It may seem an age since the federal election, but the new parliament has just convened for the first time. Anthony Albanese will be giving top priority to enacting his election commitments – “an honest politician? Really?” – and starting with his promise to cut uni graduates’ HECS debt by 20 per cent.
Unsurprisingly, the promise was popular, meaning the Coalition and the Greens won’t want to make themselves unpopular by blocking the cut in the Senate. In any case, the Greens’ policy is to abolish uni fees – a fairyland promise that’s easy to make when you know you’ll never have the numbers to keep it.
But just because a cut in graduates’ debt is popular doesn’t necessarily make it good policy. Is it? No and yes.
HECS – the higher education contribution scheme – now called HECS HELP because some imaginative smarty thought of adding the moniker “higher education loan program”, began life 36 years ago as an eminently fair and sensible way of helping the government afford to provide university education to a much higher proportion of our youth.
Over the years, however, successive governments have stuffed around with it, making it less generous and less sensible. So something needed to be done, but simply cutting the size of graduates’ debts doesn’t really fix the problem.
It’s clear that being provided with a uni education gives a young person a great private benefit: a lifetime of earning a wage usually much higher than most non-graduates earn. So it’s fairer to non-graduates to ask graduates to contribute towards the cost of their education.
It’s also true, however, that those taxpayers who don’t benefit from higher education still benefit from being able to work in an economy alongside more highly skilled workers. This “public benefit” justifies not requiring graduates to pay anything like the full cost of their education.
But the trouble with bringing back uni fees was the risk that it could deter bright kids from poor families from seeking to better themselves. This is where the designer of HECS, Bruce Chapman, an economics professor, came up with a brilliant Australian invention, the “income-contingent loan”, which should be up there with the Hills Hoist and the stump-jump plough.
You don’t pay the tuition fee upfront – the government pays the university on your behalf, and you repay the government. But, unlike any commercial loan you’ll ever get, when you to have start repaying, and the size of your repayment, depend on how much you’re earning. So, in principle, you should never be paying more than you can afford.
You don’t pay interest on the loan, but the outstanding balance is indexed to the rate of inflation – which, to an economist’s way of thinking, means you’re paying a “real” interest rate of zero.
If you never earn enough to be able to repay the loan – say because you become a monk – you never have to pay the loan back. That’s by design, not accident.
Trouble is, successive governments have not only made the scheme less generous, the post-COVID inflation surge has added greatly to people’s HECS debts. Debts have become so big they reduce the size of the home loans banks are willing to give graduates.
Worse, in the name of encouraging young people to take supposedly “job-ready” courses such as teaching, nursing and STEM (science, technology, engineering and maths), in 2021 the Morrison government reduced their annual tuition fees, whereas fees for courses such as business, law and the humanities were greatly increased.
Fortunately, this half-brained scheme did little to change students’ choices, but did mean abandoning the previous arrangement in which the fees for various courses were geared roughly to the size of the salaries those graduates were likely to earn.
The cost of an arts degree is now about $17,000 a year, or a massive $50,000 for the full three years. So it’s people who have studied the humanities who now have debts quite out of whack with their earning ability. Smart move, Scomo!
Albanese’s 20 per cent cut in debt levels will do little to fix this crazy misalignment of fees with future earning potential. The cut will have a cost to the budget of about a huge $16 billion in theory, but more like $11 billion when you allow for all the debts that were never going to be repaid anyway.
By making it a percentage cut rather than a flat dollar amount, too much of the benefit will go to highly paid doctors and lawyers. And, in any case, of all the young adults having trouble with the cost of living in recent years, those on graduate salaries are hardly the most deserving.
On the other hand, at a time when, justifiably, the young feel the system has been stacked against them, I can’t be too disapproving of Albo’s flashy measure to help keep the younger generation’s faith that, in the end, the democratic process will ensure most age groups get a reasonable shake.
The young are right to feel bitter about the way earlier generations have enjoyed the ever-rising value of their homes while allowing the cost of home ownership to become unreachable for an ever-growing proportion of our young. And that’s before you get to other features of our tax and benefits system that favour the old.
Thankfully, the government is making the rules for HECS repayments much less onerous, making them work the same way as the income tax scale. The minimum threshold for repayments will be raised from income of $56,000 a year to $67,000. Your income between $67,000 and $125,000 will require a repayment of 15 per cent, and 17 per cent on income above that.
This will yield significant savings to those with debts. But, of course, the lower your repayments, the longer it will take to clear your debt and the more your outstanding balance will be indexed for inflation.
The government’s changes offer justice of a kind, but the rough and ready kind.
