Universities Australia, formerly the AVCC, today released a paper suggesting that HELP student loan repayments be securitised.
Versions of this idea have been around for many years. In the past, people in the finance industry have wanted to buy the stream of future repayments from previous HECS debts (now HECS-HELP and FEE-HELP). They would of course have demanded a huge discount on the face value of these debts, because of the risks of slow or non-repayment we have discussed before. For financial and political reasons, previous governments have never agreed to this.
The Universities Australia version gets around the political problem of explaining to the punters that the $13 billion dollars lent to students still outstanding at 30 June 2007 is, on the government’s own estimates, worth only $8.2 billion. It suggests that the government sells bonds in the capital markets to raise money for higher education, and uses the income stream from HELP repayments to finance the interest it would have to pay the bond holders. Money not immediately spent on universities would be put in a Future Fund-like investment scheme, and the returns spent on universities in later years.
This idea neither should nor will go far, for at least the following reasons:
First, why would the government borrow money in the capital markets when it is itself already a signficant investor in those markets, through the massive budget surpluses of the Howard years that will be even larger under Rudd? The only explanation I can see in the UA paper is concerns in the financial market that due to these budget surpluses the ‘long-term end of the bond markets has been depleted’. But if so, isn’t the answer standard Treasury bonds? UA suggests that the Future Fund and the Higher Education Endowment Fund would invest in these HELP bonds, so the government would be lending to itself to finance universities, a very strange state of affairs.
Second, why would the government lock away some or all of a current discretionary income stream of HELP repayments – about $960 million in 2006-07 – to fixed purposes in servicing the interest on the HELP bonds?
Third, this completely over-turns the original idea behind HECS, which was to *reduce* the long-term cost of higher education to taxpayers.
Fourth, this scheme would worsen one of the key structural faults of the current higher education system, the overly-tight link to the federal budget. If Treasury believes that future HELP returns will just be returned to universities then they will be very averse to lending, since the money will effectively be a subsidy, which in turn would mean that they would oppose increased price flexibility – their opposition to increased government spending exceeding their commitment to free markets.
Fifth, it would create a perverse incentive for universities to encourage students to borrow money, because if they do universities will get the money twice – once when the student pays the fees, and again in subsequent years when the student repays. Universities would only get the money once from students who pay upfront.
Sixth, because HECS-HELP and FEE-HELP repayments are merged into the one HELP debt for ATO purposes it would create the odd situation of money lent for students going to private providers being turned into subsidies for public universities when they are repaid. At least it would create unity between the public and private sectors!
The only context in which I could imagine this scheme even beginning to make sense is if a cash-strapped government wanted to raise money off-budget to fiddle the books. Those conditions do not exist.
If UA wants extra money, they should make the case for it and if the government accepts their argument the money should be provided transparently through the Budget. But schemes like this just undermine what little credibilty UA has within government, rather than advancing their prospects of financial relief.
Andrew Norton 
I would have thought, in the first instance, that Universities should securitise the cashflow stream they get from the government – that would generate a nice lump-sum (at close to the risk-free rate) but would require universities to squeeze out some of their inefficiencies.
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Sinclair – Though this assumes that universities can generate adequate returns on capital, which without going entirely postgrad and international they will have trouble doing unless domestic prices are deregulated; regulation of which caused their financial problems in the first place…
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Yes, it would require some efficiencies and productivity gains – none of which would be too difficult to obtain given the correct incentives. But rather than run to government for even more money, universities should work with the buckets of cash they already have access to.
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Very interesting post, Andrew. I don’t understand (or remember) how the money flows work at the moment, but I would think that the rationale for selling HECS debt would be similar to the rationale for any other form of privatisation. In this case, the issue is whether the government (or universities, depending on who receives the HECS repayments) is the best party to manage the risks of non-payment by students. In this context, I would see the government as just being a funnel through which ex-students’ repayments are paid to bond holders. Presumably, the idea is that the bond holders would be exposed to the risks of non-payment, not the government/taxpayers.
Arguably, the government presently faces a conflict of interest as the holder of HECS debts as well as the higher-ed policy-maker, because it gains from reductions in repayment thresholds or increases in the interest rate (express or implied) on HECS debt. This is convenient for people like me who believe that (HECS) students should pay more than they do, but it is similar to the conflicts of interest that the government faces elsewhere as market participant and regulator. As for the sale proceeds, they could be put in the FF, invested in higher-ed or returned in tax cuts – that is a separate policy question.
It is true that selling HECS bonds on the market, which would include the Future Fund, would mean that the government may be effectively ‘lending to itself’. But the difference is that (I assume) the FF will assess the investment like any other and buy the bonds if they fit within their overall investment strategy. Presently, the government is heavily exposed to the repayment behaviour of ex-students, just like it was (and still is to some extent) over-exposed to Telstra’s financial performance.
