Last week’s budget leak about cutting the discount for paying student contributions upfront was only part of the HELP reform story. They are also going to cut the ‘bonus’ for repaying early from 10% to 5%. (For example, if you pay the ATO $1,000, they will now wipe $1,100 from your HELP debt, but only $1,050 if this reform passes).
This is a broader change than the upfront initial payment discount, as the early repayment bonus applies across all the HELP schemes. It will partially deal with an absurdity that I plan to exploit, of people taking out FEE-HELP loans and then repaying ‘early’, effectively reducing the cost of the course at taxpayer expense.
The bonus was last cut in 2005, and it did push voluntary repayments down:
Source: Higher Education Report 2009
However why this is a good idea, even aside from the FEE-HELP anomaly can be seen in this table from the ATO Taxation Statistics report:
As you can see, on average people take 7 years to make their first voluntary repayment and on average finish repaying about 10 months after that payment. So the purpose of the discount – to get people to repay early and save the government interest subsidy costs – is not being achieved. People are repaying at the end of the repayment period, after they have already received the interest subsidy. The government would be better off collecting the full remaining amount owed to them.
The question really is whether there should be any ‘early’ repayment bonus at all.