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Selling off the HECS debt could be a super solution

Education Minister Christopher Pyne has confirmed the government is considering securitising Australia’s HECS debt, and has referred the issue to the Commission of Audit. This has immediately attracted…

Education Minister Christopher Pyne has flagged the possibility of selling off Australia’s HECS debt to help raise funds for the government. Alan Porritt/AAP

Education Minister Christopher Pyne has confirmed the government is considering securitising Australia’s HECS debt, and has referred the issue to the Commission of Audit.

This has immediately attracted a furious response from the Opposition and the National Union of Students.

The argument arises because two separate issues are being conflated.

Securitisation is an ugly word. The underlying concept is simple: it refers to the process of converting something into an asset which can be sold as a security. In this case, it refers to the flow of repayments of the HECS debt, which at the moment is just a taxation inflow to the government. It is quite feasible for the government to sell the right to that stream of inflows to anyone else.

In this sense the inflows of HECS repayments is no more than a stream of payments, just like the interest payments you might get on a government bond, or even the stream of dividends that Australia Post and Medicare provide to the government. From a financial point of view, the sale of Medicare is no more than someone giving the government a lump of money today in return for the right to the stream of future dividends. Selling off the HECS repayment stream is conceptually the same.

The key attraction for the government is it could convert a stream of payments in the future into cash today. This may or may not be a good idea, it simply depends on whether the government can make better use of the money today rather than by waiting. The new government clearly feels constrained from making investments today (for example in infrastructure) by the amount of debt it currently has. Selling off some assets to reduce those constraints may let it invest more in other areas.

Super diversification

The stream of HECS repayments could be attractive to superannuation funds. Fund managers need to diversify their portfolios in order to manage their risks. The HECS repayments would be a new asset which was not closely correlated with the stock market, and hence would provide some diversification benefit. As such it is probably worth more to them than it would be to the government. HECS architect Professor Bruce Chapman has speculated a sell-off could attract a tender as high as A$15 billion.

The HECS repayments could also be packaged in ways which made them even more attractive to outside buyers. Repayments by some students (for example medical students) might be much more certain of repayment than others, so the repayments could be bundled according to the degree of risk that they will be repaid, or to the extent to which they are correlated with the stock market. This sort of bundling (called tranching) is common with other assets such as mortgage repayment flows.

It would be quite easy to confuse this exercise, primarily one of privatisation, with the separate issue of changing the terms and conditions underlying HECS, fundamentally an issue of policy design.

The HECS system is fundamentally a loan scheme with the government acting as banker.

The government can probably operate the scheme more effectively than could the private banks because (i) it can offer unsecured loans to students at rates far below what banks would have to charge, (ii) it can use the taxation system to gather the revenue in a way which is probably cheaper than can banks or other lenders, and (iii) it can differentiate the repayments by making them contingent on income – a process which would be much harder for a private provider.

In its role as banker, the government might decide to reduce the subsidy or increase the repayment schedule. These are fundamentally policy issues, choices we make as a society about whom to subsidise and by how much. They have nothing in particular to do with the securitisation of the repayment stream.

It would be unfortunate if the debate about the extent of subsidisation of students was conflated with the issue of privatising the repayment flows.

The HECS repayment flows could be a valuable new asset for Australian superannuation fund, adding to the suite of alternative assets they have available for investment.

Join the conversation

45 Comments sorted by

  1. Jack Arnold

    Polymath

    Perhaps the disclaimer should identify the political affiliation of the author because this article appears to be Liberal Party propaganda.

    Moreover, to a lay person the idea appears to be very similar to the CDOs put together by US banks to extract more profits from dubious loans ... at US taxpayer expense.

    I am reminded that the PPP at Port Macquarie Hospital cost taxpayers three times the original cost, while the sale of the NSW Black Stump under the Greiner Liberal,Coalition government with a re-purchase clause exercised at the end of the 15 year term made a tidy about $15 million profit for the purchaser after 100% 5 star occupancy provided rental income throughout.

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    1. Michael Sheehan

      Geographer at Analyst

      In reply to Jack Arnold

      Jack, your analogy does have some worth. For example, instead of high credit risk Latinos and African Americans, we have Dawkins graduates in Education, Nursing, Media Studies, and Podiatry.