The issue about increasing the long-term cost of funding higher-ed to taxpayers is very similar to the “retention value” argument that frequently bedevils regular privatisations. John Quiggin has been a major exponent of this idea and it is, I think, currently being pushed by Nick Gruen on behalf of Unions NSW wrt the NSW energy privatisations. The idea is that because the expected revenues from public assets (whether energy businesses or HECS debts) are higher than the interest on the debt repaid as a result of the privatisation, the government should not sell the relevant asset. On this basis, of course, the government would own and run everything. My point is that selling HECS debts would crystallise and make transparent the true cost of providing HECS loans. This may be used as an excuse for Treasury to oppose additional funding, but so does every replacement of distortions (eg tariffs) with cash transfer payments.
I think your fifth concern arises from how money flows are handled. To my mind, student repayments should go straight to the bond holders. Government funding of universities for HECS students could be dealt with separately.
I won’t even try to address your sixth point!
One last thing – I’m no Warren Buffett, but present financial market conditions suggest to me that it is precisely the wrong time to be implementing something like this – the debt would probably sell for a lot less than $8.2b.
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Rajat – Selling the HELP debt completely to a financial institution(s) would expose the true costs, but all the government would do in this proposal is tell investors which stream of tax revenue the plan to use to pay for interest they will have to pay regardless of whether repayments match the interest owing (presumably encouraging them to make a conservative estimate of likely HELP repayments). They could just say the source is income taxpayers in certain postcodes – the only function of HELP repayments is to put an (arbitrary) cap on spending.
It may be the case that the government could get a better return on the money invested in student loans by securitisation; that it will borrow at modest rates from risk-averse investors and make more by investing that cash in more lucrative investments. (Though there are other objections to this kind of backdoor nationalisation.)
But that is completely separate from saying that the money should be given to universities. The HELP repayment stream is, as I noted, effectively an abitrary amount – as usual, the unviersities have provided no evidence whatsover that they should be given this sum of money.
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Andrew, so the government will effectively underwrite the debt? If so, I agree that there is no point in such a half-way house. Why not (at least in good times), offer bonds that carry the risk of actual repayments? Whether or not that would allow the government to make a margin on the proceeds of the debt sale (by investing at higher rates elsewhere), at least the government’s risk position would be reduced and any conflicts of interest would be resolved.
I agree that whether or not universities should get the sale proceeds is a completely separate question.
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This proposal makes absolutely no sense to me especially given the current circumstances. Why would a government with no net debt and projected surpluses coming out of its rear want to securitise its help loans. I mean its not like it will be a cheaper way to fund the universities (or the proposed fund) it would be cheaper for the govt just to issue bonds in its own name. So I agree with you Andrew. Its also not likely that the govt would be able to structure the deal so as to get rid of the credit risk its exposed to as it more than likely would have to hold a loss piece in the structure and going by Andrew’s numbers it would be a large loss piece. Also Securitisation markets have virtually been closed since August and don’t look like opening soon. Anyway hasn’t Costello already set-up a Uni fund? Why not issue some Treasury bonds and top up the existing fund.
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I think the crucial point is:
“Third, this completely over-turns the original idea behind HECS, which was to *reduce* the long-term cost of higher education to taxpayers.”
On the contrary, the original idea, under Labor, was to finance the necessary expansion of the higher education sector without an excessive additional burden on taxpayers. Among the Howard government’s many policy failures, cuts to public investment in higher education stand out as among the worst. The proposed policy will, rightly, reverse this.
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It won’t reverse it — more likely it will stabilize it. This should be easy to see. If students numbers and other such markers remains where they are, then it will be stabilized. If they go down, then it will be reversed. I imagine that these are not perfect, due to the huge lags in the system, but they should give a good indication.
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Andrew agree fully with you on selling off the HELP debts as a complex sleigh of hand (well HECS-HELP but why not all of them?). Glenn Withers never really explained how the interest to the lenders would be paid without Govt ultimately reducing what it gets back from the loans. To me the proposal does have a cost to the Budget, it may be a good one nevertheless if you want a way to invest more money in unis but UA ducked that issue.
In terms of what HECS was to achieve initially the story I have had from some involved was that it was indeed to both help expand the system but also reduce Commonwealth outlays – the expansion however was bigger than expected so its acheivement was to restrain the additional Commonwealth cost.
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Conor – I think Quiggin’s characterisation is a fair description of the rhetoric of the time, though of course the motivations of the key players are harder to ascertain. By 1996, clearly the purpose of differential HECS was to reduce outlays. There I think Quiggin is definitely wrong. While the Coalition should not have held down university revenues, there is no evidence that replacing public money with private money had any negative effects. To the contrary, it proved that previous subsdies were simply wealth transfers from the state to students.
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