Doubtful debt: the rising cost of student loans

6 Apr 2014

The Commonwealth Government could save more than $800 million a year by 2017, according to this report, if it recovers outstanding student loans from deceased estates and people living overseas.

Overview: Student loans have helped millions of Australians finance their higher education since the Government introduced the Higher Education Contribution Scheme, HECS, in 1989. The successor to HECS — the Higher Education Loan Program, HELP — lends more than $6 billion a year. It has been a very effective policy. But it has become expensive. By 2017 the Commonwealth will have $13 billion of loans on its books that it does not expect to collect.

Students and former students repay their education debt only if they earn more than a threshold amount — currently $51,309 a year. Income contingent loans cleverly help cash-poor students pay for their education when they can afford to do so. Some of them never earn enough in Australia to repay what they borrowed.

About 17 per cent of new lending is now classified as doubtful, meaning it is not expected to ever be fully repaid. This expense, which appears each year in the Commonwealth Budget, is projected to be $1.1 billion this financial year. With student numbers rapidly increasing, and new uses being found for income contingent loans, doubtful debt costs will continue to rise.

This report investigates several ways of reducing doubtful debt while still protecting against financial hardship.

One reason for doubtful debt is that HELP debtors leave Australia. Because HELP is repaid through the Australian income tax system it is not collected from people living elsewhere. England and New Zealand have similar student loan schemes and both require debtors in other countries to pay. This report recommends the New Zealand policy of requiring a flat annual repayment from student loan debtors living overseas.

For debtors staying in Australia, some never earn more than the income threshold or do so for too few years to repay all their debt. Because the threshold is linked to average weekly earnings, it is increasing in real terms. Over time, this means that fewer debtors are obliged to repay. Linking the threshold to inflation would maintain its real value while increasing future repayment levels.

Although these reforms would reduce HELP’s costs, on their own their effect on doubtful debt is modest. Its main cause is that HELP debt in deceased estates is written off. This is not a good use of scarce higher education funding.

Most beneficiaries of the HELP write-off will not be financially dependent on the HELP debtor. Partnered HELP debtors earning less than the threshold are not usually the household’s main income earner. Their children will be adults by the time the estate is distributed. Introducing asset contingent HELP repayment for estates over $100,000 would radically improve HELP’s finances.

If all these reforms were implemented now, they would save $860 million a year by 2016–17, and remove the need for planned cuts to teaching and research expenditure.

HELP’s repayment system was never designed for lending on the scale we see today. With the reforms in this report, we can achieve the goals of HELP at a much lower cost.

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