Modifying student loan system could ensure access for all students

29 July 2015

...with thoughtful variations in design and collection rules, the loan system could be modified in a way that would preserve the insurance features of income-contingent loans that facilitate participation, individual affordability and equity.

Bruce Chapman, Australian National University and Timothy Higgins, Australian National University

When HECS (HELP) was introduced in 1989 it applied only to undergraduates in public sector universities. It has now spread in Australia to cover post-graduates, private universities and some tertiary courses, many TAFE diploma courses and even apprenticeship wage top-ups.

The system has been adopted in around eight other countries as well and can be characterised as a quiet revolution in post-compulsory international education. This is how it should be, because income-contingent loans remove the serious barrier to educational participation of upfront fees while providing lifetime repayment protection for all debtors.

But the HELP revolution remains seriously incomplete because this sort of educational financing protection is nowhere to be seen in many parts of the vocational education and training (VET) sector, which still suffers from the scourge, hostility and unfairness of upfront fees.

The Mitchell Institute proposed expanding income-contingent loans to all tertiary students. They asked us to investigate the cost implications, the results of which have just been published.

The critical starting point is that income-contingent loans are not available for the majority of Certificate III and IV students, yet students intending to undertake these qualifications face increasingly significant upfront fees.

This is poor policy because charging upfront fees disproportionately and adversely affects those from poor socioeconomic backgrounds. Not only is this inequitable, it is also economically inefficient, because such arrangements inevitably limit the participation of motivated but financially constrained prospective skilled labour. It is a waste for the whole country.

If designed properly, an income-contingent loan is a superior option to upfront fees. It provides a training opportunity regardless of current financial means and offers insurance since repayments depend on future income.

The challenge in handing out more loans

If income-contingent loans are expanded to Certificate III and IV students, there are a number of arguments for revisiting some of the existing rules. In one way or another these relate to the need to recover considerable proportions of the debt when an income-contingent loan is applied to a different aspect of the post-compulsory education system.

First, there is a fiscal sustainability argument. Compared to university graduates, Certificate III and IV completers have low incomes and, for women, low employment outcomes.

We found that if income-contingent loans were extended to Certificate III qualifications under current HELP rules, the proportion of the loan amount that is not expected to be repaid may reach as high as 60% for female Certificate III debtors. Without corresponding increases in charges, governments would be reluctant to bear these costs.

Second, there is a question of equity within the pool of all students: if university graduates are repaying most of their loans, is it fair if Certificate III debtors repay much smaller proportions of their loan debt? And there is an equity issue for all taxpayers, since lower repayments mean higher subsidies.

The modifications to HELP that are modelled and examined in our report, and which we apply to all VET students from Certificate III upwards, involve combinations of decreases in repayment thresholds and rates, and variations to loan indexation and surcharges.

The results demonstrate that the choice of income-contingent loan parameters has a very significant impact on the magnitude of subsidies and the distribution of costs among debtors. For example, application of a minimum repayment threshold of A$40,000 per annum (with a 2% repayment rate), plus a loan surcharge of 10%, could reduce subsidy ratios by 15% compared to the current system.

VET is in need of important reform, including with respect to the current accreditation issues, which are undermining the integrity of the system. However, to make sure the system is equitable, there is a critical need to remove upfront fees and expand HELP to cover all Certificate III and IV adults in education and training.

If this occurred, government subsidies would increase if there were no increase in tuition charges. If governments are reluctant to boost funding of tertiary education, then there is a range of modifications to offset greater income-contingent loan subsidies that would arise from including Certificate III and IV debtors.

We illustrate that, with thoughtful variations in design and collection rules, the loan system could be modified in a way that would preserve the insurance features of income-contingent loans that facilitate participation, individual affordability and equity.

Bruce Chapman is Director, Policy Impact, Crawford School of Economics and Government at Australian National University.
Timothy Higgins is Senior Lecturer, Research School of Finance, Actuarial Studies & Applied Statistics at Australian National University.

This article was originally published on The Conversation. Read the original article.