The future of HECS
Throughout the inquiry, evidence received from students, vice-chancellors
and others highlighted the importance of Australian's unique HECS scheme.
Ensuring financial stability and accessibility of HECS
The reforms propose changes to the design and parameters of the HECS
scheme with the policy objective of strengthening Australia's higher education
system while repairing the budget. The proposed reforms seek to streamline the
HELP program by:
aligning FEE-HELP and HECS-HELP;
removing the HECS-HELP up-front payment discount and voluntary
removing the FEE-HELP lifetime limit and loan fee; and
removing the VET-FEE HELP lifetime limit and loan fee.
The reforms also propose to increase the indexation and minimum
repayment threshold for HELP debts.
Aligning FEE-HELP and HECS-HELP
The HECS-HELP benefit was first introduced as part of the 2008–09 Budget
with the purpose of reducing HECS-HELP repayments by approximately $1800 a year
for early childhood education and $1700 a year for other occupations.
Subsequently, the HECS-HELP program was expanded to other areas of identified
need, including mathematics, science related occupations and nursing.
The reforms propose to discontinue the HECS-HELP benefit from 2015,
as it has had a low take up and has been ineffective in achieving its aims.
The Graduate Destination Survey of recent graduates shows
that transition into these occupations was high before the HECS-HELP benefit
was introduced and has not changed significantly since.
The Committee also notes that the Review of the Demand Driven Funding
System conducted by Hon. Dr David Kemp and Mr Andrew Norton recommended
that '[t]he HECS‑HELP
benefit for graduates in designated occupations should be discontinued.'
Removing HECS-HELP upfront payment
discount and voluntary repayment bonus
The changes to the loan scheme also include the removal of
the up-front payment discount for HECS-HELP loans and the voluntary repayment
bonus for HELP loans,
both initiatives of the previous Labor government.
By decisions made by the previous Labor government, since 1 January 2012
Commonwealth supported students who are eligible for HECS-HELP and elect to fully
pay, or part pay $500 or more of, their student contribution amount upfront to
their higher education provider receive a discount of 10 per cent. This
discount amount is paid by the Government to the student’s higher education
Further, since 1 January 2012 where a student makes a voluntary repayment of $500 or more towards a HELP debt, they receive a bonus of 5
per cent. This bonus amount is an additional credit against the student’s
outstanding HELP debt that is never recovered by the Government.
The Business Council of Australia supported these measures and
acknowledged that their removal would contribute to the sustainability of the
The committee did not receive any substantive submissions opposing the
Removing FEE-HELP lifetime limit
and loan fee
Currently the amount of FEE-HELP loan a student can access across their
lifetime is capped. This has the effect of potentially excluding students who
would be unable to pay any fees over and above the limit upfront.
The proposed reforms would remove these barriers and ensure equitable access
for students regardless of the type of course or which provider they choose.
Removing VET FEE-HELP lifetime
limit and loan fee
Currently the amount of VET FEE-HELP loan a student can access across
their life-time is capped. This has the effect of potentially excluding
students who would be unable to pay any fees over and above the limit upfront.
The proposed reforms remove the current life-time limits on VET-FEE HELP loans.
Further, the existing VET FEE-HELP loan fee was implemented to assist
the Government to manage the costs of extending HELP to higher level vocational
education and training courses. However, under the proposed changes, the fee
will no longer be necessary as changed indexation arrangements for all HELP
debts (discussed later in this chapter) take account of the costs to government
in providing the loans. As such, the proposed reforms remove the VET FEE-HELP
to ensure all students are treated fairly and equitably.
Evocca College also explained that the removal of the financial barriers
to VET-FEE HELP, students who would otherwise have commenced their studies in
lower qualifications will now instead choose to enter at Diploma level.
The committee heard evidence from students about the financial benefits
of the removal of VET-FEE HELP. For example, a student undertaking a Bachelor
of Design Arts from the Academy of Design in Melbourne, would experience
approximately $15 000 in saving as a result of the VET FEE-HELP reform.
