Introduction

Since its inception in 1989, the Higher Education Contribution Scheme (HECS) has become an integral part of the Australian higher education system. By shifting a significant proportion of the cost of higher education from the Commonwealth to students, it has enabled the continuing expansion of the sector in an era of budgetary constraint. Total student payments through HECS in 2002 03 are estimated to be $1177 million, or around 20 per cent of the funding available to higher education institutions from Commonwealth programs.

This brief contains information on the development of the scheme since 1989, its current operation and related issues. Links to relevant web sites and online documents are provided where appropriate.

Key Sites

The principal Internet sites relating to HECS are those maintained by the Department of Education, Science Training (DEST) and the Australian Taxation Office (ATO).

The Department of Education, Science and Training

The DEST website for HECS contains:

• information for students on HECS in 2003, as well as similar information for the Open Learning Deferred Payment Scheme (OLDPS), the Postgraduate Education Loan Scheme (PELS), and the Bridging for Overseas-Trained Professionals Loan Scheme (BOTPLS)
• material on tuition fees for Australian students and overseas students
• information on financial assistance for students
• information booklets, administrative guidelines and FAQs relating to HECS and the other schemes

The Higher Education Report for the 2003 to 2005 Triennium outlines government policy and other developments in the sector. It has a section on HECS (pdf file) with a description of the scheme and statistics.

Under the former provisions of the Employment, Education and Training Act 1988, the Higher Education Council was required to produce annual reports on the operation of HECS. The twelfth and final report in this series was published in June 1998. The reports contain information on the impact of HECS on enrolments, details of changes to the scheme, and detailed statistical and financial data. These reports can be accessed from this DEST page.

The DEST statistical publications contain some HECS data. The annual Selected Higher Education Student Statistics has tables on the HECS liability of students; and the annual Selected Higher Finance Statistics gives details of the income from HECS received by each higher education institution. These publications can be downloaded from this page.

The DEST Annual Report has an appendix containing financial data relating to HECS. Current and former Annual Reports can be obtained from this page.

The Australian Taxation Office

The Australian Taxation Office is responsible for collecting HECS debts. It has a page on tertiary education and HECS which provides access to information about HECS indexation rates and repayment formulas.

Recent Developments

The Government announced major changes to the higher education funding system in the 2003 04 Budget. Documents detailing these policies can be obtained from the DEST site, Our Universities: Backing Australia's Future. This provides a summary of the reforms, a policy paper, fact sheets and other information. For background, reactions and other information about these developments, see the Parliamentary Library e-brief on Higher Education Funding Policy.

The changes to HECS are described below. It should be noted that these changes will not take effect until Parliament agrees to amendments of the Higher Education Funding Act 1988.

Changes to HECS in the 2003 04 Budget

From 2005, institutions in receipt of Commonwealth supported places will determine their own student contribution level for each course they offer within ranges set by the Commonwealth. Currently there are three HECS bands, each with a fixed rate of student contribution. From 2005 these fixed rates will be replaced by ranges. The top of these ranges will be 30 per cent higher than the projected level of HECS for each band for 2005 under current arrangements. The bottom of each range will be $0. Institutions will be able to set the student contribution at any point within these ranges. In addition, a fourth band will be established called National Priorities, which will consist of education and nursing courses. The range for this band will be from $0 to the current level of HECS for Band 1 ($3854).

The minimum repayment threshold for HECS will be raised to $30 000 by removing the two bottom repayment bands. This means that those with a HECS debt will start paying 4 per cent of their income when they reach $30 000, whereas they now pay 3 per cent when their income reaches $24 365. In addition, the maximum rate of repayment will be raised to 8 per cent where income exceeds $60 000 (the top rate is currently 6 per cent where incomes exceeds $43 859). The Government has also reduced the discounts for upfront payments (from 25 to 20 per cent) and voluntary repayments (from 15 to 10 per cent).

