HECS explained: All of your questions answered by one of the scheme's founders

August 06, 2014
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With the hype around HECS and fears that student debts will skyrocket under new government plans, Hijacked realised there’s probably a lot of unanswered questions about the one loan scheme most relevant to students. So we decided to chat to one of the scheme’s founders, education economist and Professor of Economics at Crawford School of Public Policy ANU Bruce Chapman about the ins and outs of HECS, and the consequences of some of the proposed changes.

HJCKD: What exactly is HECS in a nutshell and why do we need it?

Bruce Chapman: HECS is a system in which university students pay some proportion of the cost of attending university, on average about 40-50 per cent, and it works by people paying back in the future when if and when their incomes are above about $50,000 a year. In 1989 the then Labor government introduced the system for several reasons – one was to increase the amount of money that the government would have so they could expand the system. The second reason was a view held by many that students not paying for their education was unfair… it was paid for totally by all tax payers, 80 per cent of whom didn’t get the benefits of being a graduate.

HECS was designed and motivated by not having people need to sign any money at all, and if they had bad luck in the future – if they didn’t graduate or they weren’t in a good job or unemployed – they didn’t have to pay anything. So the design aspect of it was essentially motivated not to deter poor people and also to be fair so people who didn’t get income benefits from going to university, wouldn’t have to pay.

HJCKD: Tell us about your role in developing HECS. How did you come up with it?

BC: I was a consultant for the Minister for Education at the time, John Dawkins, and he asked me to design a system that would allow the government to introduce tuition charges. He made it clear that no matter what happened there would be charges. I think most people expected me to come up with a system which is like the systems in the rest of the world – you protect poor people a little bit by giving them bank loans, but I thought a better system would be the income contingent system that we now have.

HJCKD: Tell us about the government’s new plan. How is it different, and what are your problems with it?

BC: The plan is to apply a real rate of interest, which is more or less what it costs the government to borrow the money to finance this, roughly of about 5 per cent per year. Currently the rate of interest on the debt is about half that. That doesn’t sound like a big difference, but over time that can become quite important.

A concern that many people had, including me, was that this would make the system quite expensive for people who didn’t start to repay quickly. A colleague of mine, Tim Higgins, and I looked at the data very closely. We found that it was pretty clear that graduates in the lowest part of the income distribution of graduates would end up paying more, and in some cases significantly more, than the graduates who did really well.

HJCKD: You and your colleague Dr Higgins have proposed two alternative recommendations – what are the advantages of each?

BC: Both of those systems have an underlying principle which is that once the debt is incurred it can never go up. They take away from the unfairness of it [the proposed scheme] and the reason is if people are in poor circumstances – that is they’re not over the first income threshold of $50,000 – the debt doesn’t keep rising to reflect a high interest rate, it just stays where it is in real terms.

HJCKD: You’ve backed calls for a debt recovery scheme of graduates moving overseas. Why should we do this? Is it even possible?

BC: It is pretty unfair that people with a HECS debt can go overseas, often to quite good jobs and often not to return for a few years, and not pay their HECS debt. It’s always been a problem with the HECS system that you can avoid the HECS debt by moving overseas. It actually costs taxpayers a fairly high amount of money. Roughly 40 million dollars a year… when you add all that up over the last 25 years since HECS was introduced, it’s cost us in money we’ve never got about 800 million dollars. I know 25 years is a long time, but that’s a lot of money.

The proposal that we have, which is not our proposal, it’s just a modification of the New Zealand system, is to require people who go overseas to tell the tax office that they are going overseas, and then to send in every year the minimum amount of HECS payment – $2000 a year. So every six months they’d be required to pay $1000. We’d make that the obligation of a person with the debt so that the government doesn’t have to waste resources chasing people.

HJCKD: Do you see any irony in the fact that half the cabinet never paid for uni?

BC: We actually recommended to the government that they make it [uni fees] retrospective. That was treated with total political contempt…

You could say that about all aspects of government policy that change the nature of things, for example many of the people you’re talking about used to pay higher taxes. But I do get the point. And it’s a bit ironic in the sense that many of the people who advocate increasing university tuition are people who got it for free, but it’s not an unusual thing, it’s not unique – just about everything in public policy used to be different. There are winners and losers hanging around all over the place. But as I said, I tried my best to get it introduced retrospectively, including on me, but they wouldn’t have it.

Bruce Chapman is a Professor of Economics at Crawford School of Public Policy at ANU

Sam Caldwell

Sam Caldwell attends The University of Technology, Sydney and is studying a BA Communications (Journalism). He is also a passionate debater.

Image: Kristen Daly