Indexing HELP debts and a new
minimum repayment threshold
Under current arrangements, HELP debt that has been outstanding for more
than 11 months is indexed in line with CPI each year on 1 July. As such, HELP
debt increases only with inflation.
Unlike a personal loan from a bank, it does not matter how
long a graduate takes to pay off their HELP debt: the value of the debt does
not increase in real terms. This is an important element of the design of the
HELP scheme, and a protection for graduates. It particular, it protects
graduates who earn less than the HELP repayment threshold (currently $53,345),
or who take time out of the workforce (e.g. parents raising children).
The reform package proposes to charge a real interest rate at the government
long-term bond rate, capped at 6 per cent.
The September 2014 10 year Commonwealth government bond rate is 3.55 per cent.
CPI for the 12 months to the September 2014 quarter is 2.3 per cent.
The bond rate is the interest rate that the Government pays
on the money that it borrows to lend to students as HELP loans. The Government
borrows money at the bond rate and lends it at CPI: this is a cost to the
Government (estimated at $190 million in 2013-14). While a real interest rate
would eliminate this cost to Government, it would have a negative effect on
lower earning graduates. HELP debt would increase in real terms while graduates
were under the repayment threshold or out of the workforce. The end result
would be that graduates who earned less would pay more. This would be a
regressive system and contrary to the design of the HELP scheme.
In 1996 Professor Chapman outlined the benefit of the interest rate on
HELP debts being lower than 'real' interest rates:
The lack of a real rate of interest on the debt is also worth
highlighting. It means that those former students who earn relatively low
incomes over their lifetimes are given greater subsidies in the form of
implicit access to an interest free loan. The orders of magnitude of this
subsidy can be quite large. For example, [it was] demonstrated that male
lawyers, because they earn high incomes relatively quickly after graduating, in
effect pay up to 30 to 50 per cent more (in present value terms) than do public
sector teachers who spend five years out of the labour force after graduating.
The reforms would also establish a new minimum repayment threshold for
HELP debts of two per cent where a person's income reaches $50 638 in 2016–7.
Currently tax payers are not required to start repaying their HELP loans until
their income reaches $53 345.
As such, from 1 July 2016, a lower repayment amount of two per cent will apply
for persons with incomes above the new threshold up to the current minimum
Higher education will remain cost
free at the point of delivery
In the current HELP environment where HELP debt is indexed at CPI, the
level of debt never increases in real terms. While this means that debtors only
ever repay the same debt they incurred regardless of the timeframe in which
they take to repay the loan, this means the government is subsidising the debt.
In 2014 the cost to the government to subsidise degrees is more than $6
billion, and the value of HELP loans is more than $5 million. Further, the
government submits that in 2017 their funding through HELP loans will be
approximately $10 billion.
In a deficit environment the government needs to borrow the
money that it lends to students. Because the government currently lends to
students at less than it costs the government to borrow the money, there is an
additional subsidy from taxpayer to student. Given the scale of costs now
present in the higher education system, it is time that students picked up a
fairer share of the tab for these interest charges. This is why we are changing
the indexation rate for HELP debts from the consumer price index to the
Treasury bond rate (safety capped at six per cent).
The current fiscal environment dictates that the current HELP debt indexation
arrangement is not sustainable, however, under the proposed reforms HELP debts
are and will remain income-contingent loan schemes.
Under the HELP scheme, graduates are obliged to repay only
when they have the income to do so. Otherwise, graduate[s] are not obliged to
‘clear the debt’ over any period. HELP debts are not the same as mortgages or
personal loans. HELP loans are fundamentally different in the way they operate.
In evidence before the committee, Professor Bruce Chapman argued that:
What always mattered hugely to maintain the rationale and the
power of this [HECS] instrument was income contingency—not having any charges
up front, offering insurance against default and offering consumption
smoothing. That is the essence of an income contingent loan and the motivation
for it—and that is still there. But the parameters have changed hugely. In 1989
the charge was the same for all courses—so there were very considerable
Universities unanimously supported that sentiment:
HELP loans remove up-front financial barriers to access for
all students, irrespective of their personal or parental means. Payment is
related to income after graduation, rather than financial resources at
enrolment. Fees and HELP debts have no impact on most students’ financial
circumstances while they are studying.