The Operation of HECS

The Higher Education Funding Act 1988

The legislative basis for the scheme is the Higher Education Funding Act 1988. The Act also provides grants of financial assistance to higher education institutions. Under section 38, such financial assistance is granted on the condition that institutions comply with the requirements of the HECS.

Chapter 1 defines terms and lists the higher education institutions which are to be funded through the Act. Chapter 2 sets out the funding levels and conditions attached to grants for these institutions. This chapter is amended annually to adjust the level of grants for cost supplementation and to add each new year to the rolling triennium.

Chapter 4 and 5 provide the statutory basis for the HECS and the Open Learning Deferred Payment Scheme (OLDPS), while Chapter 5A deals with the repayment of loans made under Chapters 4 and 5. The HECS annual course contribution and the repayment thresholds are subject to annual indexation, according to formulae defined in sections 40 and 106Q respectively. This means that annual amendments are not required to adjust the contribution and threshold amounts.

How HECS Works

Persons seeking to enrol in award courses at higher education institutions are required to complete and return to the institution a Payment Options Form. This Form nominates if they are going to pay their HECS up-front and receive a 25 per cent discount, or if they are going to defer their payment by asking the Commonwealth to pay their HECS for them. If they pay up-front, then the Commonwealth pays the remaining 25 per cent to the institution from the HECS Special Account. If they choose to defer payment, then they must provide the institution with their tax file number so that the Tax Office can be informed of their HECS debt.

The HECS debt is indexed using the Consumer Price Index each year. The adjustment is made on June 1 and applies to that portion of the debt that has remained unpaid for a year or more. No interest is charged on HECS debt.

HECS debtors are required to begin repaying their loans when their 'HEC repayment income' reaches the compulsory repayment threshold. HEC repayment income is defined as taxable income plus any reportable fringe benefits and any reductions for net rental loss (i.e. income cannot be reduced through the negative gearing of rental property). HECS repayment thresholds are adjusted each year to reflect changes in average weekly earnings. It is possible to defer the compulsory repayment if it can be demonstrated that such payments would cause serious financial hardship.

It is also possible to make voluntary repayments at any time. For voluntary repayments in excess of $500, a bonus of 15 per cent is added to the repayment.

Voluntary repayments and payments made through the tax system are paid into the HECS Special Account. Any shortfall between these repayments and the payments made out of the HECS Special Account for loans or discounts is covered by a Commonwealth contribution to the Account. The DEST Annual Report has an appendix containing financial data relating to the HECS Special Account. Current and former Annual Reports can be obtained from this page.

HECS debts are cancelled at death. There is no requirement for the deceased person's family or beneficiaries to repay any remaining debt.

Budget Treatment of HECS

Major changes to HECS are not necessarily reflected in the Budget bottom line, because of the treatment of the scheme under the accrual accounting format currently employed by the Commonwealth Government. The loans made to students are not classified as an expense but as an asset, because they will be repaid. Commonwealth expenses relating to HECS consist of the following:

The only revenue item associated with HECS is that obtained from the indexation of HECS debts. This amounted to $252 million in 2001 02.

HECS Contribution and Repayment Rates

Tables 1 and 2 give the rate of full contribution (i.e. no discounts for up front payments) for students since the inception of the scheme. There are two sets of rates because the introduction of differential rates in 1997 did not apply to existing students.

Table 1: HECS contributions for students who commenced before 1 January 1997

Table 2: HECS contributions for students who commenced after 1 January 1997

Group 1: arts and humanities; justice, legal studies; social science and behavioural science; visual and performing arts; education; and nursing.

Group 2: mathematics and computing; other health sciences; agriculture and renewable resources; built environment and architecture; science; engineering and processing; and administration, business and economics courses.

Group 3: law; medicine and medical science; dentistry and dental services; and veterinary science.

Table 3 gives repayment rates (the percentage of income repaid through the tax system by those with HECS liabilities) and the income thresholds (the level of income where a particular repayment rate applies) for the years since the scheme commenced.

