7.13 Higher education arrangements

Commonwealth funding of higher education promotes quality, equity of access and national consistency for higher education. This, in turn, contributes to a more skilled, flexible and productive workforce, with higher wages and lower unemployment resulting in higher tax revenues, reduced unemployment costs and improved international competitiveness.

Total funding from the Commonwealth Government to universities in 2012 was nearly $15 billion, including payments under the Higher Education Loan Programme (HELP), a student loan scheme.

A large proportion of the benefits of higher education accrue directly to the individual students, through improved employment prospects and higher lifetime incomes. Research indicates that, compared to a year 12 graduate, someone with a bachelor qualification can expect to earn $430,000 more over their lifetime (in current dollars). This suggests there is scope to increase the amount paid by students toward the cost of their tuition.

Chart 7.19 shows the Commonwealth currently pays around 60 per cent of domestic bachelor degree tuition costs while students only cover around 40 per cent (with 87 per cent of students deferring their student contribution through a government-supported student loan).

The Commission considers that a rebalancing of the public and private contributions to higher education costs is warranted, reflecting the substantial private benefits that arise from higher education. At the aggregate level, the proportion of Commonwealth funding should fall to 45 per cent of domestic bachelor degree tuition costs, while students would be required to cover 55 per cent of the costs.

The strong growth in total costs in recent years reflects the deregulation of bachelor degree places from 2012. The intent of this change was to provide universities with flexibility in responding to demand in setting the number of students in different bachelor degree courses. More recent preliminary data shows a slowing in this initial growth rate, as universities settle into the new system.

Chart 7.19: Commonwealth and student contributions to the tuition cost of higher education

This chart highlights the historic trend of Commonwealth and student contributions to the cost of higher education studies.

Source: Department of Education.

While the Commonwealth has removed the cap on the number of students which universities can admit, it still regulates both the level of public contributions to universities and the maximum fees which universities can charge for different courses (with students’ private contributions forming the difference between these two set amounts).

It is expected that the Review of the Demand Driven Funding System that is currently underway will give further consideration to the appropriate level for fee caps.

A number of universities lodged submissions with the Commission proposing the complete uncapping of fees.

Allowing universities to determine their own prices should improve efficiency through the operation of competitive forces. A range of prices should arise based on the quality of service offered by each university in each field of study.

Increased competition within the university sector would drive innovation and quality improvements for Australian students.

This is an area where the Commission considers further work is required. While an increase in competition in the Australian higher education market would yield improved outcomes for students, there are questions around whether market forces in Australia are sufficiently strong to yield distinct price differentiation between different courses and universities.

The Commission considers that changes should be made to the existing HELP arrangements. At present, student contributions to the cost of university education can be paid up-front or deferred by taking out an income contingent HELP loan from the Commonwealth.

HELP loans allow students to spread the costs of their education over their working lives.

However, the current design of HELP loans passes on additional costs to the Commonwealth including through the provision of concessional interest rates, the existence of bad and doubtful debts, and duplication and complexity in the existing system.

Outstanding HELP loans are indexed by CPI each year. The fact that the interest rate on these loans is below the Commonwealth government borrowing rate means that an ‘additional’ subsidy is provided to students equal to the difference in these rates. To better reflect the true cost of these loans to the Commonwealth, the interest rate should be increased to a level which reflects all its costs in making the loan.

Changes to HELP repayment arrangements should also be implemented to reduce write-offs for bad and doubtful debts. The Commonwealth currently expenses some 17 per cent of HELP Loans per year (or around $1 billion) in anticipation of write-downs for bad and doubtful debts (including HELP exemptions for teachers and nurses).

At present repayments commence when taxable income reaches $51,309 per year (which is around the average salary for Australian graduates).

The minimum HELP repayment threshold could be reduced to be equal to the minimum wage (currently $32,354 per year), with a low repayment rate of 2.5 per cent of income. The rate of repayment would then increase with income until it matched the current initial repayment rate of 4 per cent at an income of $51,309 per year.

The arrangements under which the repayment threshold is indexed (currently to Average Weekly Earnings) should also be changed to instead reflect movements in the CPI.

To reduce administrative overheads and ensure consistency, the five current HELP schemes should be streamlined, including removing SA-HELP.

SA-HELP is a Commonwealth funded student loan scheme to cover student amenity fees which are currently around $273. It is simply not cost effective or administratively efficient for the Commonwealth to provide a loan scheme — potentially to be repaid after a period of years — to cover an amount of $273.

There is also some ‘leakage’ of HELP repayments because debtors who move overseas are not under any legal obligation to repay their HELP loans. Implementation of arrangements to enforce repayment of HELP loans by people outside of Australia would require a change of policy and legislation and would be administratively difficult and costly.

Under the current system, the Commonwealth also loses out when HELP payments are deferred by students living overseas. However, under the Commission’s recommendation to increase the rate of interest on HELP debts to reflect the full cost of loans including provisions for bad debts, the Commonwealth will no longer be worse off if HELP repayments are pushed back by a number of years. Students’ HELP payments will continue to grow in real terms in their absence, giving them an incentive to make payments even while overseas.

The Commission has considered the option of selling the Commonwealth’s book of student loans to the private sector (or ‘securitising’ the HELP debt). Under a securitisation arrangement the current stock of outstanding student loans would be sold to private investors backed by the cash flow, including both principal and interest, from the HELP loans.

The Commission considers that HELP loans are unlikely to be a good risk-adjusted investment option for the private sector.

Currently HELP loans are valued on the Commonwealth balance sheet at around $22 billion. Unless an investor was willing to pay at least this amount, any sale would result in a deterioration in the Commonwealth’s balance sheet position.

The Commission is aware of analysis that suggests that government could expect to receive around $12 to $13 billion from the securitisation of this debt. It is therefore likely that securitising HELP loans would either yield a sale price less than the current book value or require an ongoing subsidy to investors to increase their return.

Moreover the Australian Taxation Office would still be required to administer and collect the HELP debt. Securitising the HELP debt would also reduce the flexibility of future governments to undertake further reforms of the student loan arrangements.

Recommendation 30: Higher education arrangements

Commonwealth funding of higher education promotes quality and equity of access, while contributing to a more skilled and productive workforce. The Commission recommends a number of changes be made to existing arrangements to better account for the private benefits of higher education and improve performance of the sector including:

  1. decreasing the average proportion of higher education costs paid by the Commonwealth through the Commonwealth Grants Scheme from 59 per cent to 45 per cent and increasing the average proportion of costs paid by students from 41 per cent to 55 per cent;
  2. tasking the Minister for Education with developing options to increase competition in Australia's education system through a partial or full deregulation of fees for bachelor degrees, taking into account any relevant recommendations of the Review of the Demand Driven Funding System. The Minister should report to the Prime Minister in 12 months' time on progress and a preferred way forward;
  3. reducing the cost to the Commonwealth of the Higher Education Loan Programme by:
    1. increasing the interest rate applying to HELP loans from the current rate (equal to movements in the CPI) to a rate which reflects the full cost to the Commonwealth of making the loan (incorporating the government borrowing rate, as well as the cost of bad debts and administration costs);
    2. increasing the repayment of HELP debt through reducing the threshold for HELP repayment from $51,309 per year to the minimum wage of $32,354 (with a low starting repayment rate of only 2.5 per cent);
    3. changing the indexation arrangements for the HELP repayment income threshold from movement in Average Weekly Earnings to movements in the CPI); and
    4. streamlining the five current HELP schemes, including removing SA-HELP and aligning administrative fee arrangements and incentive payments for early repayment.