The Age | 1 August 2014
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The federal government is expected to ditch one of its most controversial budget measures – the plan to apply real interest rates to student debts – following advice from the architect of the HECS repayment scheme that it is unfair to poor graduates.
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Photo: Andrew Taylor
Modelling by education economist Bruce Chapman and Timothy Higgins has found poor graduates could pay 30% more for a degree than their high-income counterparts if the government indexes student debts at the government bond rate rather than inflation. Women who take time off work to have children would be among the hardest hit.
With an assumed starting debt of $60,000, Chapman’s modelling found low-income graduates (those in the bottom 30% of earners) would amass total repayments of $105,000 from under the while the top 25% of earners would pay only $75,000 in total repayments on the same debt – $30,000 less than low earners.
Graduates on a median salary would pay about $82,000 in repayments on the same starting debt.
Low-income graduates would be hardest hit by compounding interest on their debts because they spend more time out of the workforce and have lower salaries.
Using the long-term bond rate will be regressive and it is very hard to argue this is fair. HECS was designed to protect people who go to university but, because of bad luck or bad circumstances, don’t get to enjoy the benefits. HECS should act as an insurance mechanism and that aspect of the scheme is being undermined.
Using the long-term bond rate will be regressive and it is very hard to argue this is fair. HECS was designed to protect people who go to university but, because of bad luck or bad circumstances, don’t get to enjoy the benefits. HECS should act as an insurance mechanism and that aspect of the scheme is being undermined.
Chapman’s paper presents two alternative interest-rate proposals that would reduce inequity concerns but have only a small impact on the budget.
- Only charging the higher interest rate when graduates reach the repayment threshold (currently $51,000); or
- A one-off 25% surcharge on each graduate’s loan, with debts then pegged to inflation.
Under the first option, low-income earners would pay 6% more in repayments than high-income earners – down from 30%. The second approach would wipe out the inequity altogether.
University vice-chancellors, who are confident the government will modify its interest rate plan, have come out strongly behind Professor Chapman’s proposals.
Universities Australia chief executive Belinda Robinson said:
There is agreement within the sector that the impact of applying a real interest rate to student loans needs to be modified to ensure continued affordability of a quality university education. The options in Professor Chapman’s paper represent a fairer approach to student loans and are less likely to deter students from accessing a world-class university education.
When Albert Einstein was asked what was the most important force in the universe, he didn’t say gravity, he didn’t say light — he said compound interest.
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