Top marks for Australia’s HECS System

A conversation with Professor Bruce Chapman AM FASSA, architect of the HECS system.

Photo credit: ANUCBE Staff Portraits Bruce Chapman. Photography by Andrew Taylor

Background

In the late 1980s, the Australian Government faced a dilemma – how could the nation provide higher education for the future that was both affordable and equitable? Alongside social scientists, public servants and political figures, including Meredith Edwards, Neville Wran, John Dawkins, Pam Lyndon, David Phillips, and Chris Ronalds, Bruce Chapman, a Fellow of the Academy of the Social Sciences in Australia, developed Australia’s Higher Education Contribution Scheme (HECS) in 1989.

Professor Chapman, can you explain how does Australia’s HECS system work and how is it different from what other nations do to fund higher education?

Built on an income-contingent loan model, the HECS system seeks to rebalance the burden from taxpayers to those who would benefit most from higher education – the students.  It differentiates itself from other existing models, such as the mortgage-type loans used in the US, by allowing students to access undergraduate degrees without requiring the immediate repayment of upfront payments or loans. Instead, students are only required to contribute when their income reaches a ‘fair’ threshold for loan repayment

Could you explain to us what the tangible benefits of this system are?

Since the introduction of HECS, higher education enrolments in Australia have increased by approximately 70% including amongst students from lower socio-economic backgrounds. These increases have been attributed to both the scheme’s payment deferral, and the government’s investment in more student places.The scheme now recoups nearly $2 billion annually for the Australian Government and supports the steady growth of a highly skilled workforce. Due to the policy’s embeddedness within the existing tax system, HECS is a low-cost initiative, with administration costs being only 4% of total revenue.

We know now, that the Australian HECS System sets an international example, tell us about how other nations have adopted this system.

Australia’s income-contingent loan model is increasingly held up as the preferred approach for policy makers wanting to offer support to students within the tertiary sector. Following Australia’s lead, New Zealand, South Africa, England and Wales, Hungary, and South Korea have also adopted the income-contingent loan model as their student loan mechanism. The Netherlands and Malaysia are on the brink of implementing similar schemes.

Research has shown that in the US, which uses the alternative mortgage-loan model, student debt has more than tripled in the last decade to AUD$1.5 trillion and it is estimated that more than seven million borrowers are in default and millions of students are behind on their repayments.

What next for HECS in Australia?

Since its inception, the HECS system has been extended to cover many aspects of Australian tertiary studies financing, including tuition assistance for graduate studies, access to private universities, vocational education and training, and study abroad support. My colleagues and I are currently examining how this broader system can be made more efficient and effective. One particular area of focus is the potential benefits that could be recouped for the government by requiring Australians who earn a significant income overseas following their training to repay their loans. My research shows that the costs to the public sector of unpaid HECS debt from graduate debtors working overseas is approximately $30 million per year. This translates to an annual loss of 2% of annual HECS repayment revenue. Highlighting and addressing issues such as this suggests there is still work to be done to maximise the benefits to society of this evidence-led policy.

What next for income contingent loans? Are there other areas where this model can be applied?

The income-contingent loan model has expanded in concept beyond the team’s initial vision. The original team’s research has opened up a new field of inquiry that brings together social scientists to apply income-contingent solutions to contemporary public policy issues.  There is ongoing discussion around the viability of applying the model to paid parental leave; legal aid; business innovation; unemployment support; aged care provisions; health care; drought relief; Indigenous business investment; research and development investment; housing loans for the disadvantaged; residential solar energy devices; and payment of white collar criminal fines, among others.

The most pressing application of income-contingent loans beyond education is in drought relief. Over many decades the Australian Government has provided financial support to farm businesses as well as a welfare payment to farm families in times of drought. But this support has usually taken the form of grants and interest rate subsidies, raising questions of equity and effectiveness. My colleague Professor Linda Botterill and I have been investigating the possibility of an income-contingent loan policy for the delivery of support to drought-affected farm businesses. Repayments on government-financed contingent loans would be required only if and when farm revenues have recovered after the drought. We argue that this is highly likely to be more equitable than a grants system financed by taxpayers. It would be much easier to administer and could be tailored to individual farm circumstances.

Income-contingent loans could also be applied to paid parental leave schemes to offer additional time off for new parents beyond the current leave entitlements. As I explained, because repayments of the loan would only be required when households were in a position to repay, such a scheme could provide significant consumption-smoothing and income-distribution advantages over alternatives. Furthermore, it could introduce flexibility and choice without requiring further contributions from the government or the employer, while providing a solution to a financing impasse that would not be forthcoming from commercial banks.

Can you sum up for us, the impact on policy that your system has had?

HECS demonstrates how innovative social science can influence government to seek new and effective solutions for national challenges. Similarly, the results of my research and that of my colleagues  has inspired the next generation of social scientists to develop pragmatic and useful new applications for the versatile income-contingent loan model, opening new pathways for the development of progressive public policy.

 

 

 

 

 

Contact Information

Academy of the Social Sciences in Australia

    ABN: 59 957 839 703
  • Location: 26 Balmain Crescent, Acton, ACT 2601
  • Postal: GPO Box 1956, Canberra, ACT 2601
  • +61 .2 62491788
  • +61 .2 62474335
  • secretariat@assa.edu.au

Quick Links