The HELP loan scheme is very expensive to run. Its estimated program expenses are nearly $1.8 billion in 2010-11, mainly due to lending what I expect now exceeds $20 billion to students at only CPI interest, and annualised estimates of debts that are not expected to be repaid.
One thing that should be examined as a way of reducing these costs are the thresholds for repaying. Under current arrangements, in the financial year just finished HELP debtors will pay nothing if they earn less than $43,151.
Though that catches most new graduates in full-time work, my estimate from collating data from several sources is that at least one-third of HELP debtors in Australia in 2007-08 and not currently enrolled in a course incurring HELP debt did not make a payment that year.
I suspect that this proportion will increase over time because the thresholds are indexed according to movements in average weekly earnings. Over time, this is likely to increase at a higher rate than the earnings of new graduates. This is because AWE is influenced by ‘compositional effects’. For example, as relatively well-paid professional and managerial jobs have increased as a proportion of total employment this has helped push up AWE.
AWE is also influenced by the ageing of the workforce, so that over time it incorporates more of an experience premium. However a trend to part-time work is having a negative effect on AWE.
A better indexation system would be based on the labour price index, which is aimed at measuring wage increases for the same work. Comparing AWE and LPI increases since 2001 you can see than LPI is more steady and in most years increases by less than AWE.
Note: AWE, year to November; LPI, year to June.
Over time, which is used has a big effect on the thresholds. If we extrapolate forward the average increase in AWE over these years to 2020, the threshold for repaying will be $70,000. But if we do the same for LPI, the threshold for repaying will be $64,000. If we assume that graduate wages will move at rate closer to LPI than AWE, then without a policy change fewer graduates will be repaying and those who do repay will do so at lower rates.
Changing from AWE to LPI would be a simple reform that would save taxpayers a lot of money.
9 thoughts on “HELPing the government to save money”
And the total saving would be? I find it hard to imagine it would be a lot (although I’m happy to be wrong).
It seems to me that you might be picking at rather small amounts here, especially because most people in the full-time workforce will at some time earn over both amounts in their lives, so the saving will only be the difference between the time at which which they go over the two different measures. If the $6000 difference takes 2 years to recover in terms of wage increases, then you’re taking about $120 per student (i.e., 1% lost in the difference between the CPI and the other measure for two years). Perhaps there are a few that would go over one and not the other measure that would add to this.
I think what you really need to know is to what extent the costs are caused by late repaying and to what extent the costs are caused by people dropping out as full-time workers in the Aus workplace (or never starting) for one reason or another. My bet is most of the cost is associated with the second of these.
Conrad – I don’t have the data or the software to run a proper simulation – though I am hoping DEEWR will provide me with more information on the drivers of HELP’s losses.
But I am reasonably confident that the effects would be significant, as while I emphasised the pay/don’t pay threshold in the post, the effects of the change would cascacde through all the increments (ranging from 4% of income to 8% of income).
The assumption is that the government is borrowing in the bond market at say 5.5% to 6% to fund HELP debt and lending at 2.5% to 3%, so widespread slowdowns in repayment are in fact very expensive.
The base level of the threshold is going to be increasingly signifcant because of the VET FEE-HELP program, with lower average earnings going to people with vocational qualifications. The budget is factoring in massive losses on this, and I am presuming that the threshold point is the cause.
I still think it won’t much (I’m not an accountant, so these are just figures I came up with).
For example, the total loss to the government of waiting 3 years under your assumptions, if the debt was paid back in full on day 1 for $100 is (you can type it into excel — the first number is the interest rate, and the second the number of years waited minus one):
So you get $105.0625-$111.3025=$6.24 difference.
However, most people will just pay as much as they need to by tax, so in fact only a proportion of the $6.24 will matter, because most of the debt won’t be paid in the extra years anyway, no matter what the threshold, so most of the debt will still be at a loss to the government. If for example, 70% of the debt is paid at the 5.5% level and 30% at the 2.5% level (that’s not quite right but it’s close), you get $1.87 difference.
Now that saving is only for those graduates that pay nothing for a number of years. That’s not even most graduates — they are the minority, so you can multiply that number by figures we don’t have (lets say divide it by 2), which means you end up with less than a dollar after starting with 100. That might be an easy to get (just change the calculation as you note — I doubt too many people would even notice), but I can’t see how it will change much.
Conrad – I’m not sure I follow this argument. There is no 2.5% level of debt repayment; it cuts in at 4% (the 2.5% and 5.5% I cited were interest rates). Because the repayment is of all income, the first especially but all the increment thresholds have a significant effect on the annual amount repaid. For example, someone who earns say $43,200 for 2009-10 financial year will pay the government $1,728 in HELP repayments. Someone who earns $43,100 will pay $0. A delay in repayment of 3 years (to use your example) until income rises above the threshold will therefore cost the government several hundred dollars in interest payments on the money they have borrowed to finance HELP.
To work out the significance of this we need to know how many HELP debtors are bunched within a few hundred dollars of each threshold – the range at which a 1% difference between AWE and LPI will determine which (if any) repayment rate will apply.
But I don’t think it should be very contentious that over long periods of time the compounding effect of a 1% difference each year will see the thresholds move further and further out of line with what graduates actually earn.
I’ve had a look at some ATO data. In 2007-08 for example there were about 67,000 HELP debtors with incomes in the $40 to $45K range. They paid about $122 million. This is the kind of group that is going to slip out of the repayment system.
I’ve no doubt that the government loses money on the group you are mentioning (many of whom would no doubt get out of that category quickly — they’re basically people in the “short stay” category assuming they get a pay rise or two, which is why I used the 3 years), but I’ll bet that most of the losses consist of people who don’t work full time after getting their degree. This includes, for example, older people going to university with no real expectation of paying it back (100% loss), people who decide to start a family that only work part time for many years (in which case the compounding differences over time is important), people who leave overseas either permanently or for many years etc. . Even if these people are only a smallish percentage of the total number of students, because the government is losing up to 100% on them, it’s a huge amount compared to those just transiting quickly through a threshold.
My paper on this will target all these groups – the idea is to plug HELP’s many financial holes as well as possible while still keeping the basic policy intention of the scheme.
I’m not sure how accurate the numbers are, but if you didn’t see it in the Age, I would think it’s groups like these (at least ones that did their degrees later in life) that are responsible for some of the missing millions — and no doubt politically impossible to do anything about.
Conrad – Thanks, I saw it, though I cannot find any recently published downloadable research from this project. They have a book but it is published in Canada.
In the past my understanding is that while ABS data clearly shows that women generally, including graduates, still have fairly low rates of full-time work the delay in having kids meant that they paid back much of their HECS debt first. However now that average HECS debts are higher than in the past that may not be the case.