Interest rate options: mitigating
Despite the fact that the reform package ensures that higher education
will remain cost free at the point of delivery, university groups and students
voiced strong concerns about the applications of the long-term bond rate to
A real interest rate will mean that – for the first time –
the real value of a HELP debt will increase over time. Graduates who take
longer to pay will pay more in real terms. This presents equity issues for
lower earning graduates and especially for those who take time out of the
A number of submitters expressed grave and specific concerns about the
impact the proposed changes to the indexation of HELP debts would have on women.
This change is regressive and will disadvantage graduates who
take time out of the workforce, particularly women with families. With
indexation at CPI, the student is not paying more than it cost them.
Universities Australia argued that:
The compounding effect would be felt disproportionately by
women (who face persistent pay differentials and are more likely to have their
careers interrupted by parental responsibilities), and graduates who work in
sectors with low or moderate average earnings.
Impact on women
In light of the potential for the proposed changes to indexation of HELP
debts to impact on those taking time out of the workforce and those with lower
average earnings, a number of submitters expressed grave and specific concern
about the effect of the Bill on women.
This change is regressive and will disadvantage graduates who
take time out of the workforce, particularly women with families. With
indexation at CPI, the student is not paying more than it cost them.
and Universities Australia argued that the reform would disproportionately
impact women emphasising the fact that women 'face persistent pay differentials
and are more likely to have their careers interrupted by parental
responsibilities, and graduates who work in sectors with low or moderate
The Australian Nursing and Midwifery Federation discussed the potential
impact of the proposed changes on professions in which women are
overrepresented, such as nursing.
The National Tertiary Education Union also raised this issue with respect to
The increased interest that would be charged on HECS will be
such that it will represent an additional debt burden for our members. In a
gender profession like teaching, the impact will be disproportionate on women.
The National Centre for Social and Economic Modelling, University of
Canberra, provided evidence before the committee about the significant fact
that women at a certain age have children and the reality that women have a
lower trajectory of their income.
It is across the board that females earn lower incomes.
Across all of the areas that we looked at, and I would imagine most of the
areas you would look at you would certainly find that the repayments would take
longer for females to repay. We did look at business. The
results there are that, say for a male, you would repay it in 10.2 years. For a
female, it would be 12.2. We looked at science. The repayments for a male would
take 11.8 years. For a female scientist, it would be 15.6 years. So it is certainly
a longer repayment period—and, naturally, larger repayments in dollar terms.
Professor Henry Ergas emphasised the role of HELP in understanding
Australia's unique position with respect to well-educated women and their rates
of workforce participation.
Australia is unusual in having substantial numbers of
graduates, especially women, who do not participate in the labour force on a
full-time basis, whereas the pattern in the other advanced economies is for
well-educated women to have high rates of full-time labour force participation.
It is reasonable to believe the zero interest rate on HELP encourages this, as
the penalty for deferring repayments is nil, compounding the other factors that
result in high effective marginal tax rates for second income earners.
Alternative interest rate regimes
As the arrangements that index HELP debt at CPI are no longer
sustainable, a number of submitters offered alternative interest rate regimes
that would maintain taxpayer affordability and ensure the sustainability of
HECS-HELP into the future.
The really critical part of HECS is that it should be seen as
a risk-management instrument. It is to protect people who—through accidents,
bad luck or adversity in the state of the [l]abo[u]r market—are in trouble, in
the future, who have attended university so that they will not incur major
costs for that. That is why there is an income-contingent first threshold of
repayment. That is why the consumer price index was always used to adjust the
One of the options put forward by Professors John Chapman and Dr Timothy
Higgins was a hybrid model that would substantially reduce the chance of real
increases in the debt principal.
[B]ased on the current English ICL interest rate arrangement
which indexes loans in line with the CPI when debtors’ incomes are below the
first threshold of repayment of the debt, and with the bond rate when debtors’
incomes are above the first threshold of repayment of the debt.