Table 3: HECS Repayment Rates and Thresholds, 1988 89 to 2002 03

Note: the 2 per cent rate and threshold in 1996 97 were for voluntary repayments.

HECS Statistics

The most recent financial data relating to HECS can be found in Table 3.5 of the section on HECS (pdf file) of the Higher Education Report for the 2003 to 2005 Triennium. This is reproduced in Table 4 below.

Table 4: Financial Aspects of HECS, 1989 1990 to 2003 2004 (estimates)($m)

Source: DEST, Higher Education Report for the 2003 to 2005 Triennium, Table 3.5. Figures for 2001 02 and later years are estimates. The 'Net Commonwealth HECS Outlay' is not a Budget item but simply the HECS liability for any given year minus the student payments for that year. See the section Budget Treatment of HECS for an explanation of Commonwealth Budget expenses under HECS.

Updated estimates of future HECS liabilities and other statistics have also been provided by the Minister in response to a question on notice. See House of Representatives Hansard, 18 March 2003 (pdf file), Question No. 1284 (p. 12680). This includes a table showing the number of persons leaving higher education with a HECS debt in each year since 1989, by the size of their debt.

The annual Selected Higher Education Student Statistics have a number of tables showing the HECS liability status of current students. The data for 2002 can be obtained from this page (see tables 47 to 50).

The funding tables provided by the Australian Vice-Chancellors' Committee (AVCC) are particularly useful because they present figures for the period 1982 to 2005 adjusted for cost factors. There are also a number of tables which contain per student funding figures and which separate HECS from other Commonwealth funding. The AVCC publication, Key Statistics on Higher Education (November 2002) also contains statistical data relating to HECS.

The DEST annual publication Selected Higher Education Finance Statistics gives details of the income from HECS and other sources received by each higher education institution. These indicate the growing importance of HECS and other fees as a source of funds for the system, as illustrated in Table 1 from the Parliamentary Library e-brief, Higher Education Funding Policy.

Background

Origin of HECS - the Wran Committee

In December 1987 the Commonwealth Government announced that it was committed to expanding the capacity and effectiveness of the higher education sector but that with the current budgetary circumstances it would be necessary to consider sources of funding involving the direct beneficiaries of higher education. It established the Committee on Higher Education Funding (Wran Committee) to develop options and make recommendations for possible funding schemes which could involve contributions from students, graduates, their parents and employers. In April 1988 the Wran Committee recommended a contribution scheme whereby higher education students would pay an additional 2 per cent of taxable income until they met 20 per cent of the cost of their higher education. The requirement to pay would arise only when the student's personal taxable income exceeded the average earnings of all working Australians. The Committee also recommended three levels of contributions: $1500, $2500 and $3000 pa. (depending upon the cost of the course). The report canvassed the possibility of allowing institutions to vary these charges by 15 per cent above and below the standard. Both the charges and the level of income contingency were to be indexed to maintain their real value, rather than imposing any interest payments. The report suggested that a discount be applied to 'up-front' payments, and that this discount would need to be around 40 per cent to be attractive in financial terms.

In August 1988 the Government announced that it had accepted most of the Wran Committee's recommendations, and that it would introduce the HECS on 1 January 1989. However, the scheme would have only one rate of contribution ($1800 in 1989) and an up-front discount of only 15 per cent. The legislative authority for the scheme was contained in the Higher Education Funding Act 1988. The Minister's Second Reading Speech can be obtained here.

Major Changes to HECS Since 1989

The Scheme has been subject to many changes since its inception. Proposed measures are generally announced in the Federal Budget and then incorporated in amendments to the Higher Education Funding Act in the following Budget Session, although not all such proposals have been accepted by the Parliament. The table below summarises these changes.

Glossary

HECS contribution: the annual charge levied on students for undertaking a course.

Repayment rate: the annual percentage of income repaid by those with a HECS debt.

Repayment threshold: the level of income at which a particular repayment rate begins.

