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.
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.