There is one glaring exception to the rule that Tony Abbott’s budget
cuts are designed to protect higher income-earners at the expense of
lower income-earners: the changes to university fees.
Although uni students like to see themselves as part of the
deserving poor, it’s overwhelmingly the sons and daughters of people in
the upper part of the distribution of income who go to university, and
do so with the goal of acquiring the qualifications that will allow them
to take their own place in the upper reaches of the distribution.
So the irony of the government’s efforts is that it’s
predominantly the children of the better-off who’ll be hit by the
expected significant increases in the cost of a uni education. And those
increases raise the hurdle faced by those wishing to join the echelon
intended to benefit most from the government’s budget reordering.
Only about 17 per cent of uni entrants come from a lower
socio-economic background – a proportion that has changed little over
the decades. The Whitlam government’s abolition of fees was intended to
increase the proportion of poor kids getting to uni, but didn’t.
The Hawke government’s reintroduction of fees was predicted
by some to reduce the proportion of poor kids, but didn’t – mainly
because of the success of an invention by Professor Bruce Chapman, of
the Australian National University, specifically designed to ensure it
didn’t: the "income-contingent loan", known to us as HECS.
Much the same was predicted when the Howard government
greatly increased uni fees, but HECS ensured it didn’t happen. That was
chicken feed compared with this decision to allow unis to set their own
fees. If this one doesn’t reduce the proportion of poor kids at uni, it
will be because of the continuing magic of HECS.
That, plus the new requirement that 20 per cent of the unis’
additional revenue be used to set up "Commonwealth scholarships" to
assist students from disadvantaged backgrounds. (Where have I heard that
name before? Maybe because I had one in my uni days, before Whitlam.
This government is nothing if not retro.)
These days, going to uni means not so much paying fees as
taking on a debt. Loans have three key variables: the size of the
principal borrowed, the rate of interest charged, and the term of the
loan.
Abbott’s changes will affect the first two, with major
implications for the third. Once the unis are let off the leash, there’s
no telling how high they’ll lift their fees. Between them, they have a
monopoly over the provision of a high-status, high-value product in high
demand.
And it’s not just the changes planned to take effect in 2016.
The further the government cuts its funding to unis, the more the unis
will up their fees. And they may not stop at covering the cost of
teaching, but also require students to subsidise their lecturers’
research. So suggestions that fees could double or treble aren’t
far-fetched.
That covers the principal. At present under HECS there’s no
formal interest rate, but outstanding debt is indexed to the consumer
price index. To economists, this says the debt is subject to a "real"
interest rate of zero.
Now there’s to be a formal interest rate set at the long-term
Commonwealth bond rate, 4 per cent at present, but capped at 6 per
cent. This implies a real interest rate of between 1.5 per cent and 3.5
per cent.
So whereas at present outstanding debt merely keeps pace with
inflation, now it will grow in real terms – will compound, particularly
while no repayments are being made. (This change will apply to everyone
still with a HECS debt, not just present and future students.)
Commercial loans have a fixed repayment period, with a fixed
rate of repayment calculated to ensure all interest and principal is
paid by the end of the period. HECS debt has no fixed repayment period.
Rather, debtors pay nothing until their annual income exceeds
about $50,000. Initially their repayments are set at 4 per cent of
their income, but this increases as their income rises, to a maximum of 8
per cent. (Hence the term income-contingent loan.)
So the time it takes people to repay their HECS debt varies
mainly with the level of income they attain after leaving uni. The lower
your income, the longer it takes to repay. This means the imposition of
a real interest rate is "regressive", hitting lower-income debtors
harder than those on higher incomes.
It also means that, leaving aside differences in the size of
the initial principal, the people who’ll end up with the biggest debts
under the new rules will tend to be students who stay at uni for a year
or two before realising tertiary education isn’t for them, graduates who
take time out of the workforce to raise children and then work
part-time for a bit, and graduates who go overseas. These last will face
an ever-growing disincentive to come back.
But none of this contradicts Abbott’s claim that a HECS debt
will still be "the most advantageous loan they ever receive". That’s why
it never made financial (as opposed to filial) sense to repay HECS
early under the present rules, and only rarely will it make financial
sense under the new rules.
People’s debt will be much bigger and they’ll stay owing it
for many years longer, but their repayments will never be onerous,
thanks to the loan being income-contingent.
