Abbott government creates interest-incurring personal debt for 1.5 million Australians

Conservatives like to make a big deal about sovereign risk – the idea that if a new government is willing to change the rules after people have entered into deals with it, then people will not trust it in future, and its costs of doing business will increase.

Apparently that doesn’t matter if the people with whom it’s doing business are ordinary Australians.

The Australian Government in the 1980s, 1990s and 2000s made a deal with the most recent generations of Australian students. Unlike your parents, we’ll be charging you for your degrees. Sure, we could just tax you progressively like everyone else if you make lots of money as a result of that degree, but we’re going to specifically make you pay us back for that degree itself, when your income hits an average sort of level. The repayment will be indexed with CPI so you do pay us back the real cost of that degree.

HECS no interest

OK? Sign up to that, and you can go to university.

Fast-forward to 2014 and this new Abbott Liberal/National Coalition government is changing that deal, quite drastically, and after the fact – not just for future students, but anyone with an existing HECS/HELP “debt”:

A new minimum repayment threshold for HELP will be introduced from the 2016‑17 income year (1 July 2016‑30 June 2017). In that year, graduates will commence repaying their HELP debt once their income reaches an estimated $50,638. A 2 per cent repayment rate will apply for those with incomes above this new threshold, up to the existing threshold (estimated to be $56,264 for the 2016-17 income year)…

HELP debts will be indexed by the Treasury 10 year bond rate (to a maximum of 6.0 per cent per annum) rather than the Consumer Price Index (CPI). This means that government is lending money at broadly the same rate it borrows money. The new arrangements will apply to all HELP debts that are subject to indexation on 1 June 2016, regardless of when the debt was incurred and whether the student is still studying or has completed their studies.

Got it? If you have a $100,000 HECS debt, then guess what – you just gained a second “mortgage”. (Well, a debt like a mortgage, only without actually having an asset to cover it.) Would you have borrowed $100,000 if it was going to have interest charged on it? Maybe not, but stiff – this government is changing the rules on you.

You’ll be paying it back as soon as your income hits $50k, considerably less than the current average Australian wage of $74,760.40. Got it? Because this government assumes everyone at University graduates with an above-average wage (serves you right for spending taxpayer money studying a low-paying degree in order to help ordinary Australians, social workers!), it will hit you hard the minute you reach two thirds of the average wage – and if you take a while to get there, don’t worry: your debt will be incurring interest and growing ever more severe with every passing day.

Big gamble for poor people going to university now, isn’t it? Better pick a high-paying degree, or we’re throwing you into a debt trap. (On the much higher fees that universities will now be free to charge.)

But, I suppose – at least students commencing degrees now will get to make the decision, knowing the (ridiculous, prohibitive) cost. The 1.5 million Australians who just got lumped with an interest-bearing debt were never warned when they incurred that debt that any future government would have the unbelievable gall to create a mortgage-sized debt on them out of thin air.

Because that’s what has just happened – unless we somehow stop it.

It’s the perfect storm of unfairness, of inequity, of destruction to the future of Australia. It’s unfair on students now and in the past. It’s inequitable and puts higher education out of the reach of the poor. And it will drive down enrolments in degrees whose graduates might not make a lot of money, but whose contributions to the future of the country are vital.

Is this the worst thing in this most ridiculous and indefensible of budgets, in which the government slashes spending to fund its tax cuts for the rich? Well, maybe not – gouging a huge hole in the safety net so that we are actually saying to Australian citizens “I’m sorry, but if you can’t find a job and don’t have the money to enrol in a course then you’ll just have to starve to death for six months each year” is even worse, let alone imprisoning refugee children on remote islands without any protections, or wrecking universal healthcare to discourage poor people from going to the doctor – but, still. I’ve never heard of the Australian government making a deal with 1.5 million Australians and then sneakily turning it into an interest-bearing debt.

It’s not enough for the ALP to block random measures of this Budget. There’s nothing worth salvaging. The whole thing needs to be thrown out and started again. And no member of this thoroughly untrustworthy, cynically dishonest, class warrior, far-right, society-destroying government deserves to win a seat in an Australian parliament ever again.

