21 July 2015
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Two of the key architects of the original HECS, Dr Tim Higgins and Professor Bruce Chapman, have produced a new report that argues for 
significant reform to the income contingent loan scheme that would extend it to more VET students while making it affordable. They argue that extending income contingent loans to more VET students is required to ensure equity among tertiary students, but this would require adjustment to the current system otherwise it would not be financially sustainable or equitable. They note that when compared to university graduates, Certificate III and IV completers have low incomes and, for women, low employment outcomes. They propose that, unless government funding for tertiary education is increased, there is a persuasive case for reducing the income repayment threshold, reducing the repayment rate and imposing a uniform loan surcharge across all tertiary students. The following summary of the report – Feasibility and design of a tertiary education entitlement in Australia: Modelling and costing a universal income contingent loans – has been prepared by the Mitchell Institute which commissioned and published it.
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The Mitchell Institute commissioned Higgins and Chapman to prepare the report following the release of its issues paper, Financing tertiary education in Australia – the reform imperative and rethinking student entitlements, in February 2015 by Mitchell Professorial Fellow Peter Noonan and Mitchell Policy Analyst, Sarah Pilcher.
The February paper proposed the potential expansion of Australia’s successful income contingent loan scheme to all Australian tertiary students from Certificate III upwards as part of a new model for tertiary education funding across the Commonwealth and state governments.
This latest report to the Mitchell Institute presents the outcomes of various financial modelling, conducted by Higgins and Chapman, of the potential costs of applying an income contingent loan scheme to include all tertiary education students.
The Mitchell Institute will draw on the Higgins and Chapman report to finalise its proposal for an integrated tertiary education funding system in Australia.
What is an income contingent loan?
At present, there are a range of different income contingent loans schemes operating in Australia’s higher education and VET sectors. Under such schemes, students are not required to pay the upfront cost of their course. Instead, they are able to take out a loan with the government and repay the loan through the taxation system once they enter the workforce and their incomes reach a certain threshold.
But these loans are not available to all students. In the VET system, those studying for Certificate III and most Certificate IV VET courses, for example, early childhood education, aged care, and hospitality, do not have access to an income contingent loan. These students must pay the cost of their course upfront – a potential barrier as fees for many of these courses are increasing.
What does the Higgins and Chapman paper say?
The Higgins and Chapman paper says there are strong public policy arguments for extending the income contingent loan system to include more tertiary students, but that doing so would mean revisiting some of the fundamental parameters of the existing income contingent loan scheme.
The authors re-examine the basic rationale for income contingent loans as a policy intervention, setting out several key reasons for extending and revising the current system.
What is the policy rationale for extending income contingent loans to more tertiary students?
Higgins and Chapman suggest that left to itself, the tertiary education market will not meet the needs of individuals, employers or the economy. They argue extending income contingent loans to more tertiary students is required for the following reasons
1. To ensure equity among Australian tertiary students.
Current settings treat students differently depending on the sector in which they study, the type of provider organisation at which they study, the level of the qualification, and the state in which they live. This has led to unnecessary complexity and inequity in tertiary education and decreases our stock of human capital
2. To ensure greater policy coherence and transparency.
The current system may not be creating the right incentives. The existence of upfront fees in some settings, and the variability of those fees, is likely to affect student choice.
Uneven policy settings may curtail, and in some cases, restrict students’ choices, and this is likely to disproportionately affect students from disadvantaged backgrounds.
3. To ensure the ongoing financial sustainability of the income contingent loan system.
Currently the Commonwealth is paying not only a course subsidy but a loan subsidy (this arises because some debt may not be repaid and because interest charged on the loan is less than the government’s cost of borrowing), and this varies greatly depending on a graduate’s income. Understanding and quantifying these loan subsidies is vital to ensuring the ongoing viability of the scheme.
