Increasing interest in higher education reform

Increasing interest in higher education reform

In the recent Federal budget, the Australian government controversially proposed a change in the indexed rate of HELP debt, alongside fee deregulation and the lowering of government subsidies. This has signalled a seismic shift in government thinking and the structure of Australia’s tertiary education sector.

For the first time, the government plans to charge up to 6% real interest on existing and new HELP debts, based on a treasury 10-year bond rate. Currently, HELP debt is adjusted to be in line with changes in the cost of living as measured by inflation (i.e. changes in the Consumer Price Indexation), and no real interest is charged above this. If this proposed change is approved by the Senate, those with existing HELP debt (currently totalling $25.2 billion) and students commencing their studies on HELP from 2016 onwards, will likely face a heavier financial burden.

The HELP debts have essentially been providing an interest rate subsidy. It is hoped that this reform will reduce government expenditure in the sector, and relieve pressure on the sizeable budget deficit. In its current form, however, real interest on HELP debt would likely increase the disparity between low and high income earners. Lower income earners would be disadvantaged, as they may require greater time to repay their loans, while their debt continues to accumulate. HECS architect Bruce Chapman and Timothy Higgins illustrated this with an example in their research paper in July. Based on data from the 2011 census, for a $60,000 HELP loan with an average bond rate of 5%, a high income earner (among the top 25% of earners) could repay $75,000, while a low income earner (in the bottom 30% of earners) could repay as much as $105,000. The magnitude of this disparity would be exacerbated if the maximum 6% bond rate is applied.

Chapman and Higgins propose an attractive alternative, incorporating a loan surcharge of 25% and periodic adjustments to the principal amount based on inflation. This would not only address the potential of increasing disparity between high and low income earners, but importantly alleviate the need for the government’s “out of pocket” expenses on subsidies.

Considering the additional burden of fee deregulation, some deserving students may be unable to afford the university of their choice, and opt for less reputable but more affordable institutions. It is also possible that lingering HELP debt could delay a student’s ability to obtain home, personal or business loans. This is particularly interesting given Australia’s current property boom, where first home buyers already make up the lowest proportion of new home loans in ABS data history. Despite these potential policy implications, there remains unknown the degree to which demand for Australian tertiary education will be affected by this fiscal policy direction.

While unpopular, reform is necessary to help relieve the pressure on the Australian Government’s significant budget deficit. However, in its current form, the change in the indexed rate of HELP debt is likely to have negative policy implications. Recently, Federal Education Minister Christopher Pyne indicated that he would be willing to drop the real interest charge on HELP debt, if it would secure a “far-reaching and important” agreement with the Senate to reform higher education. It will be interesting to see how the Senate votes this week on these university changes.