Rajat asks about deferral trends over time. The figure below is the percent of total student liabilities deferred 1989-2009.

Source: Higher Education Report 2009.

As you can see, the trend is consistent with discount rate having an effect. When it increased in 1993 from 15% to 25%, more people paid up-front and the deferral rate dropped. When the discount decreased from 25% to 20% in 2005, the deferral rate increased, ie fewer people considered it worth paying upfront.

The data is also consistent with the effect building over time. Continue reading “The longer-term effects of upfront discount rates” →

According to media reports this morning, the government is planning to cut the discount on student contributions paid up-front from 20% to 10%.

According to The Age’s version of things, ‘the government will justify the cut on the grounds that the benefit goes mostly to wealthy families.’

But contrary to common impressions, the discount was not intended as a benefit to anyone other than taxpayers. Because it is very expensive to lend money at zero real interest, students paying up-front can save the goverment money. In a couple of scenarios I did last year, for male arts and law graduates earning median incomes in professional or managerial jobs, it was slightly cheaper for the federal government to pay the discount than to pay the interest subsidy on the HELP debt.

However, the economics of the discount depend on how long students would otherwise take to repay. For quick repayers (or people who would pay upfront anyway), the government would be better off not giving the discount. If students are going to repay slowly, the discount looks like a better deal for taxpayers. Another factor is that up-front payment removes the risk of non-repayment.

Whether or not halving the discount makes financial sense for the government depends on the behavioural response. Continue reading “Should the upfront student contribution discount be halved?” →