The income threshold for repayment was originally set with reference to average full and part-time earnings – the rationale being that if a student never earns a greater than average wage, they have not realised the private benefits of their study and therefore do not need to repay their debt. These settings, conceived at a time when tertiary participation rates were much lower, may no longer suit a world of near universal tertiary education and training.
What are the key findings of the Higgins and Chapman paper?
The Higgins and Chapman report seeks to quantify the largely hidden subsidies involved in income contingent loans through unpaid debt and the difference between the rate at which debt is indexed and the costs to government of borrowing to finance student debt.
The modelling mapped students’ projected incomes by qualification level, finding significant variation in lifetime incomes across VET and higher education qualifications.
Higgins and Chapman found that extending current income contingent loan arrangements to a broader scheme would require adjustments, as doing so under current settings would arguably be neither financially sustainable nor equitable.
The paper finds that extending the current income contingent loan system to a broader range of students would result in:
1. High loan subsidies for some students and qualifications.
This is particularly the case for Certificate level qualifications and also for female graduates because females experience much lower rates of full time employment. This has a significant effect on lifetime incomes and capacity to repay an income contingent loan.
2. High variability in the effective subsidy rate between different groups of students.
This variability in loan subsidies means costs are not shared transparently or equitably among the pool of borrowers and the Commonwealth.
Given these conclusions, the paper then presents modelling that changes a number of key variables of the income contingent loan mechanism, including:
- the repayment rate;
- the income level at which students commence repayments;
- the interest rate applied to the loan; and
- loan fees or surcharges, noting that these currently exist for FEE-HELP and VET FEE-HELP, but not HECSHELP.
Changing these settings can have a significant impact on how much, and how quickly, debt is repaid.
It also highlights the complexity of equitably sharing the costs of income contingent loans between the individual student, the pool of student borrowers and the Commonwealth (or taxpayers).
This involves not only a consideration of the public and private benefits of tertiary study or training, but also the extent to which the policy settings create cross-subsidies from some cohorts of students to others.
The paper also explores a range of broader policy issues including:
- Federal\state responsibilities where the Commonwealth operates the income contingent loans scheme but the states/territories fund VET and could transfer costs to students and through them to the Commonwealth.
- Setting fee policies and public funding appropriately so that students don’t take on debt for excessive fees that will not be fully or ever be repaid as a consequence of inappropriate provider behaviours.
Women have generally less capacity to repay their income contingent loans than men as a consequence of lower levels of workforce participation. There are also important interactions between the tax system, family benefits and child care costs meaning that repayment rates and the level at which repayments commence have to be carefully considered.
What do Higgins and Chapman conclude?
Higgins and Chapman argue that on balance, if income contingent loans are offered to Certificate III and IV students – but if state/territory and Commonwealth governments are reluctant to increase funding of tertiary education – then the modelling makes a persuasive case for reducing the income repayment threshold, reducing the repayment rate and imposing a uniform loan surcharge across all tertiary students. The authors see these measures as a viable means of ensuring consistency while also ensuring that additional costs of the system are progressively shared across the pool of borrowers.
About the authors
Dr Timothy Higgins is Senior Lecturer and researcher in Actuarial Studies at the Australian National University. Prior to academia, he worked in the Department of Treasury where he was involved in the design and costing of public policy, including the HECS scheme. He is a Fellow of the Institute of Actuaries of Australia and has been a consultant on higher education policy to the Australian government. He has written extensively on the design, application and costing of income contingent loans.
Professor Bruce Chapman is Professor of Economics and Director, Policy Impact at the Crawford School of Public Policy
at the Australian National University. He is widely regarded as the architect of HECS, the Australian income contingent loan scheme for higher education. He has extensive experience in public policy, including as a senior economic advisor to Prime Minister Paul Keating, 1994–96, and as a higher education financing consultant to the World Bank and the governments of Thailand, Papua New Guinea, Mexico, Canada, the UK, Ethiopia, Rwanda, Malaysia, Colombia, the US, Chile and China.