How expensive is student lending for the government?

The HELP student loans scheme involves significant expense to government. One of these is the cost of carrying around $20 billion in accumulated debts while only getting CPI indexation. Figures DEEWR gave me put this cost at $650 million for 2009-10.

The discount for paying upfront and the bonus for voluntarily repaying early are designed in part to help minimise this cost (their other purpose is to avoid the risk of non-repayment).

The discount especially has sometimes been criticised as an ‘unfair’ lower price to ‘rich’ people who can afford to pay upfront, as one commenter on another post did. While we can sensibly debate the level of the discount, which is now 20% but has been 25% and 15% in the past, the idea of the discount is sound. Given the cost of the interest subsidy, it can be cheaper to write off the discount now than to carry the debt. This either saves money for taxpayers or makes more money available for other government purposes.

Using the same male arts and law graduates in professional jobs on median earnings examples in an earlier post, I compared the cost to government of the different payment and repayment options. I assumed that the government borrows money at 6% and lends at 2.5%. Continue reading “How expensive is student lending for the government?”