This week Treasury Secretary Ken Henry launched a Treasury Working Paper called ‘HECS for TAFE: The case of extending income-contingent loans to the vocational education and training sector’, by Bruce Chapman, Mark Rodrigues and Chris Ryan. This is an idea I have supported myself; there is no intrinsic reason why where a course is placed in the Australian Qualifications Framework should determine whether a student should have to pay up-front or being able to take out an income-contigent loan. As with many aspects of policy, the difference is due to a quirk of history rather than principle. In the 1970s, the Commonwealth acquired funding responsibility for higher education, but vocational education was left with the states. So HECS was introduced in 1989 to help the Commonwealth discharge its resposibilities, but vocational education was left as a state responsibility.
While I support the principle of not differentiating between vocational and higher education, I would not support the version of income-contigent loans apparently proposed in the Chapman et al. paper. Their calculations seemed to be based on a straight application of HECS, but they are vague (apart from a footnote which only semi-clarifies the situation) on how they would handle the current debt surcharge element of HECS-HELP.
At universities, students paying their student contribution amount up-front get a 20% discount. Or to put it another way, if you don’t pay up-front you pay a debt surcharge of 25%. (eg say a subject costs $1,000. If you pay up-front with a 20% discount you get $200 off, leaving a price of $800. If the real price is $800, $200 extra is 25% more.) For full-fee students, the surcharge is more obvious. If undergraduate full-fee payers take out a FEE-HELP loan, they pay the advertised price plus 20%.
There are two good reasons for having a surcharge. The first is that these loans schemes incur significant costs through bad debt and forgone interest (students only pay the inflation rate). These should be viewed as part of the total expenditure on education, and evaluated accordingly. Would the money be better spent directly on education? If people can afford to pay up-front, then the answer is almost certainly yes. Otherwise, it is effectively a handout to those who have capital (eg say a course costs $10,000, which the student has. If there is no incentive to pay up-front, the student could take out a HECS loan and pay the inflation rate of interest of about 3%. Meanwhile, they could leave their $10,000 in a cash management trust earning more than 5% a year, and pocket the difference).
The second reason for not having overly soft loans is to encourage price sensitivity among students. Those who pay up-front are likely to be more choosey based on price than those who won’t have to pay for many years or those who realise that they can effectively engineer themselves a subsidy by taking out a loan at less than the interest they can receive commercially. While it was disappointing to see Julie Bishop reading from the Labor script when she said that:
“Any consideration of an income-contingent loan scheme for TAFE students must take into account … the risk that state governments will unreasonably increase TAFE fees”
she is not entirely without a point (on the other hand, without loans investment in vocational education is probably being kept undesirably low to maintain affordability, so price increases are not necessarily a bad thing).
As I argued in my paper on FEE-HELP last year (pdf) there is more that could be done to improve the financial position of the student loans schemes.
Chapman and co are certainly pointing policy in the right direction, but I hope the Treasury bean counters would not agree to their proposal as it stands.
Andrew Norton 
Wondering about your two reasons – the first “it is effectively a handout to those who have capital” – how many students have that much money, surely very few?
And ” Those who pay up-front are likely to be more choosey based on price ” why? if you have so much money that you can pay up-front, you probably don’t need to make as careful choices as students who feel they are committing themselves to a large debt.
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About 20% of HECS students pay up-front, but a larger proportion of full-fee students. It would be even higher in the vocational sector, where the prices are lower.
Much research suggests that people value money more in the present than in the future – eg $100 is worth more to me now than in 5 years time.
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“Much research suggests that people value money more in the present than in the future – eg $100 is worth more to me now than in 5 years time.”
That would certainly be true if you only had $100 – surely how much you value money depends to some extent on how much of it you have. $100 is nothing now or in the future to someone who has a million.
“About 20% of HECS students pay up-front” – but with whose money? Maybe it’s about 20% of students who have families wealthy enough to pay up-front.
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Even with the surcharge, it’s way below what market interest rates would be, given the income-contingent aspect of HECS. At the least, they could increase the rate to growth in AWE.
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Speaking about market principals in education, I was under the impression that at least for the trades, the drop-out rate was greater than 50% in apprenticeships (evidentally showing how little the average Australia cares about their future well-being and success). I wonder if fees are actually a good thing, since it might discourage some of the people that are likely to drop out from entering. Alternatively, if there is a shortage of applicants, I presume the problem is the other way around.
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In the trades, the impression I have (from my younger brother, a builder’s apprentice, and several of his mates, in similar trades) is that the drop out rate has more to do with the utterly shite pay of being an apprentice than the costs of the formal education part.
When working at your local coles is worth more per hour than learning first-year building, you’ve got to be pretty damn committed… and at seventeen, eighteen, ninteen years of age, thats pretty tricky.
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“When working at your local coles is worth more per hour than learning first-year building, you’ve got to be pretty damn committed”
I disagree with this — this is a weird Australian thing amongst people of that particular group — A million people manage to go to university without any pay (in fact, most of them pay), and many of the trade professions get you almost the same benefits in terms of later pay as university. In most places in the world, people would think these schemes are like a gold mine.
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Andrew, your comment seems more in the nature of a friendly amendment. Rather than concluding “I hope the Treasury bean counters would not agree to their proposal as it stands”, why didn’t you say “I agree, so long as it comes with the same surcharge as HECS for uni”? Or do you think there are reasons why the surcharge is likely to be hotly debated?
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Andrew – A subtle distinction, but ok. My experience with Treasury on this, now admittedly rather dated, was that they preferred real interest rates, but debt surcharges have been the political compromise. On the other hand, the absence of a surcharge for p/g full-fee borrowers is a large loophole that has been left open for years.
And I think it is a real criticism of the Chapman et al paper that this aspect was not thought through more carefully.
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