Budget Forum 2017: Changes to HECS-HELP and University Funding

Budgets are always contextual and reactions to them will be relative to both alternatives and the status quo. The natural comparison of the 2017/18 changes to outlays and HECS-HELP is still the extraordinary 2014/15 Budget plans of the previous Education Minister, in which there were to be initial outlay cuts of around 20 percent, the imposition of a real rate of interest on HELP debts, and the introduction of the facility for universities to charge any fee they chose.

If that is the point of comparison there will be a collective sigh of relief from the sector, particular because this is the first Budget of a likely three-year term, when the worst is always expected. If the 2014/15 Budget for higher education was a man or woman-eating crocodile, then this is a pussy cat. Not a welcome or pretty pussy cat, it should be emphasized, just not frightening.

With respect to outlays and student debt arrangements, the main proposed changes are:

(i) An “efficiency dividend” – read, a cut to outlays – of about 5 percent, half each in 2018 and 2019;

(ii) For HECS-HELP, there is to be a small increase in charges introduced over a three-year period, maxing out to 7.5 percent; and

(iii) The first income threshold of repayment of HECS-HELP is to be reduced from the current level of about $55,000 a year to $42,000 a year. The rate of collection of the repayments as a proportion of the first income will be cut as well, from 4 to 1 percent of income at the new threshold.

Before comparative analysis is offered on these three issues, some words about the “efficiency dividend” are in order. I don’t recall when this phrase was first introduced, but it is now an entrenched part of the Budget lexicon. And because just about everyone now knows it is a porkie and essentially a term to be pilloried, it has now transcended its original disingenuous purpose of obfuscation to take on the status of farce. It took a while for George Orwell to turn into John Cleese, but this is where we are now. This is not specifically a criticism of this government or this Minister, it is instead a plea for Australian public policy language from all parliamentarians to be less underhand, a knowingly futile request.

Back to normalcy. In the flavour of a comparison with the astonishing 2014/15 Budget proposals, what now follows examines the effect of these changes, and for the financial implications for three groups: the universities; current and new students; and existing HECS-HELP debtors no longer enrolled.

For the universities, while the outlay cuts are much smaller than the 20 per cent proposal of three years ago (which didn’t come to pass), this doesn’t mean that in comparative terms the institutions will be financially better off with the current plan. The reason is that the previously suggested cuts were to be accompanied by a new facility allowing the universities complete discretion with respect to the prices they could charge, with this power having the potential to deliver marked increases in revenue for a significant number of courses and institutions.

My view is that had this gone ahead, the vast majority of universities would have been prepared and able to increase prices well beyond a situation in which they would have been disadvantaged in net terms by the outlay cuts. In other words, in the short run at least, universities would have gained financially from the 2014/15 Budget measures which never transpired. If this had happened this then would raise the possibility of there being further rounds of outlay cuts in ensuing years, ending where we don’t know.

This time, however, there is no accompanying capacity for the universities to gain more revenue directly from the students, and this means that the “efficiency dividend” (cuts to outlays) has a greater potential to be damaging to universities’ bottom lines then before. Not that this will surprise or unbalance Vice-Chancellors, particularly those with long memories, since effective cuts to university budgets in terms of outlays per student have been the norm over the last 30 years, but were most often delivered invisibly via less-than-full indexation of the grants.

The small increase in HECS-HELP charges is designed, as was the original re-introduction of university charges in 1989, to change the incidence of funding away from the public sector to students/graduates. This change will affect all students currently enrolled, and who will enrol in the future, but unlike the change in repayment arrangements, there are no implications for people who have left the system.

