Over at his blog, Andrew Leigh asks whether the OECD was right not to count an implicit subsidy in HECS-HELP in its figures on how much the federal government spends on higher education. The federal goverrnment argues that because the OECD only counts direct subsidy paid to higher education institutions, it understates total spending on higher education. This is a complex issue; I would welcome feedback on my analysis.

There are two possible subsidies in the income contingent loans scheme. There is the writing off of bad debt, about which I have written extensively (pdf). Lending to students that won’t be repaid should be classified as a higher education expense. And there is an interest rate subsidy, because HECS-HELP debts are indexed to inflation, but otherwise no interest rates are charged. There are direct and/or opportunity costs to the federal government in not charging interest on HECS-HELP debt.

Andrew L is questioning the implicit interest rate subsidy point. These are not his words that follow, but the reasoning goes like this:
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