In evidence before the committee Professor Chapman further explained
[T]he hybrid... use[s] the consumer price index as an
adjustment of the debt when people's incomes are below the first threshold and
when their incomes are above the first threshold—in 2016, that will be roughly
$56,000—then you use the bond rate. The basic principle for that would mean
that, roughly speaking, the real debt will not go up unless the debt levels are
The following graph, supplied by Professor Chapman and Dr Higgins
illustrates the difference in repayment amounts (in 2016 dollars) for part-time
or full-time employed graduates who completed a bachelor degree based on
proposed indexation at bond rate and based on the hybrid model.
Figure 3: comparison of repayment
amounts based on proposed indexation at bond rate and based on the hybrid
Borrower repayments (2016 dollars). All graduates
(loan = $60, 000)
Overseas-held HELP debt
Currently students departing Australia are under no obligation to report
their student loan status. In addition, while overseas, they are under no
obligation, regardless of their income, to make repayments on their student
loans, unless they are an Australian taxpayer.
Mr Andrew Norton of the Grattan Institute stated that:
One of the design flaws in the whole HELP scheme is there is
no provision for payment for people who are working overseas, potentially
earning very high incomes. Overall, higher education continues to provide high
Professor Chapman argued that:
We lose about $40-$45 million per year because HECS debtors
go overseas and we do not collect it. Tim and I worked on some data a couple of
years ago. He did a fantastic job with pretty poor data to calculate what it
was actually costing the Australian taxpayer, and it is currently about $40
million. Over 25 years, it started out smaller, but we are talking about $800
million. We are talking maybe up to a billion dollars. If the fees go up by
important amounts then the lost money overseas must go up as well.
Professor Chapman and Dr Higgins urged the committee to examine this
matter of lost revenue. Specifically, Professor Chapman put forward a proposal
that the government 'make it a legal obligation that in the event of going
overseas for six months or more' you must pay a minimum HECS payment of
The department undertook to examine this proposal
and acknowledged that:
For each new graduate cohort each year, Chapman and Higgins
estimated that there is additional lost revenue of $20-30 million. This is less
than one per cent of the total value of loans made each year but it is
The committee is convinced that affordable access to higher education
will continue to be supported, as the proposed measures ensure that students will
still be able to defer payment of their tuition fees. The committee notes that
Australia's higher education system is unique in comparison to its
international counterparts, as the reform package will ensure that no up-front
financial barriers to access higher education for all students, irrespective of
The committee is persuaded that most of the proposed changes are crucial
to ensuring quality in higher education and are proportionate to the policy
objective of strengthening the system while repairing the budget, without
adverse impact to the sector or students.
The committee is satisfied that the lower two per cent repayment rate
for those above the new minimum repayment threshold will ensure that low-income
graduates will not experience a large reduction in their disposable income,
while supporting the sustainability of HELP.
However, the committee believes that the indexation of HELP debt is an
area worthy of further consideration to ensure graduates who may not reach
their earning potential are not overly burdened by debt. The committee notes
that the interest rate on HELP and the conditions of repayment have a
significant effect on the size of the debt burden. Therefore, in light of the
evidence, the committee urges the government to re-examine this aspect of its
At the same time, the committee notes that an increase to the indexation
of HELP debts will not impede students' access to higher education because
students will only be required to pay back their HELP debts once they start
earning above the minimum repayment threshold. As such, the committee
recommends that the government set a rate of indexation that will adequately
reflect the borrowing cost to the government, but also partially remove the
indirect subsidy that all taxpayers contribute to higher education. The
committee was persuaded by evidence presented on alternative indexation models,
notably the hybrid model put forward by Professor Chapman and Dr Higgins, and
urges the government to explore the viability of such a model.
Finally, the committee acknowledges that a significant amount of HELP
debt revenue is lost when residents move overseas, and urges the government to
The committee recommends that the government examine HELP indexation
measures in light of evidence presented to the committee, recognising unforseen
impacts of the proposed reforms on students.
The committee recommends that the government explore avenues to
recover HELP debts of Australians residing overseas.
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