UPDATE: Dear easily-confused media. The government is indeed forcing people to pay their HECS “sooner”, but it is completely false to describe the interest issue as just “higher interest”. The issue is that they’re charging interest where people signed up to the scheme being promised to be charged no interest. Yes, it was to be adjusted with CPI – but that’s not in any way interest. CPI just means that the value of the debt is adjusted to take into account inflation. Interest makes the debt bigger for every year you can’t pay it, compounding.

(Please tell me Australian journalists understand the difference between CPI adjustments and interest. Please.)

In short: this is charging interest after incurring the debt where it was promised none would be charged before incurring the debt.

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14 responses to “Abbott government creates interest-incurring personal debt for 1.5 million Australians

  1. Couldn’t agree more. This execrable demonstration of real class warfare should be flushed down a dunny.
    While I’m here, I’ve been thinking recently about the “User Pays” principle and it occurred to me that the businesses which employ the graduates are real beneficiaries of our tertiary education system. Shouldn’t they be making a meaningful contribution to the cost of training their workforce? (Above and beyond the concessional tax rate they pay)

  2. I *am* a social worker (with a HECS debt) now half way through the first year of my Masters (more debt) in Counselling and Psychotherapy. Not sure if I’ll bother continuing, presuming that this budget gets through.

  3. narcoticmusing

    Agreed J. It is disgusting to a) make a profit from a student doing a degree (yes, Govt will profit from the debt at 6% b/c it is higher than the real cost) and b) change the rules midstream. De-regulating the uni fees is also of grave concern and without justification. Universities in Australia are already too dependent on students for revenue (compared to the cost of delivering each degree). Universities should be using R&D to raise revenue; instead they slug students. This will make this worse, shifting university focus from public good to profit machine even further.

    Even in economic terms this is madness. There are numerous studies showing the impact of such debts. For example, it causes people to stall when they might start a family, which in turn increases the health costs and risks. It causes a major drag on the housing market because people are saddled with a massive debt and thus cannot borrow for housing. Given this countries ridiculous dependency on the housing market, one would think saddling people with a debt like this is not wise.

  4. jordanrastrick

    I agree with most of what has been written here, but

    “(yes, Govt will profit from the debt at 6% b/c it is higher than the real cost)”

    not sure about this, Narc. The bond rate is, surely, the real cost of debt to the government – pretty much by definition.

  5. Also, kind of f*cks mature age students too. Who have less working life to pay off their debts, and are generally less attractive to employers. Time to start writing to Senators I guess.

  6. Celia Green

    Does this change have to pass in the senate? Or am I totally stuffed?

    I have a large HECS debt from studying vet science 6 years ago. As I was a mature age student and only worked FT as a vet for a year before taking time off to have my 2 children I haven’t paid off much of my debt yet.

    The worst thing is that while my HECS debt is the same as someone who has studied Medicine or Dentistry, my earning potential is FAR FAR lower. Contrary to popular belief vets do not make a lot of money. The new graduate award wage is $38,721 (Animal Care and Veterinary Services Award 2010). If you are lucky your boss may pay you slightly more. As a new grad I was paid $42,000 per annum. As a senior vet with 10+ years experience you might be lucky and get $80,000.

    Would I have done my vet degree if I had known I would be saddled with a $50,000 “mortgage” on top of my house mortgage while trying to juggle lowly paid part time work with having 2 young children? I probably wouldn’t have done it.

    The changes are also discriminatory against women who often have more time out of the workforce to take care of children and thus the interest accruing on their HECS/HELP debt will be significantly more.

  7. narcoticmusing

    Jordan – you are presuming that all govt revenue is from bond debt. It is not, it is a tiny fraction of the incoming revenue. So it is completely erroneous to equate funding or indexation of any program to the bond rates. I should add that if the bond rates are such a good measure of the cost, why don’t all things get indexed at that rate? I note that this same Budget pulled indexation down to CPI for a range of things, such as the pension and healthcare funding – both of which have to manage cost increases with no relationship to CPI.

  8. jordanrastrick

    “Jordan – you are presuming that all govt revenue is from bond debt. It is not, it is a tiny fraction of the incoming revenue.”

    Ummm, no I’m not? Debt isn’t even properly classified as revenue of any form; its utterly apples and oranges to compare the two.

    If the lowest any lender is willing to lend me money is 8% p.a., that’s my “cost of debt”, regardless of whether my revenue a.k.a. income is $10,000 p.a. or $10 million p.a. See here or here.

