How much do you know about your HECs Debt?

August 24, 2015
Editor(s): Ricky Chen
Writer(s): Michelle Pham, Stephanie Zeng, Lang Qin, Phoebe Tai

All Australian university students will have some interaction or reliance on HECS, whether it is through themselves, their friends or their institution. Its ubiquity over the student body makes it an important issue for many of our peers. Through research it has been shown that HECS offers many benefits but does not come without its disadvantages. It has led to an increase in people going to university, but has also led to an over-saturated graduate job market.

There are fears that the problem could become as bad as the American student loan system into the future, if current trends continue. Ultimately, HECS and higher education in Australia must be discussed and debated by the public with examples for comparison primarily coming from Europe and America.

What is HECS?

HECS-HELP loan is an interest free Commonwealth government loan offered to students undergoing tertiary education in order to defer the cost of their studies until they are more financially capable of paying back the loan. HECS was originally created by the Hawke Government in 1989 and has since undergone multiple adjustments including differential fees based perceived course value, and the introduction and subsequent removal of a 7 year full-time cap on Commonwealth Supported Places (CSP). Once a student meets the HECS-HELP eligibility criteria, which includes studying in a CSP and holding an Australian citizenship, they are not required to make payments towards the cost of their course (Student Contribution), though they can make partial payments if they wish. Compulsory repayments only start when their salary has reached over approximately $55,000, at which point they contribute 4% of their earnings through the tax system. Each earnings bracket will have a different repayment rate, with higher earnings attracting higher rates (figure 1). It was estimated in 2013 that there are roughly 1.5 million HELP debtors who collectively owe $26.5 billion. 

What are the benefits of HECS?

By allowing students to borrow on generous terms from the government, HECS enables more students to gain access to tertiary education and thus greater employment opportunities. HECS loans, however, differ from other types of debt in many ways.

Firstly, the rate of inflation is the only interest rate charged on the outstanding balance of your loan as HECS debts are indexed each year to account for changes in the Consumer Price Index (CPI). This means that a HECS debt is essentially an interest-free loan as its real interest rate is effectively zero.

Secondly, students are not required to start repaying their HECS debt until their income reaches a certain threshold (figure 1). Moreover, with a progressive repayment, it greatly reduces the financial burden for each student.

Thirdly, there are also financial inducements for early repayment of a HELP loan. By making a voluntary repayment of $500 or more, you will receive a bonus 5 per cent of your repayment towards the outstanding debt.

HECS is arguably a financial win for students in the long term. According to the Grattan Institute’s report notes, after taking into account the costs of education and tax, both male and female university graduates earn about 50 per cent more over their careers than those without a university degree.

Figure 1: HECS-HELP Repayment Thresholds and Rates: 2015-16

Repayment income (RI*) Repayment rate
Below $54,126 Nil
$54,126 – $60,292 4.0%
$60,293 – $66,456 4.5%
$66,457 – $69,949 5.0%
$69,950 – $75,190 5.5%
$75,191 – $81,432 6.0%
$81,433 – $85,718 6.5%
$85,719 – $94,331 7.0%
$94,332 – $100,519 7.5%
$100,520 and above 8.0%

(Source: StudyAssist – Australian Government)

Possible downsides to HECS

While HECs does provide more opportunities and flexibility for students to enter tertiary education, there are also several drawbacks to the policy. One of its major weaknesses is its easily exploitable repayment process. A new report by Highfield & Warren in the eJournal of Tax Research reveals that many students are dodging their loan obligations by working overseas or by manipulating their incomes to never reach the repayment threshold, using a combination of tax deductions and non-lodgement of tax returns. The report also predicts that, by 2017, unpaid student loans will rise to $70.4 billion, with 25% ($17 billion) of that expected never to be repaid.

Aside from the financial implications of HECs, a potential, perhaps more socially significant, corollary of HECs is its possible over-incentivising of university education, creating a positive externality. While a university education is an opportunity that should be made available to all, the provision of government aid can distort the efficient market-allocation of labour, over-flooding the market with graduates in industries that do not need them. The value of a university degree has already deteriorated since the last century.

According to statistics from Graduate Careers Australia (figure 2), in 1999, 80.8% of graduates were employed within four months of completing their degrees. That percentage has since fallen to 68.1% as of last year. The wages of graduates has also steadily decreased, with male graduates only paid 74% of the average male salary. While these changes may not necessarily be caused entirely by HECs, the provision of government aid certainly does contribute to the oversupply of graduates.

Figure 2: Graduates’ median starting salaries relative to the annual rate of full-time male average weekly earnings, 1977-2014

(Source: Graduate Careers)

Comparison with overseas, recommendations, better system?

