Use super contributions to repay student loans

One piggy bank for student loans and one for retirement. from www.shutterstock.com.au

The Higher Education Loan Program (HELP) is a balancing act. On one hand, a student loan has to be repaid only if and when it is deemed “affordable” for the graduate to do so. On the other, the cost of zero real interest, delayed repayments, or no repayment at all is carried by the Commonwealth.

To governments this now looks expensive. A recent paper by UNSW tax experts highlights the problem. Richard Highfield and Neil Warren note that there are now over two million HELP debtors. They predict that in the next few years HELP debt will reach A$70 billion, and that by 2017-18:

almost a quarter of all [new] HELP debt is not expected to be repaid.

This outlook, based on the now-rejected 2014 budget proposals, may well overstate the public cost. But the trend remains. In vocational education, where diplomas yield lower incomes than most bachelor degrees, Andrew Norton estimates that 40% may never repay their debts.

Suggested reforms

Last year, both the Commission of Audit report and a Grattan Institute report looked for ways to cut the public cost of HELP. The Grattan report proposed recovery of debts from deceased estates, annual payments from overseas graduates and adjusting the setting of income thresholds for compulsory repayments. Currently, a graduate must earn just over A$53,300 to trigger the first repayment (Table 1).

Table 1. Compulsory repayments as income rises. Author provided

The Commission of Audit proposed lowering this threshold to the minimum wage, about A$33,300, to speed up repayments. It also proposed indexing HELP debts at the 10-year bond rate to charge students the full cost of government borrowing.

The 2014 budget proposed to lower the first threshold to about A$50,000, with a 2% repayment rate (A$1000 a year), and to index HELP debts at the bond rate, capped at 6%. The latter idea was dropped as it risked big compound interest effects for longer-term, lower-income HELP debtors.

HELP repayment minimisation

The Highfield and Warren tax paper found that HELP debtors often seek to keep their assessable income below the various thresholds to minimise repayments. For example, they may claim more work-related expenses, or make charitable donations. They may also avoid repayment by failing to tell employers they have HELP loans for “pay as you go” taxation, or by failing to lodge tax returns at all.

At zero real interest, with no cost penalty for remaining in debt, this is a response to the cash-flow cost of crossing a threshold. Repayments range from over A$2100 a year to over A$7900 (Table 1). If gross income is close to the lowest threshold, an extra A$100 can cut net income by over A$2000 (Table 2).

Table 2. Net income effect above or below HELP repayment threshold of $53,345. Author provided

To recoup government costs, the tax paper proposes variations on the Grattan and Commission of Audit proposals. The authors also consider the idea of a 25% loan fee, as put forward by HECS architect Bruce Chapman and Timothy Higgins of the ANU, and other options such as higher discounts for earlier, voluntary repayments.

The dilemma here is that the most widely discussed reform ideas - adding loan fees, raising interest rates, lowering income thresholds and raising repayment rates – can’t reduce costs by very much without high risks to “affordability” for low-income graduates.

The super option

An option not yet canvassed is to redirect compulsory superannuation contributions into HELP repayments. Employers have to pay 9.5% of employee earnings into super, even for low-income, part-time workers such as students. In 2012, according to a Centre for the Study of Higher Education report on student finances, four in five domestic undergraduates worked part-time. A typical student might average 20 hours a week (less during semester, more in study breaks).

A student earning (say) A$16,300 a year would pay no income tax and make no HELP repayments. But the employer must pay over A$1400 of their earnings into a super fund (Table 3).

Table 3. Part-time minimum wage: $16,300 ($17 per hour at 20 hours per week over 48 weeks). Full-time minimum wage over 52 weeks: $33,300. Author provided

Compared with a HELP loan repayment, the benefit of compulsory super to students in part-time, casual work is questionable. The Australian Tax Office reports that many younger workers move around, change jobs and fail to track or manage their super. Some 45% of those aged between 18 and 35 have more than one super account. Each year, hundreds of dollars are consumed in fees (and insurance premiums). Over time, thousands may disappear from quite small accounts.

Redirecting super into HELP repayments would reduce student debts during study, with zero impact on their take-home pay. This could continue during a graduate’s early years in work, until their income rises to (say) the first HELP threshold. As Table 3 shows, a low-income graduate earning a minimum wage of A$33,300 a year would see A$2890 go into super - more than they’d pay off a HELP loan with income of A$54,000-$65,000 (Table 1).

Table 4. HELP repayment at $53,400 versus super contribution paid to HELP at $49,000. Author provided

Table 4 shows that by redirecting super contributions, a graduate earning A$49,000 a year could repay his or her loan at twice the rate of normal HELP repayments if earning A$53,400. The debt could be cleared in half the time. Yet, in cash terms, net income in both cases is roughly the same.

With faster repayments and fewer unpaid debts, the public cost of the HELP scheme would drop considerably. This could occur without risk of hardship to low-income graduates, since the cash-flow cost of clearing a HELP debt this way is zero. In fact, becoming debt-free sooner can only help with (say) a home loan.

The new risk is that this may erode the aim of compulsory super - to fund retirements and cut the public cost of pensions. But putting super into HELP debts up to (say) age 30 would still allow most future graduates a further 40 years in the workforce.

For over two decades, HELP and compulsory super have evolved in parallel. It’s time to consider them in tandem. International students who earn super can withdraw it when they leave Australia. Why not let domestic students use it for HELP debts?