    The vast majority of any government’s debt takes the form of bonds; and so the bond rate is more or less the interest rate at which the market is prepared to lend a government money, and subsequently is the rate that the government will pay. That is to say on $300 billion dollars of outstanding debt, if bonds are at 5% the government will be paying about $15 billion a year annually in interest (this is simplifying lots of details of the bond market viz 1 year/10 year/30 years, coupon structures, etc, but its broadly speaking accurate).

    I should add that if the bond rates are such a good measure of the cost, why don’t all things get indexed at that rate?

    Again, without in any way advocating for any of the governments measures you are criticising, this is a completely apples and orange comparison. Indexation is the rate at which a given piece of spending is budgeted to change over time. The cost of the pension was previously growing at (rate of increase of pension age population) * max (CPI, rate of increase of AWOTE). The government is planning to reduce the latter to straight CPI, which is indeed much less generous- but neither the costs of pensions to the government, nor the living costs pensioners have to cover out of that money, bear any especially direct relationship to the costs to government of financing debt.

  9. narcoticmusing

    I was not suggesting bonds/debt was revenue – actually the opposite. To say that student fees should be the at the bond rate is to say that the bonds are the only form of ‘revenue’ (for lack of a better word) that government has access to to fund the fees. What I was suggesting is that it is completely false to assume that student university fees are only covered by creating government debt and thus should be charged at that rate. The CPI rate reflected the fact that students would pay the ‘real’ cost of the fees (thus translating the cost over time to what it would be in real dollars rather than the nominal cost). Anything higher than that is profit, the same way a lender charges more than it costs it so that it profits from lending.

    The ‘cost of your debt’ when you borrow money includes a profit margin for the lender to make it worth their while to lend you the money. In other words, you profit from debt at rates above CPI. This is what the govt is doing.

    So, in summary, there is no reason to charge the bond rate unless you believe that the bond rate is the only means by which Govt can acquire funds – which is clearly preposterous.

  10. jordanrastrick

    OK, that makes more sense, but I still don’t think its right.

    To say that student fees should be the at the bond rate is to say that the bonds are the only form of ‘revenue’ (for lack of a better word) that government has access to to fund the fees. What I was suggesting is that it is completely false to assume that student university fees are only covered by creating government debt and thus should be charged at that rate

    Of course, there isn’t a huge amount of direct “cost” to government to raising taxation revenue per se, at least if they pick the right tax – only political cost from voter disapproval, and potential indirect costs in terms of the effects on the broader economy.

    Still, while the government has any significant debt, you don’t need to assume they’re not raising taxes in order to accurately describetheir cost of loaning people money as, at the margin, equal to the bond rate (or actually, greater, due to admin costs and default risk). Money is fungible. The government can of course “raise taxes to fund HECS” while “borrowing money to fund pensions”, for example, but the distinction is meaningless except where a law specifically provides for cashflows that don’t go through general revenue; and even then, not really. There is an opportunity cost of using the increased tax revenue to fund expenditure in any form rather than to retire debt. So even if the Greens and ALP hadn’t helped killed off increased marginal rates on those earning $80,000 p.a. for cowardly political gain, for instance, and so we were seeing more tax revenue, it would still be accurate to refer to the government’s cost of debt as the bond rate – at least up until the point any increased taxes brought in enough surpluses that total debt was approaching zero.

    The CPI rate reflected the fact that students would pay the ‘real’ cost of the fees (thus translating the cost over time to what it would be in real dollars rather than the nominal cost). Anything higher than that is profit, the same way a lender charges more than it costs it so that it profits from lending.

    The ‘cost of your debt’ when you borrow money includes a profit margin for the lender to make it worth their while to lend you the money. In other words, you profit from debt at rates above CPI. This is what the govt is doing.

