Universities Australia, formerly the AVCC, today released a paper suggesting that HELP student loan repayments be securitised.
Versions of this idea have been around for many years. In the past, people in the finance industry have wanted to buy the stream of future repayments from previous HECS debts (now HECS-HELP and FEE-HELP). They would of course have demanded a huge discount on the face value of these debts, because of the risks of slow or non-repayment we have discussed before. For financial and political reasons, previous governments have never agreed to this.
The Universities Australia version gets around the political problem of explaining to the punters that the $13 billion dollars lent to students still outstanding at 30 June 2007 is, on the government’s own estimates, worth only $8.2 billion. It suggests that the government sells bonds in the capital markets to raise money for higher education, and uses the income stream from HELP repayments to finance the interest it would have to pay the bond holders. Money not immediately spent on universities would be put in a Future Fund-like investment scheme, and the returns spent on universities in later years.
This idea neither should nor will go far, for at least the following reasons:
First, why would the government borrow money in the capital markets when it is itself already a signficant investor in those markets, through the massive budget surpluses of the Howard years that will be even larger under Rudd? The only explanation I can see in the UA paper is concerns in the financial market that due to these budget surpluses the ‘long-term end of the bond markets has been depleted’. But if so, isn’t the answer standard Treasury bonds? UA suggests that the Future Fund and the Higher Education Endowment Fund would invest in these HELP bonds, so the government would be lending to itself to finance universities, a very strange state of affairs.
Second, why would the government lock away some or all of a current discretionary income stream of HELP repayments – about $960 million in 2006-07 – to fixed purposes in servicing the interest on the HELP bonds?
Third, this completely over-turns the original idea behind HECS, which was to *reduce* the long-term cost of higher education to taxpayers.
Fourth, this scheme would worsen one of the key structural faults of the current higher education system, the overly-tight link to the federal budget. If Treasury believes that future HELP returns will just be returned to universities then they will be very averse to lending, since the money will effectively be a subsidy, which in turn would mean that they would oppose increased price flexibility – their opposition to increased government spending exceeding their commitment to free markets.
Fifth, it would create a perverse incentive for universities to encourage students to borrow money, because if they do universities will get the money twice – once when the student pays the fees, and again in subsequent years when the student repays. Universities would only get the money once from students who pay upfront.
Sixth, because HECS-HELP and FEE-HELP repayments are merged into the one HELP debt for ATO purposes it would create the odd situation of money lent for students going to private providers being turned into subsidies for public universities when they are repaid. At least it would create unity between the public and private sectors!
The only context in which I could imagine this scheme even beginning to make sense is if a cash-strapped government wanted to raise money off-budget to fiddle the books. Those conditions do not exist.
If UA wants extra money, they should make the case for it and if the government accepts their argument the money should be provided transparently through the Budget. But schemes like this just undermine what little credibilty UA has within government, rather than advancing their prospects of financial relief.