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    2. Robert Tony Brklje
      Robert Tony Brklje is a Friend of The Conversation.

      retired

      In reply to Jack Arnold

      The original thin edge of the wedge was HECS. Next up came continually raising it. Next it's the privatisation. Then it's the 24/7/365 infinite lobbying to, raise it higher, raise the interests rates, eliminate limits on repayment and most important of all criminalise failure to repay.
      Talk about blatant upfront in your face corruption by the Liberal Party, it's like they are desperate to get the last chances legislation for personal profits before the majority of Australians finally realise who and what the Liberal party are.
      Let's not quibble, it is time to kill HECS all together, free higher education for all who are capable of achieving it and write of the existing HECS debt.
      Rather than education for the rich only because their spawn is finding it tough going with grading adjusted on a curve and finding they end at the bottom.

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    3. Peter Redshaw

      Retired

      In reply to Jack Arnold

      Jack, not once in this article did I see anything mentioned as to how this is good for the students owing that HECS debt. Nor did I see one mention of the traditional way of government funding major infrastructure through the form of government Bonds. I know that when out of fashion with the fad of PPPs. But it seems all of this ignores the fact that government can borrow money at a far cheaper rate than the private sector.

      The fact that government can borrow money at a far cheaper rate than…

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    4. Michael Sheehan

      Geographer at Analyst

      In reply to Felix MacNeill

      felix, actually geographers are highly employable.

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    5. Jack Arnold

      Polymath

      In reply to Peter Redshaw

      Peter, as noted below there are many disadvantages for students, but then when were students ever considered important in any education system?

      Always follow the money if you want to know who is pulling the strings.

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    6. Michael Sheehan

      Geographer at Analyst

      In reply to Suzy Gneist

      Suzy, unemployment among Nursing university graduates is very high. Unlike Medicine, the number of students entering Nursing is not capped. Nursing, along with Education, was a top choice of those students who came into the 'demand-driven' system.

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    7. Jack Arnold

      Polymath

      In reply to Michael Sheehan

      Michael, the drop out rate for graduate nursing is very high, about 90% in the first two years. The usual reason given is the working conditions in hospitals being inadequately compensated.

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    8. Michael Sheehan

      Geographer at Analyst

      In reply to Jack Arnold

      Sounds like very rational decision-making to me. Maybe they should transfer to Economics.

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    1. Jack McCadden

      Analyst

      In reply to David Stein

      Well put David,

      The only point I'd raise is the potential impact on the interest rate payable on government bonds should Australia's debt continue to increase.

      We've seen the debt rating of other countries lowered due to a perceived lack of political will to address fiscal deficits, rather than the level of debt itself.

      So IF our AAA rating is at risk, then privatisations take on a different light.

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    2. Trevor S

      Jack of all Trades

      In reply to David Stein

      Pretty much as David states.

      The issue for taxpayer will be the severe haircut Government (taxpayers) will need to take to entice a private buyer. It makes no sense financially but it will probably occur because the loss of income will be an issue for some other Government to endure.

      Politically it's best to get in now, sell off a few assets, gather a war chest to ensure you can pork barrell later elections, garnering another term.

      This and shoring up the lunacy of the F.I.R.E industry in Sydney.

      Someone voted these people in and someone voted the last lot in, wasn't me, so whomever it was, shame on you :)

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    3. Peter Redshaw

      Retired

      In reply to David Stein

      David, well argued. But in all of this my concern is the lack of thought from the author in regards to the students who are carrying the debt. It is as though they are incidental and that all it is about is whether it is good for the budget and reducing debt. Your argument as to the lower cost of Treasury Bonds to private sector costs of funding borrowing negates that argument. So as argued this is purely ideological.

      The problems with selling of the HECS student debt are many and students…

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    4. Michael Sheehan

      Geographer at Analyst

      In reply to Peter Redshaw

      One of the great successes of pricing education is turning people off some types of studying.

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    5. Peter Redshaw

      Retired

      In reply to Michael Sheehan

      Michael, that is one of the problems with the way we price education. But than the way we value education right across the board is one of the other reasons that students are turned off some types of degrees or areas of study. No doubt your area of profession is one of those areas along with others like history. Both very important areas of study.

      What I found interesting was that in the recent sacking of public servants up her in Queensland under Newman and the LNP a significant number of the Geographers in Transport lost their jobs whereas most of the planners kept their jobs. You have to wonder how Planners are supposed to do their job if they don't have up to date data produced by Geographers to inform those decisions.

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  2. Paul Richards

    integral operating system

    The irony is education is to train young people to be used under limited contract as consultants to develop corporate efficiencies in profitability. With a limited few reaching corporate courtier status with the privileges and benefits promised. In effect paying to acquire for their skillset and then paying interest to corporations who use them. Good business for the national and transnational corporations.But how does this contribute to a civilised society?
    Rodney Maddock wrote; "It is quite…

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  3. Darren Kay

    Private trader

    It's true the govt hasn't released details of how HECS loans might be structured in the future as part of their 'no-policy-no-debate' stance prior to the election. We'll have to wait and see on that front.

