To extend student loans we must reduce student debt

A Grattan Institute report I co-authored highlights student debt costs, with the finding that the government could save $800 million a year by retrieving unpaid debts from deceased estates and students who have moved abroad.

The report Doubtful debt: the rising cost of student loans found that 17% of the A$6 billion a year lent through the Higher Education Loan Program (HELP) is likely to be doubtful debt – loans that are not expected to be repaid. Total doubtful debt could reach $13 billion by 2017.

These debts have been building up since Australia pioneered income contingent loans for students with HECS in 1989. Unless people with student debt earn more than a threshold amount - $51,309 for 2013–14 - they don't have to repay their loan. These loans aim to reduce students' financial risks while keeping government education expenditure under control.

The success of HECS led to new income contingent loans schemes for full-fee higher education students, student amenities fees, study abroad and some vocational education students. Ultimately it all ends up as Higher Education Loan Program (HELP) debt.

Extending income contingent loans to student income support has often been suggested. According to one survey, a majority of full-time undergraduates would be interested in taking out a HECS-like loan to increase their income. A loan could improve their living standards while studying, and perhaps help them work less and study more.

Although it is stalled in the Senate, there is already a proposal to convert Student Start-Up Scholarships to a HELP-like loan. While this change would not give students extra cash compared to now, it would create a scheme that could easily be adapted to do so.

During the 2013 election campaign, the Coalition promised a HELP-like 'Trade Support Loan' of up to $20,000 to finance "everyday costs" for apprentices in vocational education Certificate III and IV courses.

In principle, new uses for income contingent loans are welcome. They are a good policy option for people who are unlikely to have low lifetime incomes, and so do not require a subsidy, but do have a cash flow problem.

Despite the policy attractions of income contingent loans, HELP is turning into an expensive program. On the government's current estimates, 17% of new HELP lending will not be repaid. For 2013-14, that means $1.1 billion of the $6.3 billion in new HELP loans is likely to be doubtful debt. By 2016-17, as HELP lending increases, that figure will approach $1.5 billion.

These numbers suggest caution in new uses for income contingent loans.

With income support loans students would borrow more overall, decreasing their chances of paying back all their debt. The full-time workforce participation rate of female graduates starts declining in their late 20s and early 30s. As less than 20% of part-time jobs pay more than the HELP repayment threshold, any debt remaining by this time may not ever be repaid.

The extension of loans into the vocational education sector through VET FEE-HELP and the proposed Trade Support Loan could also increase HELP's costs. Although some tradespeople earn six-figure sums, generally vocational education qualification holders earn less than university graduates. That would translate into lower repayment rates.