Is there an implicit subsidy in the HECS debt?

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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A tale of two Oppositions

A Galaxy Poll in November last year found that only 33% of NSW voters thought that, based on its recent performance, the ALP deserved to win the forthcoming NSW election, but that nevertheless on a two-party preferred basis 52% of them planned to vote for it (which turned out to be the final result as well).

A Galaxy Poll reported in last Saturday’s Herald Sun asked the same question about the Howard government. It found 44% of those surveyed believed that the Coalition deserved, on performance, to win the election. Despite a significantly higher performance rating than that of the Iemma government, Galaxy found the Coalition behind on the two-party preferred, with 47% support.

What explains why Iemma can win despite poor performance and Howard is likely to lose despite much better performance?
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