    As for the securitisation of the HECS portfolio, is it reflective of the LNP's ongoing ideology to privatise non-core public assets? Or are the proceeds intended to fund more carbon emissions (road infrastructure)? Or retire debt, claim bragging rights of returning to surplus faster than the ALP and miraculously solve our 'budget crisis'?

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  4. N Wilson

    Biologist

    I think it is naive to believe there is not likely a political and ideological agenda in this. Pyne has both a history of ideological warfare on public education and as a serial bullduster.

    The plaintive plea from Rodney that one shouldn't confuse the issue of HECS repayments with the HECS scheme (particularly how much students pay) is unlikely to be in Pyne's mind as he floats this one to see how it is taken.

    It is all well and good to argue in theory, but what of the profit motive when the debt is privatised? And there has to be some suspicion of packaged debt being considered an asset after recent history...

    And no doubt there is also the usual Liberal 'sell the silverware' aspect to jolly up their budget in the short term to pretend they are good managers.

    I am with everyone else (the Liberal trolls haven't yet got here at the time of writing), David Stein's contribution is the most illuminating.

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  5. Michael Sheehan

    Geographer at Analyst

    There is also the issue of how competent a government bureaucracy is at debt-collecting. HECs debts are acquired with no pricing of the student's credit risk. But when it comes to HECs collection years down the track, credit risk is very really, including people who flee overseas, beyond where the state bureaucracy is prepared to chase the debtor.

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    1. Michael Sheehan

      Geographer at Analyst

      In reply to Felix MacNeill

      No Felix, not close by. I have read some stats from time to time. Surely there must be some analysis out there. Otherwise, how would the government price the sale?

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    2. Michael Sheehan

      Geographer at Analyst

      In reply to Gavin Moodie

      Gavin, in which case, the argument for selling Help debt is untenable.

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  6. Mike Brisco

    Scientist at Flinders University of South Australia

    This morning Mr Christopher Pyne's office, in Kensington Park - large converted house, expensive suburb, neat lawns, well kept standard roses - had been freshly grafitti'd in red, on the name signs.

    Some people must have got a bit angry over something Piney said. Looked like they'd been round there early this morning to put their message - "traitor", I think - on top of his name.

    Naturally, I disagree with such a method of expressing views. But I have some sympathy, with the view they expressed!

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  7. R. Ambrose Raven

    none

    Another Noalition hate-bubble, as stupid as it is ideological.

    Presumably the Noalition have decided to either lower the income threshold or scrap it completely, tearing up the principle on which HECS has operated since its inception - that repayment would commence only once a good income threshold was reached.

    Again we see this obsession with wheeling and dealing, rather than keeping a stable and reliable income stream in place. Exactly the stupid schemes that drove the asset-price bubble that collapsed in 2007. Such things are not intended to raise revenue, but to subsidise bankster profits.

    If the Noalition want higher repayments, just lower the threshold.

    Flogging it out would create the private equivalent of a significant public sector workforce to process and collect amounts that could currently be collected for no extra cost by the Tax Office.

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    1. Felix MacNeill

      Environmental Manager

      In reply to R. Ambrose Raven

      But surely it is an axiomatic truth that the private sector is always in all things more efficient than the public? I mean, haven't you counted their legs?

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    2. Michael Sheehan

      Geographer at Analyst

      In reply to Felix MacNeill

      "But surely it is an axiomatic truth that the private sector is always in all things more efficient than the public?"
      In this sense "public" makes no sense. But governments are more effiicient health insurers, that's for sure.

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    3. Jack Arnold

      Polymath

      In reply to Felix MacNeill

      Oh dear Felix, you have fallen for the commercial myth used to justify the sale of public assets into private hands.

      The present generation of public servants is at least as competent as any group in the private sector.

      Remember, it was the private sector US bankers that caused the GFC ... not government public servants who had to clean up the financial mess with taxpayer's funds.

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    4. Michael Sheehan

      Geographer at Analyst

      In reply to Jack Arnold

      Jack, I'm pretty sure Greenspan and the Federal Reserve were/are government pubic servants.

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    5. Jack Arnold

      Polymath

      In reply to Michael Sheehan

      Well actually Michael ... the US Federal reserve is a private corporation owned by a consortium of US banks that purchased it from the US government after Theodore Roosevelt bankrupted the US government in 1912.

      Even Greenspan was surprised and amazed by the unrestrained greed of the US bankers.

