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 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%.
As can be seen, in these examples it is cheaper for the government to give the discount than to lend the full amount, though only by a small amount in the case of full up-front payment. For the government, the optimal option in my scenario is the partial up-front payment. For these relatively financially successful graduates the interest cost on a reduced loan that is repaid fairly quickly is lower than the bonus amount.
The worst scenario for the government is the voluntary repayment at the end of the loan. This and borrowing the full tuition charge and paying back entirely through the tax system are the most expensive options because of the high amounts of lending accrued early on. The voluntary repayment makes things worse because the 10% bonus is more expensive than the interest on the dwindling sums owed towards the end of the loan.
In these examples the bonus is perhaps bit higher than it needs to be, but these are probably not typical examples. I need to work on more typical repayment trajectories, taking into account that most graduates are women who are less likely than men to work full-time.