Should graduates get a special first home buyer grant?

In his Melbourne University speech yesterday, Kevin Rudd used an argument Jenny Macklin had long made against student debt:

Since 1996, the debt burden for university students has increased from $4.5 billion to nearly $13 billion. How can a young person build a deposit for a home if they are carrying a massive education debt?

Leaving aside technical objections – the size of student debt is irrelevant to annual repayments, which is what affects ability to service a mortgage – conceptually why should graduates get this kind of special treatment?

According to an ABS survey, the vast majority of university students give as the main reason for their current study as something to do with work. The same survey shows that graduates earn significantly more than other people – about half as much again, on average, as someone whose highest qualification is Year 12. The gap is even larger for the typical household breadwinner, the male partner. On my rough calculations (the data I have is not broken down by age, and does not take account of family benefits) male graduates are still about 40% ahead of males with Year 12 only even after tax and HECS repayments are deducted. Compounding the income gap, a majority of graduates aged less than 45 who have partners are with someone who also has a degree.

So though graduates are caught up in the general home affordability problem, they remain in a relatively strong financial position compared to the rest of the population. By easing financial burdens relating to student debt, Labor would be giving the people least in need of extra assistance to buy a home an added boost – a special first home buyer grant for the privileged. Worse, the extra cash would be used to further bid up house prices, worsening affordability for others. And this is from the egalitarian party?

34 thoughts on “Should graduates get a special first home buyer grant?

  1. I agree with your broad sentiments, Andrew. The ALP’s ‘universality’ approach to tertiary education has always puzzled me and clearly needs a rethink. The ALP needs to target its limited resources more effectively at the wide-ranging socio-economic and regional education inequalities.

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  2. Andrew, I certainly agree that, in principle, graduates don’t need (any further) help from non-graduates. Putting my charitable hat on, I think what Rudd might be referring to is a cashflow issue at a point in time. Assuming that both graduates and non-graduates live at home until a certain age and then seek to buy a house also at a certain age (say about 30), it could be that graduates aren’t in a great position to buy relative to non-graduates. They would have been working for less time, paying back some HECS and, in my limited experience, tend to be worse savers as they usually come from more affluent backgrounds and have more expensive tastes. Not that I’m shedding tears.

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  3. Rajat – One analysis I read found that graduates had lower home ownership aspirations than non-graduates. Part of this was attributable to lower aspirations for having children, with the desire to start a family being important in prompting the decision to purchase a house. I don’t think we can rule out that cash-flow factors could have an effect, particularly as graduates will normally aspire to more expensive locations than non-graduates and therefore will need a bigger mortgage, but normatively I don’t think that there is anything we should do about it. People make their choices in life for their own benefit, and they should not expect others to pick up the bill.

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  4. Like you, I have few problems with the community asking uni attendees who get big earnings boost to contribute towards the less fortunate. But Rudd ain’t arguing for a new FHOG, is he? Sounds like he’s just using some rhetorical license.

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  5. Andrew – No, he is not directly proposing that. But he is using home ownership as a justification for handouts to graduates. I was using some rhetorical licence to try to empahsise just what he was effectively saying. And it is my lonely duty in life to point out the feeble arguments made in the higher education debate.

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  6. Andrew – I agree with (the first part) of what Rajat said – your figures aren’t much use if they include averages of the whole graduate population over it’s whole working life. Social workers, librarians and laboratory assistants will do without income for 3 years, end up with a debt and probably never earn much more than the average in their first 5-10 working years – which is when they will want to buy a house.

    Surely the best way to do these things is by income tax, means tested benefits etc. And having HECS kick in when earnings reach $55,000 a year.

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  7. Are they really carrying the burden of a massive debt, or are they carrying the burden of having a higher effective marginal tax rate?

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  8. What a collective load of BS. Graduates are generally paid more because they do work that is more complex, holds significant responsibility or they perform work that is unique with skills that take a very long time to get. Generally while not earning an income. Loading up this drivel about how they have it all because they earn more is nothing short of thinly disguised

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  9. Yeah, graduates are an underpaid, underprivileged, overworked, overstressed bunch.

    And ABS data is just pure fiction.

    How can you publish such neo-communist pay-packet-envy-driven Lathamesque twaddle, Andrew? Don’t you feel ashamed, now that Glenn has set you straight? 😉

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  10. Yes, graduates earn more than non-graduates. But as I never tire of pointing out, Australia has had a very effective HECS scheme since 1915. It’s called progressive income tax.

    If your state-financed degree in (say) Pre-Nostradamic Hermeneutics gives you an extra $10k a year, you repay part of that financing each year through the additional income tax you are paying. As marginal income tax rates for graduates are considerably in excess of those for HECS, we are making graduates pay back over a lifetime more than the cost of their education even without HECS.