The circumstances surrounding Australia’s system of university debt differ starkly in both nature and magnitude from that of a number of countries. On one end of the spectrum, there are many countries, such as Germany and Denmark, in which university education is a public good, in other words, education is completely free and government-funded. On the other end of the spectrum, the U.S. is infamous for the vast amount of college debt burdening its students across the country – a reported total of over $1.2 trillion as of March 2015. Furthermore, about 17% of these students are either in default or delinquent. These figures, being higher than ever, have aroused concern amongst the American people, and prompted many U.S. politicians to brand this steep increase in college debt as a “crisis”. In fact, this issue has emerged as one of the major campaign issues for the upcoming 2016 U.S. elections, with Democratic frontrunner Hillary Clinton even proposing a $350 billion plan to lower the cost of public education and reduce student loan interest rates. This plan would assist American college graduates to pay their tuition fees without having to shoulder onerous debt from their student loans. However, though Clinton’s proposal does indeed address several problems arisen from the U.S.’s mounting level of college debt, it is not a completely loan-free scheme; students’ families are still expected to make contributions to their tuition fees. More ambitious proposals, such as that put forth by a fellow Democratic candidate, Bernie Sanders, seek to emulate the models of education from the countries discussed above – that is, by completely eliminating the need for student loans at all and making public education in America entirely free and government-funded. Although this proposal removes debt from the equation altogether, it has an even lower chance of passing through Congress than Clinton’s pitch. Nevertheless, Australia’s climbing level of student loan debt needs to be addressed before it exacerbates into a “crisis” comparable to that of the U.S.. Whichever approach is more effective, Australia should follow the U.S.’s example and place more concern on its rising measure of university debt.

In conclusion

HECS provides many students with the opportunity receive a tertiary education irrespective of their family’s income. It allows many to attend university, a public good, creating positive externalities for the community. It currently offers generous terms of repayment and is essentially interest free, offering a manageable loan for many students. However, it also over-supplies the job market with graduates, making it more challenging for new graduates to find jobs and receive a lower starting salary. The fears that it could balloon and ultimately end up like the American student loan market are well-founded and should be discussed by the public before it comes to an unsustainable burden for Australian students. This public debate should be taken seriously by politicians, with a focus on the advantages and disadvantages of HECS in comparison to the different systems of education offered by the European and American education systems.

References
Bosman, J., & Lewin, T. (2015, August 13). With $350 Billion Plan, Hillary Clinton Prods Rivals on Student Debt. Retrieved August 21, 2015, from http://www.nytimes.com/2015/08/14/us/with-350-billion-plan-hillary-clinton-prods-rivals-on-student-debt.html
Gautney, H. (2015, August 15). College Affordability: Comparing the Clinton and Sanders Plans – Bernie Sanders. Retrieved August 21, 2015, from https://berniesanders.com/college-affordability-comparing-the-clinton-and-sanders-plans/
Graduate Careers Australia. (n.d.). Retrieved August 21, 2015, from http://www.graduatecareers.com.au/research/researchreports/gradstats
Haughwout, A., Lee, D., Scally, J., & Van der Klaauw, W. (2015, April 16). Student Loan Borrowing and Repayment Trends, 2015. Retrieved August 21, 2015, from http://www.newyorkfed.org/newsevents/mediaadvisory/2015/Student-Loan-Press-Briefing-Presentation.pdf
HELP and TSL repayment thresholds and rates. (2015, May 6). Retrieved August 21, 2015, from https://www.ato.gov.au/Rates/HELP,-TSL-and-SFSS-repayment-thresholds-and-rates/?anchor=
HIGHER EDUCATION FUNDING ACT 1988. (1988). Retrieved August 21, 2015, from http://www.austlii.edu.au/au/legis/cth/consol_act/hefa1988221/
Highfield, R., & Warren, N. (2015). Does the Australian Higher Education Loan Program (HELP) undermine personal income tax integrity?EJournal of Tax Research, 13(1), 202-262. Available at: https://www.business.unsw.edu.au/research-site/publications-site/ejournaloftaxresearch-site/Documents/08_HighfieldWarren_HELP.pdf
Moreno, J. (2014, November 10). These Countries Do the Exact Opposite of What America Does When It Comes to Higher Education. Retrieved August 21, 2015, from http://www.attn.com/stories/175/these-countries-do-exact-opposite-what-america-does-when-it-comes-higher-education
Mulhere, K. (2015, August 10). 7 Things You Need To Know About Hillary Clinton’s College Plan. Retrieved August 21, 2015, from http://time.com/money/3990445/hillary-clinton-college-plan/
Quarterly Report on Household Debt and Credit. (2015, May 1). Retrieved August 21, 2015, from http://www.newyorkfed.org/householdcredit/2015-q1/data/pdf/HHDC_2015Q1.pdf
StudyAssist. (2015). Retrieved August 21, 2015, from http://studyassist.gov.au/sites/studyassist/helppayingmyfees/hecs-help/pages/hecs-help-welcome
Whinnett, E. (2014, May 21). Federal Government hunts for HECS debt dodgers. Retrieved August 21, 2015, from http://www.news.com.au/national/federal-government-hunts-for-hecs-debt-dodgers/story-fncynjr2-1226926210931HELPandTSLrepaymentthresholdsandrates201#HELPandTSLrepaymentthresholdsandrates201

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, its Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Ricky Chen
Editor

This author has not left any details

Michelle Pham
Writer

This author has not left any details

Stephanie Zeng
Writer

This author has not left any details

Lang Qin
Writer
Phoebe Tai
Writer

This author has not left any details