HECS Exemption Scholarships

In October 1988 the Government announced that it would provide 19 000 HECS exemption scholarships: 15 000 for allocation by higher education institutions for postgraduate study, and 4000 for allocation by State and Territory teacher education authorities for teachers' professional development. The number of postgraduate exemption scholarships was increased to 17 000 in 1992.

From January 1994 the Australian Postgraduate Research Awards and the Australian Postgraduate Coursework Awards were combined with the HECS exemption scholarships for postgraduates to form a new scheme, the Australian Postgraduate Awards. Holders of the awards would not be liable for HECS.

The exemption scholarships for teachers were abolished in the 1995 96 Budget.

The Higher Education Equity Merit Scholarship Scheme (HEEMSS) was announced in the 1996 97 Higher Education Budget Statement to take effect from 1997. The scheme was to further encourage the participation of equity groups by exempting one thousand new students each year from the HECS charge, building up to a pool of 4000 students by the year 2000. Scholarships were allocated to each university on the basis of the number of Australian undergraduates at each institution. The scholarships were awarded by universities in accordance with guidelines which specified that:

• recipients should be commencing students belonging to at least one of a number of equity groups (women in non traditional areas, indigenous Australians, people with a disability, from non-English speaking or low socioeconomic backgrounds, or from rural and isolated areas) and who had suffered educational and financial disadvantage
• institutions should award the scholarships on the basis of merit, with merit being determined by each institution having regard to the academic potential and level of disadvantage of applicants

DETYA has claimed that an informal survey of university equity officers revealed that:

• 85 per cent of respondents claimed that the scheme was ineffective in attracting people into higher education who might otherwise not undertake university study because young people did not value an exemption from HECS and because the universities did not advertise the scheme properly
• there was no agreement on whether the scholarships improved retention
• HECS exemptions are more attractive to mature age students and single parents, rather than school leavers, and
• the scheme is administratively expensive for the universities.

The scheme was abolished in the 1999 2000 Budget.

HECS and the GST

The GST does not apply to education payments such as tuition fees or the HECS contributions made by students to institutions. However, the GST had a considerable impact on the repayments made by students who have HECS liabilities.

Under the scheme, the Commonwealth Government pays the contributions of those students who do not wish to pay 'up-front', then recoups the money through the tax system when the student begins to earn taxable income. Students do not pay interest on their HECS liabilities. Instead, their outstanding HECS debt is indexed each year on the basis of movement in the All Groups Consumer Price Index (CPI). Because the GST caused many prices to rise, it had an impact on inflation as measured by the CPI and this in turn increased the level of HECS liabilities.

On 1 June 2000, an official of the Department of Education, Training and Youth Affairs (Mr Mutton) told the Senate Employment, Workplace Relations, Small Business and Education Committee that the increase in HECS and Abstudy loans debts caused by inflation in 2000 01 would be 5.4 per cent and that this would deliver an additional $323 million to the Government next year. As the government estimated that the increase in the CPI in 2000 01 caused by the introduction of the GST was around 2.75 per cent, it would seem that around $160 million of this additional revenue was due to the impact of the new tax system. Around 975 000 Australians had HECS liabilities at the time and were thus affected by this increase.

On the 2 June 2000 the Minister for Education, Training and Youth Affairs, Dr David Kemp, issued a press release on this subject.

HECS Related Issues

HECS and Participation in Higher Education

In 1988, parliamentary concern about the possible impact of the HECS on access to higher education resulted in an amendment of the Employment, Education and Training Act 1988, requiring the Higher Education Council to produce regular reports on the operation of HECS. The reports contain information on the impact of HECS on enrolments, details of changes to the scheme, and detailed statistical and financial data. All of these reports can be accessed from this DEST page.

The Employment, Education and Training Amendment Act (No.10 of 2000) abolished the Higher Education Council and removed the requirement for regular reports on HECS. The twelfth and final report in the series was published in June 1998.

