Universities face a moral conundrum

Charging a real interest rate would result in considerable savings for taxpayers, allowing the government to make more generous loans to those who need them. Instead of providing lawyers, doctors, and other high-paid professionals with interest subsidies, students who struggle economically could borrow living costs in addition to tuition fees. Charging an interest rate set at the government's cost of borrowing would not completely eliminate moral hazard, but it would rebalance the risk of non-repayment from taxpayers to graduates.

Rebalancing risk also means removing the perverse incentive for universities to admit students who are likely to drop out or, if they manage to scrape through their course, never earn enough to repay their loans. Quotas on new students would encourage universities to limit their intake to better-prepared students, but they are politically difficult to implement. Governments are reluctant to be seen as restricting access to higher education. Indeed, the current government wants universities to enrol even more students.

Another approach would encourage the university regulator to enforce its legal obligation to ensure that "students have the academic preparation … and no known limitations that would be expected to impede their progression and completion." Judging from the attrition rates, some universities seem to be flaunting these requirements.

In addition, universities could share the risk of non-repayment. The government has proposed a possible mechanism for sharing the risk. That is, universities with high attrition rates will receive a funding cut. A good idea, but the proposed amounts involved are tiny. A university with many dropouts would lose less than one per cent of the funding for those students. Such a minor penalty will not change university behaviour.

Making universities absorb a significant portion of a dropout's tuition would send a stronger message, but it may lead them to lower standards and pass everyone. It would also be technically challenging to require universities to retrospectively absorb some or all the losses currently covered by taxpayers. A much easier way to discourage universities from admitting poorly prepared students and failing to provide them with remedial teaching is to give universities a role in the student loan process.

Specifically, universities could be mandated to underwrite student loans and shoulder the burden of those that are never repaid. This measure would tie the financial health of universities directly to their graduates' employment outcomes, thus encouraging universities to adopt judicious admissions policies, prioritise top-notch teaching, and dissuade students from reckless borrowing.

Navigating the labyrinth of student debt and income-contingent loans is a complex exercise of balancing incentives and consequences. It calls for careful thinking about fairness, accountability, and the delicate balance between individual ambition and societal responsibility. As Australia wrestles with these challenging issues, the $737,000 student debt tale stands as a powerful testament to the fact that moral hazard can insidiously infiltrate unexpected corners, trapping both students and institutions in a web of financial and ethical uncertainty. Urgent intervention is essential to reduce moral hazard and lay the foundation for a more equitable and accountable higher education system.