Where are the missing HECS debtors?

Today the Australian National Audit Office released a ‘performance audit’ (pdf) of the Higher Education Loan Program, which supports the three types of student loans: HECS-HELP for Commonwealth-subsidised students, FEE-HELP for full-fee students, and OS-HELP, which helps finance study overseas.

The ANAO’s audit was a box-ticking exercise that found little wrong with the administration of HELP. What’s more concerning, as I argued in my paper on FEE-HELP (pdf) last year, is the overall design of the system, which controls losses by setting arbitrary loan limits, while losing or delaying receipt of lots of money that could be recovered with better policy design.

Publications released since then highlight the problem. The DEST Higher Education Report 2005 stated that 1,121,822 people had a HECS debt as at 30 June 2005. Yet the ATO’s personal income tax report reports only 250,085 persons making a repayment through the taxation system in 2004-05. Where are the other 871,737 people?

More than half of them are still at university. My estimate (there are no exact figures) is that around 460,000 currently enrolled students have a HECS debt, though some of them, especially part-time students, will also be making repayments. The Higher Education Report 2005 records 157,710 debtors overseas or with an invalid or incomplete postcode (ie, they can’t find them). That’s 14% of all HECS debtors, highlighting the importance of the point I made in my paper of implementing measures to recover money from this group. It still leaves, however, about a quarter of a million people unaccounted for.

Comparing the 2004-05 ATO income tax report with its 2003-04 equivalent highlights the significance of raising the annual income threshold (xls) at which HECS repayments start from about $25,000 to around $35,000. It caused the number of people repaying to plummet by 27% between the two years, though with a revenue loss of only 3.6%. This was a useful exercise in showing how many HECS debtors are in the labour market but have modest annual incomes (though part of this will be a quirk of the financial year – people who start full-time work early the following year after completion will record only half their annual salary by 30 June).

This takes us down to about 160,000 people – or about 15% of the total – who are in Australia but either not in the workforce or earning less than $25,000 a year. That’s reasonably consistent with the figures I reported in my graduate labour market paper (pdf) earlier this year on the proportion of graduates out of the workforce or working part-time. Given the major flows in and out of the workforce I also document in that paper this group probably isn’t too much of a concern – most of them will be caught in the tax net at some time.

The 2004-05 ATO report also gives some insight into the earnings (xls) of people repaying HECS. Five HECS debtors reported an income of $1 million or more for 2004-05, 10 of between $500,000 and $1 million and 3,010 of between $100,000 and $500,000. If investors could buy shares in people, as suggested by Joe Clark (pdf), these high-earners would provide the windfall profits that would compensate for those graduates who don’t go on to high salaries.

The largest single group, 56% of all those who made a repayment in 2004-05, had earnings between $35,000 and $50,000, with nearly 40% in the $50,000 to $100,000 range, where we can find the overall average full-time earnings for graduates. But the large number in the $35,000 to $50,000 range highlights that many are slow to make the transition to good graduate earnings. This is partly because, as my over-educated graduates paper showed, because they are not in jobs that receive the labour market premium associated with higher education qualifications.

12 Responses to “Where are the missing HECS debtors?

  • 1
    Rafe
    June 27th, 2007 08:10

    Does the list of debtors include people who have died?

    It seems that the provisions for people earning good money to defer payments due to special circumstances are too generous.

    There is obviously still a sense of entitlement so normally law abiding people have no qualms about rorting the system. Same applies to the tax system but in the case of education people have actually got something that they undertook to pay for.

  • 2
    Andrew Norton
    June 27th, 2007 08:49

    Rafe – Dead debtors are written off. Only the amount written off is provided, but if they have average level debts it was probably 450-500 people. My proposal to recover HECS debts from estates has previously prompted criticism.

    I think the actual ‘rorting’ of this system is quite low, and what rorting there is could be considered incidental to rorting the tax system. The problem is a policy one.

  • 3
    David Rubie
    June 27th, 2007 09:52

    I know where at least one HECS debtor is – at home with my kids. Even when working full time she didn’t clear the tax threshold, and worked part time for the last 11 years or so. I’m not sure how common this situation is given the large numbers of kids in childcare though.

    I would suggest that calling her “over educated” is a bit of a stretch though – she can now make quite a bit of money in a short period of time due to her over-education and experience (i.e. she doesn’t have to do a lot of hours relatively speaking due to a high hourly rate), so has little incentive to knock herself out when she is working.

  • 4
    Rajat Sood
    June 27th, 2007 15:51

    Actually, given the 10% discount for voluntary repayments above $500 (a post-tax benefit), I can’t understand why there are so many people earning >$100K who don’t extinguish their HECS debt.

  • 5
    James Simpson
    June 27th, 2007 23:20

    You would need to have a very low personal discount rate to make the 10% worthwhile. With the returns shares have been achieving, I think not paying off HECS is the rational decision. Remember that, while indexed to CPI, HECS charges no interest.

  • 6
    Tanya
    June 28th, 2007 10:51

    How does the ATO know if debtors are living overseas? I live OS and have a HECS debt waiting for me when I return but I haven’t told the ATO or any other government office that I’m overseas. Except for the minority of citizens that are registered with our embassies, the government has little idea of which citizens are overseas. I can only imagine that the OS debtor statistic is an estimation based on known factors such as age and failure to submit a tax return.

  • 7
    Rajat Sood
    June 28th, 2007 11:54

    James, you obviously have a higher risk appetite than I do! A 10% real post-tax risk-free return is not something I would sneeze at.

  • 8
    Andrew Norton
    June 28th, 2007 12:31

    Tanya – Customs has a record of you leaving the country, but I don’t know if the ATO cross-matches records with them. It is more likely an assumption based on the absence of any recorded income earned or any claims made through Centrelink.

  • 9
    Tanya
    June 29th, 2007 10:22

    Andrew, estimation / imputation does seem more likely. I’ve always wondered whether they are allowed to cross match such information .. that and the cost associated with adequate data entry and matching would prohibit actual stats. As you’ve discussed before, this is something the government would need to figure out if it wants to collect from overseas debtors.

  • 10
    Andrew Norton
    July 6th, 2007 09:13

    We have the same name

  • 11
    S.
    July 31st, 2007 06:37

    Hi- I stumbled across this blog quite by accident, curious about a comment that was relayed to me, perhaps you can answer it. I too live OS, working in the not-for-profit world, and have been wanting to begin voluntary repayments of my HECS debt (despite earning below the threshold). Someone mentioned to me in passing, that they had heard that Australians out of country over 2 years have their HECS debt erased… hmm, sounds a bit odd. However is there any truth to this? I had to ask! S.

  • 12
    Andrew Norton
    July 31st, 2007 06:57

    No, HECS debts are only extinguished by repayment or death.