In most of its reports the Higher Education Council concluded that HECS was not deterring students from participating in higher education. However, it also noted that it was not possible to draw conclusions relating to the precise impact of the scheme from general enrolment statistics because demand fluctuated over time and enrolments were influenced by factors other than HECS. To obtain more information, the Council commissioned a number of surveys. The conclusions of these are presented in the Sixth Report (March 1992) and the Seventh Report (May 1993).

DEST has produced a number of papers relating to HECS and its impact on participation. These include:

• Smith, Ramm and Archbold, Investigation of the source of funds for up front Higher Education Contribution Scheme (HECS) contributions and postgraduate fees paid by Australian students (January 1998)
• Les Andrews, The effect of HECS on interest in undertaking higher education (August 1997).

These and other studies were summarised in the DEST Occasional Paper by Les Andrews, Does HECS deter? factors affecting university participation by low SES groups, August 1999. Andrews concluded that 'HECS does not appear to have substantially affected the level of applications or enrolments of students in general although little can be said concerning students from low SES backgrounds' (p.25). It considered that the main determinants of university participation were values and attitudes towards higher education rather than financial considerations. However, these conclusions were predominantly derived from an examination of the literature before 1998, and thus could not assess any longer term impact of the 1997 increases to HECS.

Chapman and Ryan, Income contingent financing of student charges for higher education: assessing the Australian innovation (May 2002) surveyed more recent studies and analysed data from the Youth in Transition Survey. They also concluded that the introduction of HECS did not adversely effect participation. In particular, it did not result in decreases in participation by prospective students from relatively poor families.

However, a recent survey by Richard James, Socioeconomic background and higher education participation: an analysis of school students' aspirations and expectations, (April 2002) has indicated that concerns about costs may adversely affect participation by the socioeconomically disadvantaged. The study surveyed over 7000 Year 10 12 students from three states (Victoria, NSW and Western Australia) in 1999. The survey did not specifically address HECS issues.

In August 2003 DEST released two more papers on factors affecting access to higher education, including the effect of the Higher Education Contribution Scheme:

• HECS and opportunities in higher education: a paper investigating the impact of the Higher Education Contributions Scheme (HECS) on the higher education system, by Aungles, Buchanan, Karmel and MacLachlan, and
• Expansion in higher education during the 1990s: effects on access and student quality, by Martin and Karmel.

The former report concluded that the 1996 changes to HECS had the effect of reducing demand for higher education among school leaver applicants by around 9 000 students per year, and among 'mature age' applicants by around 17 000 persons per year. The paper concluded that HECS had not discouraged overall participation in higher education among persons from a low SES background, although the share of males from a low SES background in HECS Band 3 (the most expensive) courses declined by 38 per cent following the introduction of the differential HECS charges.

The main findings of the Martin and Karmel report were:

• for the period 1989 to 1997, the number of students (non-overseas) grew rapidly, but has subsequently levelled off
• access to university in terms of the proportion of a cohort going to university peaked in 1996
• there has been a significant increase in the duration of study over the decade, and
• the evidence that the academic quality of students has declined over the decade is very weak.

Statistics on participation in higher education by persons with socioeconomically disadvantaged backgrounds are published by DEST in the annual Selected Higher Education Student Statistics. The most recent data (2001) can be obtained from these tables (XL file).

Despite the growth in the system over the last 15 years, participation in higher education is restricted to a relatively small part of the population. In 2001 only 6.4 per cent of persons aged 15 to 64 were studying for a bachelor or higher degree. For 20 24 year old persons, the figure was 22.3 per cent (23.7 per cent for females, 20.8 per cent for males). In terms of educational attainment, in 2001 17.1 per cent of the population aged 15 64 had a bachelor or higher degree (17.7 per cent for females, 16.4 per cent for males). The level of attainment declines with age: 22.1 per cent for 25 34 year olds, 20.6 per cent for 35 54 years, and 12.8 per cent for 55 64 years. See the ABS publication, Education and Training Experience 2001 (May 2002) for more details.