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    6. Michael Sheehan

      Geographer at Analyst

      In reply to Jack Arnold

      Not as surprised and amazed as at Greenspan's monetary policy post the 1987 crash through to his retirement, and especially after the tech-wreck, which was known as the Greenspan Put.

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  8. MC Loven

    hitchhiker

    shorter article: "we like to call buying cheap loans "securitisation", and once the silly social value can be ignored, we can invest the resulting money in another profitable venture, again with the minimum gain in social (ideally negative) capital."

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  9. Ken Alderton

    PhD student, former CEO

    Again I point out that the HECS scheme was brought in as as a replacement for the "fee free" system that preceded it, It was designed to maintain both the level and equity of the "fee free " but with a contribution from the users. Any changes should preserve this design.
    If the objectives of the scheme are lost in the desire to correct current budget deficits then the country will pay the cost further down the track. Future costs of current political benefits doesn't sit highin the priorities of poiticians but should be of concern to anyone with children and grandchildren

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  10. Ken Alderton

    PhD student, former CEO

    I cannot help being a cynic. This is the second article in The Conversation that seems to be promoting the idea of modifying the HECS debt by either privatising the income streams or by increasing the income stream to the government. This follows Minister of Education Christopher Pyne saying that privatisation has been “floated as an idea” and would be examined in a review of HECS by the Commission of Audit.
    The author of this opinion piece, Rodney Maddock has listed in his profile that he “has…

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    1. Ken Alderton

      PhD student, former CEO

      In reply to Remy Davison

      The scheme in your article, as far as I can see, is not simply designed to increase the income stream to the government or to private interests or relieve a budget position. It introduces competition into the system. Since the ATO still participates and the government sets the maximum fee structure they are still set the parameters of the system so that students are not disadvantaged.
      Properly controlled, so that competion is real it might very well either reduce the cost to, or produce better options for the student.
      What are the chances of it being recommended by the Commission of Audit?

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

      Adjunct professor at RMIT University

      In reply to Ken Alderton

      The US has had competing private loan schemes for higher education fees for a very long time. It is as disastrous as private health insurance which Obamacare is trying to fix. Obama has started on the mess of US college financing, but there is a long way to go.

      The White House Office of the Press Secretary (2013) FACT SHEET on the President’s plan to make college more affordable: a better bargain for the middle class, media release 22 August, retrieved 27 August 2013 from

      http://www.whitehouse.gov/the-press-office/2013/08/22/fact-sheet-president-s-plan-make-college-more-affordable-better-bargain-

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  11. Lee Emmett

    Guest House Manager

    The picture of Joe Hockey adjusting Christopher Pyne's tie says it all.

    The LNP is so self-absorbed in their own agenda that they have no idea of how ordinary people will respond to this 'idea' which seems to have come from outer space.

    Where did this proposal get any coverage in the LNP's 'Real Solutions' airbag of goodies?

    Tony Abbott and his team are attempting to introduce fundamental changes to many portfolios, including this privatisation 'lemon', without any sort of mandate whatsoever.

    This government is not only sneaky, but downright contemptuous of the Australian electorate, if they think they will get away with this sort of 'privatisation' by decree.

    Christopher Pyne seems to believe he has some sort of divine right to impose his will on the populace - his passion on Q&A last night was scary to behold.

    Fortunately in a democracy, debates will occur, and this privatisation proposal is unlikely to make its way unchallenged through parliament.

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  12. David Spence

    Chartered Accountant

    In a vague attempt to have your cake and eat it, if this securitisation goes ahead, why not make the 'buyer' be either the Future Fund or one of the Nation-building Funds?

    Education is as much part of our national infrastructure as roads and dams, and both the FF and N-b policy documents set fairly low long term roi, which should mean that the initial up-front sale price of the HELP debt may be higher than that to be obtained in an outside commercial sale.

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  13. Pat Moore

    gardener

    Well the horse's mouth (which seems all rather extraneous to the discussion) was rather adamant in yesterday's strident student (aka economic units?) protest in Melbourne that they did not want their education loan repayments privatised? That borrowed cultural symbol of shoe throwing to publically expose a liar and burning an effigy of Tony Abbott seems to indicate that not only are the students getting angry, but also that they have learnt their multicultural lessons well. Is Joe Hockey, in laughing…

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  14. Jull Sanders

    logged in via Facebook

    Have I got it right? I may have a debt and bear obligations before the government, but as soon as it is made an asset and sold, I can not be sure that no changes to my interest rate or term and conditions may be set in.
    Lucky I am not to be indebted Australian, but even with my present financial situation I have to apply for consumer loans (http://personalmoneyservice.com/bad-credit-installment-loans/) from time to time to make my payments on student loan on time.

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