    On my rough calculation (typical marginal rate of 40%, real private rates of return to education of 12%) the government gets this way about a 5% real return to its up-front investment in tertiary education. Since that’s considerably more than their cost of funds (the real Treasury bond rate) they’re underinvesting in it even from the narrow point of view of their own finances – and remember that’s excluding HECS. We are therefore providing incentives to much less than the optimal level of such education.

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  11. DD – wouldn’t you need to estimate the difference in income earned on an individuals with and without the education. So the tax collected on the net benefit. Reading your calculation it looks like you’re working off the gross benefit.

    Also at real rates of 12% it would pay individuals to borrow in private markets and go to uni. Now the HECS scheme crowds out the prvate market. The government could easily reduce their upfront investment by abolshing the HECS scheme and force people into the private market an so increase their return. Why don’t they do that?

    The problem I have with the progressive tax argument is that it seems contrived and ex post. Most economies have progressive taxation and a range of education financing schemes. I agree the government ‘recovers’ its investment, but this is not policy design (I’m not suggesting that you said it was).

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  12. DD makes an important overall point, which is that returns to education are highly sensitive to marginal tax rates – I calculated that for male graduates the 2005 and 2006 tax cuts would easily wipe out the effects of the 2005 student contribution amount increases.

    But Sinclair is right that government investment in higher education *decreases* their rate of return, because public investment crowds out private investment. The introduction of HECS showed this – the government spends less per student but tax revenue is unaffected, except by general changes to marginal tax rates.

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  13. DD’s point is an important one, but I don’t think it’s a reason for abolishing HECS. If everyone went to university for the same number of years, we’d be better off replacing HECS with higher taxes. Until then, HECS preserves equity between uni-goers and non-uni goers. Since most of the benefits of education are private, it’s reasonable that the beneficiaries give something back.

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  14. Andrew, perhaps you could clear something up for me. I have often wondered if the ‘graduate premium’ cited in these policy debates is a comparison between what graduates earn and what they would have earned had they not gone to university, or if it is just a crude comparison between the earnings of graduates and non-graduates. If the latter, then surely it is comparing apples with oranges?

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  15. Laszlo, without answering for Andrew, I assume that the earnings comparisons are of the latter form – between graduates and non-graduates. But this is not relevant in the present context, because the issue is whether graduates are in a better financial position than non-graduates, not whether they are in a better financial position than they would have been had they not attended university.

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  16. In this case, I am just doing a simple comparison with the earnings of people with Year 12 only, as this is usually the requirement for going to university. Some of the rate of return literature I have seen discounts the returns on the grounds that those who go to university are more intelligent than those who do not, and would have higher earnings in any case. Where a reasonable basis for doing so can be found (ideally, panel studies than can control for school results or IQ) this is a useful calculation to make.

    As credentialist requirements spread, however, this will become less relevant, as bright but not university qualified people will have fewer oppotunities to show their abilities.

    Rajat’s right that it does not affect this point, but it is an interesting issue overall.

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  17. Sinclair –

    But of course it’s the increment in income due to the education I’m talking about. I’ve assumed that $10k is due to the education, and applied the tax to that margin only. In the real world it’s quite likely that selection or screening effects means my graduate’s actual extra income will be more than $10k, with extra tax in proportion, but this is irrelevant to my point.

    And that it’s not policy design is also irrelevant – in considering equity and efficiency it’s surely effect not intent that matters.

    As for the crowding out thesis, that goes to the much broader question of whether government should be involved at all. Crowding out, after all, is never anything like 100%. Taking your argument to its logical conclusion goverment would not finance any education, including preschool f’rinstance. There are well known market failure arguments for why a purely private system underprovides the efficient amount, plus of course distribution matters.

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  18. DD – as best I can see you’re making the argument that high income earners get more from the state, therefore they should pay more, and indeed they get what they pay for. That is an argument for progressive taxation – albeit one JS Mill considered and rejected.

    The problem that I still though is in those economies with progressive taxation and university fees, but no HECS there would be ‘over-charging’ for education and again, an ‘under-investment’ in education. So what you’re saying is that any fee on students (be it direct or indirect) other than progressive taxation leads to under-investment. It that an accurate description?

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  19. There are both equity and efficiency reasons for HECS or university fees more generally.

    The equity reason is that people who attend uni (who tend to become higher income earners) should not benefit (too much) at the expense of those who do not attend. Whilst progressive taxation might promote equity in the sense of equality of post-tax income, it does not address the issue of equity in the sense of payment for use. Of course, equity being a normative concept, whether equity encompasses a user pays philosophy is a value judgment.

    The efficiency reason for HECS/fees is that, as Andrew L said, a large share of the benefits of uni are appropriated by the attendee. The absence of HECS/fees would therefore encourage inefficient over-investment in higher education at the expense of other activities. Progressive taxes don’t address this, because they penalise higher incomes regardless of whether they reflect a return on education, hard work alone, or risk-taking.