Student Costs and Finances

In September 2001 the Australian Vice-Chancellors' Committee (AVCC) published M. Long and M. Hayden, Paying Their Way: A survey of Australian Undergraduate University Student Finances, 2000 (available from this page). The survey had 34 752 respondents from twenty universities. According to the authors, the survey provides strong evidence to support concerns that students' financial circumstances are preventing them from gaining optimum value from their studies. HECS received considerable support among students as an alternative to the payment of upfront fees, even though it could result in levels of debt that many students considered worrying. The students who were most likely to make use of the deferred HECS option were those with relatively disadvantaged financial circumstances.

The AVCC Submission on Welfare Reform (June 2003) makes reference to a number of other studies regarding the financial situation of higher education students.

The International Comparative Higher Education Finance and Accessibility Project is a three year, Ford Foundation-financed project to study the worldwide shift in higher education costs from taxpayers to students. The section on Australia contains much useful information on higher education costs, including both fees and living expenses.

Benefits of Higher Education

One of the justifications for increasing the cost of higher education for students is that they obtain substantial lifetime benefits from such education. Others argue that the social benefits of higher education are sufficient reason for a greater public contribution. There have been a number of attempts to quantify the returns to investment in higher education in the Australian context. The recent work by J. Borland, P. Dawkins, D. Johnson and R. Williams, Returns to Investment in Higher Education (Melbourne Institute of Applied Economic and Social Research, 2000), surveyed this literature and calculated rates of return using 1997 data. Its conclusions were as follows:

• On average, the total gain in earnings over a working lifetime that a graduate can expect is estimated to be $300 000.
• However, allowing for the cost of the education and applying a four per cent real rate of interest, as the rate of discount, the present value of the net monetary benefit of the higher education over a lifetime is estimated to be about $90 000.
• Earlier studies using 1976 data indicated that the private rate of return was 21.1 per cent and the social rate was 16.3 per cent (i.e. individuals were gaining more from the investment than society).
• Using 1997 data, the private rate was 15.0 per cent and the social rate 16.5 per cent. This suggests that the introduction of HECS has reduced the private rate of return so that it is now similar to the social rate.
• A balance sheet approach to government expenditure on higher education (i.e. comparing how much the government spends with how much it gets back in the form of higher taxes from the higher earnings of graduates) indicates that $5.3 billion spent on university teaching in 1997 98 (excluding research) would ultimately generate about $8 billion in additional receipts from the taxes of graduates.
• The average rate of return to government from their investment in higher education is estimated at 11 per cent.

Borland has recently produced new estimates (pdf file) of the private rate of return for an Australian university degree: 14.5 per cent, with a lifetime gain in earnings of around $380 000.

The benefits of higher education for the individual in terms of employment and income are also evident from the surveys of the Australian Bureau of Statistics (ABS). The unemployment rate for bachelor degree graduates is 2.7 per cent, compared to 9.1 per cent for those without non-school qualifications. The table 'Labour Market Outcomes' on this ABS page contains comparable figures for the last ten years.

The employment rates and starting salaries for recent graduates can be obtained from the annual surveys conducted the Graduate Careers Council of Australia. These are summarised in the publications, The Grad Files and GradStats, which can be downloaded from this page.

The ABS also publishes earnings figures for higher education graduates and persons with other educational qualifications: see ABS, Education and Training Indicators Australia 2002 (December 2002) for a summary of these results. In 2001 the average weekly earnings of a bachelor degree graduate were $1108 (full time) and $555 (part time). The figures for a person who only completed Year 12 were $737 (f/t) and $277 (p/t). The average weekly earnings for all persons were $854 (f/t) and $342 (p/t).

Index and Tables

Introduction

Key Sites

Recent Developments

The Operation of HECS

HECS Statistics

Background

HECS Related Issues

Tables

Table 1: HECS contributions for students who commenced before 1 January 1997

Table 2: HECS contributions for students who commenced after 1 January 1997

Table 3: HECS Repayment Rates and Thresholds, 1988 89 to 2002 03

Table 4: Financial Aspects of HECS, 1989 1990 to 2003 2004 (estimates)