15% universal loan fee for HECS/HELP



The key purpose of HECS is to provide all students with an opportunity to participate in higher education.  In order to give as many students as possible this opportunity it is logical that the underlying risk of some HECS debt will never being repaid will rise. Given that individuals tend to under-invest in education due to risk aversion associated with complex choices (especially students from low socio-economic backgrounds), the economic upside of increasing the freedom of choices in quality education is greater than any downside of some HECS never being repaid.

However, since a student’s HECS liability is capped the cost of any downside from students being unable to repay their HECS liability rests with the government.  This raises the question as to whether the cost should be borne by the government and hence all taxpayers or by the taxpayers who benefit from accessing HECS to participate in higher education.  If it is the later, there are a number of options to recover the cost of non-payment of HECS: a) increase the rate of interest on outstanding HECS, b) lower the repayment threshold, c) increase the marginal tax rate contribution, d) recover outstanding HECS liability from deceased estates, or e) an upfront fee retained by the government (and not paid to the higher education provider).

Of the five options, two are particularly problematic.

Increasing the interest rate on HECS liability above CPI (i.e. any real interest rate greater than zero) leads to discriminatory impacts on individuals with differing life-histories. In particular, a key reason for having a zero real rate of interest on ICLs/HECS is to address the gender asymmetry in life history.  Simply, a real rate of interest greater than zero discriminates against women.  But a zero real rate of interest also helps those who experience bad luck or take longer to benefit from the returns of higher education such as disabled students or those from low socio-economic backgrounds lacking the social capital to fully exploit the benefits of their education.

Recovering outstanding HECS liability from deceased estates gives rise to two counter-productive impacts. Firstly, by recovering outstanding HECS liabilities from deceased estates the key idea of HECS protecting students from the downside of choices in higher education is removed. Choices once again become risky, leading to an under-investment in education due to risk aversion. An outcome that will particularly effect students from less wealthy or lower socio-economic backgrounds. Secondly, it will only take a salient few cases where a young family loses their home due to a mother or father dying from misfortune for students to think twice about incurring a HECS liability. Not all people with an outstanding HECS liability die old.

The remaining three options do not give to serious social equity impacts.  Although they are not perfect.

Lowering the repayment threshold means that some students maybe repaying their HECS liability before they receive any increase in earnings from their investments in education.  A lower repayment threshold also increases the perceived ‘upfront’ cost of education which may lead to choice inertia where students choose not to participate in higher education.

In Australia the marginal HECS tax rate contribution is applied to all income in much the same way as the Medicare levy.  Although the rate varies depending on income levels, a less regressive approach is to apply a higher marginal HECS rate only for income above the HECS threshold as is done in the UK and New Zealand.  However, the salience of a higher tax rate may lead to some students questioning the value of their investment in education.

Similarly, a 15% surcharge may also lead to some students reconsider their investment in higher education.  However, previous policy changes have shown that students do not modify their choice behaviour when student contribution amounts change.  Applying subsidies to student contributions for STEM subjects did not increase demand for these subjects nor did demand change when these subsidies were removed.  There is also a concern that by adding a surcharge students will take longer to pay off their HECS liability.  But if the real interest rate is zero (no higher than CPI rate) there is no additional penalty for students that take longer to pay-off their HECS liability.

In addition to the above, a 15% surcharge is simple and transparent.  It keeps government transaction costs low and from a behavioural economics perspective does not increase choice complexity and therefore is unlikely to impact higher education participation.

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