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  20. Andrew, another problem with estimates of the ‘graduate premium’ is that many students don’t graduate at all, as Bryan Caplan points out:

    http://econlog.econlib.org/archives/2007/02/schooling_not_c.html

    These students are paying HECS debts on an years at university for which they’ve already sustained a loss. That’s not to say HECS is a bad thing (as I think many on the left still do), indeed fees generally should focus the minds of students when they’re considering which course to take. It is just to note that the returns to a university education, I believe, are overstated by just about everyone on all sides of politics.

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  21. I should also say that government subsidised loans are probably partly
    to blame for many students failing and eventually dropping out. When it’s not your money on the line, the incentive to succeed is of course dulled.

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  22. Laszlo – I have seen (but cannot recall the results of) some research on the earnings of US college drop outs, but nothing here. Here, however, the risk is taken by taxpayers as well, as people who earn less than $38,000 a year pay nothing for their education, though they still have the opportunity cost of however long they spent studying.

    There is substantial dispersion of earnings among graduates; indeed I think I am one of the few in Australia pointing out that many graduates are not in jobs requiring university qualifications. But (with some definitional caveats) 80% of graduates are in jobs where we could expect them to earn a premium, so as a group they are hardly a top income support priority.

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  23. I think I might have been slightly misinterpreted. I don’t think the incomes of graduates should be supported (personally the only income support I’d support is a negative income tax). The most pernicious problem with overestimating the return on higher education is that too many students are churned through meaningless government-subsidised degrees (most Arts degrees for instance) because there is a social perception that university is good for them. This costs them and the taxpayers who fund their study. Of course the Labor party crying poor for so called Generation HECS has worn thin and students should take more responsibility for the costs of their education. But that shouldn’t mask the fact that our higher education system is doing a disservice to thousands of students while claiming to do them great favours.

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  24. Laszlo, why do say that most Arts degrees are meaningless? In what sense are they worse than Science degrees or Law degrees or Economics degrees or Commerce degrees or Business degrees or Engineering degrees?

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  25. Andrew’s argument is fine, as far as it goes. It amount to saying “Sure, recent graduates lag behind a bit nowadays for a while but they will still make more money in future so there is no reason for helping them out”. That’s fine (if true – and most claims like that are based on historical data not forward prediction) but when the pendulum swings the other way, and the graduates are making obscene amounts of money while the non-degree qualified workers languish – all the time watching the value of their only major asset, their house, erode in relative terms – can we be confident that the non-degree qualified members of society wont increase taxes to keep their “lead” over us graduates? Of course not. How can a recent graduate who has witnessed the hypocrisy of today’s baby boomer leaders have any faith whatsoever that in 20 years time when it is our turn (finally after 15 to 20 years of waiting) to profit on our investment in education that it wont be stolen away from us by our peers – who by then must surely have become used to the smug feeling that fills their hearts when they look at the “geeks” who they have been financially victorious over for 20 years.

    As good a definition of a recent graduate as anything is “A person who has learned that society rewards shortsighted mob driven speculation far more than long term investment in real skills”.

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  26. Laszlo wrote:

    When it’s not your money on the line, the incentive to succeed is of course dulled.

    When betting on a horse race, this is most likely true. When studying to get a better job than you might have gotten without studying, I doubt it would hold. You’re not only betting someone elses money, you’re betting your own future. It would be hard to believe that a student would place little value on their own future (although some obviously do, the majority would not).

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  27. $100,000 of (non-means tested) debt probably sharpens the mind a bit more than a HECS debt that you don’t have to pay back until your income reaches a certain level (or ever have to pay back if you leave the country!).

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  28. The reality is that life for non baby boomers in the USA is much harder than it has ever been. My student loans are only 2 years salary but coupled with the highest cost in housing in America ever the burden is crushing. Personally I think that individuals and especially Corporations that buy single family homes just to rent them out at inflated prices are to blame for our current housing woes. America is quickly becoming a country where if you do not already own a home you never will. Salaries and wages are not going up with the cost of housing for generation X. Something has to be done to correct the housing/wage gap.

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  29. captian

    Something is being done. Prices are falling, so i suggest you move to those areas that are fallng the most and live the American dream. In some places they are down 35%! Go!

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  30. Although interest rates rising is potentially only a temporary affordability problem, young potential home owners are still faced with the problem of a real estate market which (according to experts) doubles in value every 7 to 10 years.

    When today’s 18 year-olds are 28 and looking for their first home, by this measure you could expect median house prices to be double what they are today…

    In Sydney, you could be looking at $1m+ (with current median house prices in Sydney being around $500,000 right now)

    It leaves me wondering – where will the next generation build their wealth? Will it be in the share market? Will they need to wait (like vultures) until the baby boomers start kicking the bucket? Or will there be some unforeseen event which will level house prices?

    I guess time will tell.

    John.

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  31. Having just completed a degree and having just bought my first home, I don’t believe a ‘special’ home owners grant should be given to graduates. The home owners grant should be kept consistent for everybody regardless of there academic standing. Yes, I (and others) spent years studying but that was our choice and that should not entitle us to more money to spend on a home – Simply, get a job and save more money…

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