There will be grumblings about this increase in price, but in economic and behavioral terms, there is not much going on here. There are two points to be made about changes in the level of the fee:

(i) There is no conceptual or empirical analysis that helps us understand accurately what “the right” or “fair” charge should be. Economists can recognize the benefits to society from higher education, and thus make a case for a subsidy, but we can’t go close to quantifying these benefits. The decisions on pricing will inevitably be made with reference only to revenue and politics; and

(ii) The evidence is now overwhelming that changes to the level of the charge, or other aspects of HECS-HELP, such as the first threshold of repayment, have no discernible effects on student behavior or choices. This has been true for all Australian experience with HECS, including its introduction in 1989, when the cacophony of dire predictions about what would happen to the enrolments of women, and ethnic minorities, were the dominant noises, but nothing happened. In England, which also has a HECS-type system, the 300 percent increase in the charge in 2011 similarly had no effect on university applications after a small decrease in the first year. We can predict confidently that the 7.5 percent increase here will have no aggregate effects on anything except the revenue stream enjoyed by the Treasury.

Decreasing the first income threshold of repayment from about $55,000 per annum to $42,000 per annum (a change promoted enthusiastically by Andrew Norton from the Grattan Institute) looks to be a serious change in the system. Unlike the two proposed changes considered above, the consequences will be felt well beyond current and future students, since all variations in repayment rules affect not just students, but all debtors, even people who might have graduated years ago. This point is worth explaining.

Over the years there have been a lot of changes made to the HECS-HELP collection rules, and all of them have been retrospective in the sense that they apply to the repayment of the debt for everyone, not just students enrolled at the time of the introduction of the change. Some commentators have asked if this is “legal” in the sense that an explicit contract made between a student years ago with rules that were more generous is apparently being broken to suit the government.

It is in fact “legal” for governments to do this, because the debt agreement made between students and the government is not a commercial loan contract; instead it has only the status and operational context of an Act of the Parliament. Governments have been able to and did take advantage of this aspect of HECS for a long time, and it is not a new and cunning discovery of the current Cabinet.

The reduction of the first income threshold of repayment of HECS-HELP has other complications, and this is not a simple reform. The following points matter.

First, it is critical to note that the first rate of repayment of HECS-HELP is currently 4 percent of income, and the new arrangement entails a significant cut in this proportion to 1 percent of incomes at $42,000, and 2 or 3 percent up to $55,000. This means that those debtors earning $42,000 per year will soon be paying $8 or so a week, but at the top end of the new range the new repayment obligation will be just over $30 a week.

There will be some negative surprises experienced by graduates currently working part-time and earning more than $42,000 but less than $55,000 per annum because many of them will be starting to repay again after possibly even forgetting they still have a HECS-HELP debt. While there might be small changes in some labour supply behavior, there won’t be discernible effects on university applications or choices about discipline, because in empirical financial terms these changes are small.

Second, there is another, positive and likely unintended consequence from the lowering of the first income threshold of repayment, which goes well beyond what this means for current university students as well. This relates to the complicated issue of the possible expansion of HECS-HELP into a universal loans system for all tertiary education, a policy reform championed by Peter Noonan of the Mitchell Institute for some time now.

The basic issue here is that with the current first income threshold of repayment of around $55,000 per annum, loan repayments for many vocational education and training course graduates would not be required for some time, a point established convincingly last year by Tim Higgins from the College of Business and Economics at the ANU. The basic issue is that there is an interest rate subsidy associated with HECS-HELP and this could be reduced to manageable amounts for the budget for these VET graduates only if the first income threshold of repayment is lower because with this more people repay sooner.

There is no reason to believe that the government’s motivation for lowering the first income threshold of repayment was to lay the ground for a universal tertiary HELP system. Nevertheless, this is certainly likely to be welcome for those who have experienced decades of policy disappointment related to the persistence of up-front fees for the (mostly poorer) students in this part of tertiary education. It can be argued that the institutional machinery is now much closer to realizing the desirable goal of the removal of all direct charges in Australian tertiary education and their replacement with HELP across the board.

A third consequence of the lower first income threshold of repayment, hand-in-hand with a new rate of first repayment of 1 per cent of income, is that the existing first crunch point at the first threshold will be significantly reduced. At the moment earning a dollar over the first threshold entails allocating 4 percent of income (over $2000 year) to make the first HELP repayment. This has now been reduced to about $400, which will put a smile on the faces of economists because, as shown in work from the ANU’s Tax and Transfer Policy Institute, this has been associated with taxpayers with debts “bunching” under the threshold. This, arguably slight, annoyance for economic efficiency has now been cleaned up.