places, opening the doors to thousands of students who wouldn’t otherwise have gone to university. Many of these students came from disadvantaged backgrounds, or were the first in their family ever to set foot inside a lecture theatre, particularly so in regional areas. The uncapping of student places will prove to be one of the most under-recognised nation-building initiatives of our time. It will return a social dividend over the career span of every student who benefited from it.

But it has come at a price. All these new students became eligible to apply for a government HELP loan to assist with the cost of tuition, increasing the HELP debt owed to the government. There has been a $1.6 billion increase in HELP costs in 2012-13 alone.

I would be the first to call this a long-term national investment. But in reality the Treasury budget is no magic pudding and we expect the government to balance its books.

I’d be surprised if the Commonwealth were not considering three obvious options to bring the growing HELP debt under control. The first is to once again cap university places. The second is to change the loan contract terms in the government’s favour. That could mean charging interest on student loans, lowering the salary threshold at which repayments begin, or even chasing down debts from students who die or work overseas. The third option is selling HELP debt to banks and using the money to continue the uncapped student scheme.

Does it matter to the student who they repay their loan to?

Choosing option one - capping student numbers - would be a national tragedy. Option two – being tougher on loan repayments – could create a disincentive to study for all but the more privileged of students. Option three, however - selling, or to be more accurate, securitising the debt - should have no effect on students whatsoever.

Here’s what would happen if the HELP debt were securitised. Students would still enter into a loan contract with the government, as they always have. The government would still be the financier of that loan - that would remain unchanged too. And the government would continue being the collector of debt repayments through the Tax Office.

What would be different is that the Commonwealth would sell the rights to its $30 billion stream of long-term debt repayments at a reduced price of, say, $15-$20 billion today. Yes the government short-changes itself a little in the process, but it removes debt from its books while receiving an immediate cash injection - as opposed to waiting years to see that money trickle in.

In this scenario, nothing changes for the students. They continue to make their repayments to the ATO, most commonly via salary garnishing. But the ATO then hands that repayment to a bank that bought the right to the debt.

Not only is this the only option that spares students, but it gets the government out of its financial pickle as well. The bank wins because they love holding other people’s debt and since they don’t have to go to the polls every three years, they can afford to be patient.

Eventually they will recover more from that repayment stream than what they initially paid for it, although they won’t ever recover the full debt amount. There will always be a proportion of bad debtors but this would be factored into the sale price.

Critics of this plan claim there could be pressure from the banks for the government to sweeten the deal at the expense of the students. This could come in the form of interest being applied to the loans, repayments starting at a lower salary threshold, or even dead students being pursued for unpaid debt. However these are fairly weak arguments because the government could make these changes tomorrow, and enjoy the extra loan repayments all to itself, without having to bother with a securitisation deal.

There is plenty of discussion around where the value in this deal lies for government and for the banks, but virtually no debate on what is best for students. If selling the debt helps secure the future of the uncapped system, providing places for students who would not otherwise go to university, then it’s a no-brainer for me.