Doubtful calculations of doubtful debt

The Department of Education’s annual report is out today, and with it more information on student loan doubtful debt. For 2005-06, they estimate that 19.3% of the debt is doubtful, down from the 20.6% estimate for 2004-05. It may not sound like a big change, but it is equivalent to more than $170 million.

I wish they would tell us more about how these figures are calculated. Since they started calculating the doubtful debt figure it has ranged from a low of 13.5% in 1996-97 to a high of 28.3% in 2003-04. All this suggests that there are going through some fairly major changes in actuarial assumptions, especially as the downward trend in estimates has occurred at the same time as the income threshold for making any repayment increased by more than $10,000, effectively excusing some lower-income people from their debt. My best guess for the cause is higher labour force participation rates, especially for women. But the variability suggests that all the estimates should be viewed sceptically.

Of course, if they took my advice and made more effort to collect from people living overseas and from deceased estates the financial position of the loans scheme would improve still further.

10 thoughts on “Doubtful calculations of doubtful debt

  1. While I agree that the government would do well to take your advice in general, I can’t agree in this instance. I would argue the government should exit the students loans market altogether and allow a private market to evolve – perhaps retaining some residual lender of last resort for low-income households.

    Rather than link to the CIS press release, you might link to the Catallaxy post of last year (if it still exists following the great crashes). I do think there is good reason why DEST doesn’t accept your view on deceased estates and ex pats. Newcomers may wish to see the full(er) debate.

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  2. SD, I think you worring too much if the non-payment rate is only 20%. The government loans have the advantage over private ones in that you can never get out of them by going bankrupt, unlike private loans, which I presume might be rather tempting for your average 21 year old.

    It also a) saves the mess of having different systems for trying to evaluate who is poor, rich, or indifferent; b) doesn’t discourage poorer students much; and perhaps most importantly c) is a politically viable way to get a reasonable proportion of university costs back from most students.

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  3. Actually Conrad my concern isn’t about the 20% ‘bad debt’ rate. It’s about the whole notion of bad ‘HECS’ debts. HECS is an income contingent loan. If individuals earn less than the threashold income level there is no debt – so the government are calculating a nonsense number. Sure they won’t get their money, but that is the policy design.

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  4. Yes, Sinclair – it just reinforces my point that we have had a HECS scheme in place since 1914. It’s called progressive income tax.

    The maths works – for the whole period of your working life the government takes a cut of any extra income you earn as a result of your education, at the appropriate marginal tax rate (for most uni graduates it will tend to be at or near the top marginal rate). If the private rate of return to education investment is about 12% (a reasonable estimate), then the government is already getting an 0.45×12% =~5% real return on the investment from most graduates, even without HECS.

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  5. DD – The government can get a much better return on higher education with HECS, since HECS enables it to shrink its investment without affecting its tax revenues.

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  6. Of course, just as they could get a higher return by upping the marginal tax rate (well, at least until they run in to Laffer-style effects). But the question is should they – the aim, after all, is not to maximise revenue but to enable socially optimal education investment (“optimal” for both equity and efficiency).

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  7. DD – See my other recent posts on higher education, which if anything suggest that HECS has been so low that there has been no deterrent to wasteful investment in higher education, and we have hundreds of thousands of graduates in jobs that don’t require degrees.

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  8. But Andrew, I understood your point to be that the waste comes from the perverse incentives to providers, not students.

    So long as the social rate of return to a university education is above that we get for alternative uses of public funds (and even if a third of that 12% private return is just a product of screening – which is higher than most studies find – that still leaves 8%, which is way above the real Treasury bond rate) I don’t think you can say that the aggregate number of graduates is too large. Whether we could do even better by changing the composition of those graduates is a completely different question.

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  9. DD – I agree fully that the main inefficiencies do not relate to the tail of students for whom a degree is of no financial advantage. But you are assuming that government funding increases higher education to a socially optimal level, when I am saying that much of the historic investement was simply public expenditure replacing private expenditure, with significant loss to the public since that money could have earned higher returns elsewhere. At the moment, by prohibiting additional higher education investment from Cth-supported students, the government is reducing higher education investment to below its optimal level.

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