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Thursday, May 15, 2014

Why Australia is not becoming America, and the HECS system still works

I am sick of reading alarmist media coverage and facebook statuses proclaiming that Australia is becoming America. The people making these comments probably have little understanding or appreciation of the “student debt crisis” in America, or the key differences between the US system and the Australian system post 2014 budget.
In this post, I am not attempting to offer an opinion on whether the government’s deregulation of university fees is positive or negative overall. This is a very complex question, there are many unknowns, and even the experts disagree. What I will tell you is why I don't think the 2014 budget means that Australia is becoming America, and why we won't have some sort of student debt crisis in the future.

The first thing to note is that regardless of how high the loan balance is, HECS loans are only repayable as a percentage of income that you actually receive. That means if you are unemployed or a low income earner, you don’t pay anything.

The student loan market in the US is complicated and there are various types of loans available. Many of these loans are repayable regardless of employment status and amount earned. This has created issues with rising unemployment levels during the GFC – people lose their jobs and then default on student loan repayments. 

The most flexible loans in the US (federal loans) allow deferral of repayments in some circumstances, but those circumstances are not as generous as under the HECS system. Under HECS, if you don’t earn, you don’t pay. If you do earn, you only pay a percentage of your income, and this percentage starts off small and only rises as you earn more. In 2009, 31% of US graduates reported paying over 12% of their income in education debt repayments (Source). Currently in Australia, the maximum you’ll ever pay is 8% of your income and you have to be earning over $80k to do that!

The second thing to note is that in America, private loans are often taken out by students to finance the gap between the cost of education and federal student loan limits. Most often, these loans are offered by private institutions (ie banks) and they are much more expensive and less flexible than federal loans. 

The closest analogy in an Australian context is taking out a personal loan or home loan with an Australian bank. With these loans, the bank is taking on the risk of the loan, and although they might offer limited hardship relief, it won’t be long before they’ll enforce the security underlying the loan (ie, repossess your house or car or your parent’s house or car if they guaranteed your loan) if you default. Repayments are fixed regardless of how much you earn or whether you have a job. Interest rates are generally variable, which is a risk factor because they could rise substantially depending on the economy. The banks look out for themselves – they are for-profit institutions.

The vast majority of Australians would never consider taking out a personal loan to pay for their accommodation during university, let alone their tuition fees. In America, this is much more commonplace. 

Finally, let me say that we don’t know exactly what will happen to university fees now that they will be deregulated. Currently, the average ratio of student loans to income is much higher in the US than it is here, and that might change. Personally, I think the statement in this article that “universities will increase tuition fees to international student fee levels, which are currently about three times higher. The Group of Eight universities will do that pretty quickly” may be an exaggeration. 

Even if it isn’t, my simplistic thoughts on the matter are:
  • If a degree costs 120k, people will be less likely to study one that is less likely to lead to a decent income and employment (I’m thinking an arts degree).
  • People might get some experience in the workforce and start studying later, which can be very positive (I personally wish I’d done this for various reasons).
  • If less people go to university, this would make it easier for graduates to find work. It might also over time push up salaries in careers requiring a degree.
  • More people will consider TAFE and apprenticeships (and the Government’s 2014 budget measures to encourage these options and make them more financially viable are to be applauded). I personally think that too many people go to university when they would be more suited to doing a trade or TAFE course. We have skill shortages in some trades, and graduates of certain degrees can’t find a job because of oversupply. This imbalance needs to be corrected.
I don’t like how HECS interest will rise to cover the Government’s cost of lending, but I suppose it does encourage people to pay off their loan faster. Ultimately it reduces the cost to the Government of providing these loans, and there is scope for the Government to reduce the interest charge if that’s feasible down the track (wishful thinking…)  Yes it sucks, but like ever rising taxes, I think that we’ll grumble and then move on.

If I have gotten anything wildly wrong, as always, please comment and correct me!

1 comment:

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