    This is incorrect. “Real” is a term of art in finance and economics, and you’re misapplying it; the real cost of a loan is not in general equal to CPI, and indeed, you will frequently see discussion of real interest rates, which are residual interest rates (the cost of loans) once CPI has been factored out. Similarly, the profit margin of a bank or other financial institution, discounting operational costs, is the difference between the rate at which they lend money and the rate they borrow money. In a hypothetical simplified bank whose assets are all mortgages with zero default risk for which it is charge a fixed rate of 7%, and whose liabilities are all term deposits for which it is paying out a fixed rate of 3%, the bank’s margin is 4% – that is, they will make 4% of their asset base per year in accounting profit. This is true whether CPI is 0%, 2%, or even 10%, in which case the real interest rates in question are all negative. The bank may not be making any economic profit – which means that its shareholders might be losing money in the opportunity cost sense, by not investing their own money somewhere that could be offering a better real rate of return. But, again, this can be true whether CPI is 2% or 10%.

  11. narcoticmusing

    Given the reserve bank’s interest rate, and the rate that Australia can borrow at (which is not at all limited only to our bond rate – bonds are one way to borrow, not the only or even main way to borrow) it is ridiculous to require a one to one relationship between the cost to fund a degree and the bond rate. It is not merely borrow for this instead of that, it is a case of borrowing makes up a tiny fraction of all funds expended by government and thus there is no one-to-one relationship with ANYTHING. By charging the bond rate, the government is creating a one-to-one relationship with the bond rate. This will generate revenue for governments much the way lending generates money for banks. The benefits of lending are not merely the difference between cpi and the interest rate, I agree, but the bond rate is DESIGNED to generate a profit margin for the investor. Government does not have to rely on the limited mechanisms banks have, nor is lending/investing cash their primary source of income. I’ll say it again, borrowing is a TINY amount of the funds used by government. TINY. Not remotely significant enough to tie HECS to it in a one to one fashion, nor anything for that matter. I do not agree in any way shape or form that student loans having compounding interests rates at the bond rate is good economics, ethical or anything more than a means to generate additional revenue by once again is a transference of wealth from those who cannot afford the fees.

    As it is, I disagree with most students paying fees at university period; particularly as it is always those that benefited from the fruits of previous generous policies trying to impose this on futures. Nevertheless, if fees are to be charged and the costs loaned by the government, then CPI was a reasonable mechanism to manage the nominal to real translation, given the costs of borrowing and lending you speak of for banks is not a true or even remotely applicable scenario for governments.

    All of that, indeed, is part of the greater problem that universities already charge too much in fees for their courses. They are treating students as means to gain revenue to pay staff/costs/etc. That is not the purpose of a university nor its students. Research (and thus research positions) should be funded by (oh oh, wait for it) RESEARCH. Instead, it is increasingly subsidised by student fees. The student is paying far more than just their degree, they are paying the professor to do whatever the fuck he wants just so he can be published enough to look good, rather than the public good of actually teaching or actually researching.

  12. jordanrastrick

    Given the reserve bank’s interest rate, and the rate that Australia can borrow at (which is not at all limited only to our bond rate – bonds are one way to borrow, not the only or even main way to borrow)

    The reserve bank doesn’t fund government expenditure in any meaningful sense, and so this is another case of an apples to oranges comparison. And bonds are, in fact, by far and away the main way all well-off governments, including the Commonwealth, borrow money. Purely off the top of my head without any reference to sources, I doubt that globally any middle- or high- income country not in Greek-style fiscal strife has more than a percent or so of its public debt in total held in any form other than government bonds or similar securities. Indeed, if the government could be borrowing significant amounts of money from any source at meaningfully cheaper rate than what’s on offer in the bond market, they would be crazy not to borrow every cent of it they could in order to retire some of the debt that is held as bonds. Of course this raises the question of why any such lenders would be willing to provide these discounted loans to a government, rather than simply buying bonds on the open market and pocketing any remainder of what they were willing to charge (answer: they’re not, and so they do.)

    it is a case of borrowing makes up a tiny fraction of all funds expended by government

    This is as wrong as the Abbott government propaganda that we have a budget crisis. Total budgeted expenditure in 2014-15 is $412.5 bn, against revenues of $385.8 bn, which is to say the deficit, the additional amount the government is planning to borrow, is $29.8 bn, or a little over 7.7% of revenue; while the total accumulated stock of gross debt is around $300 billion, or a year’s worth of revenue. That’s not a crisis, but its no “tiny fraction”, either. Indeed, just this fiscal year’s projected deficit (and that’s assuming every nasty thing the government has on the table passes) exceeds the entire total of all outstanding HECS debt. Of course that is still the completely wrong way to make the comparison, because the logic of opportunity costs applies whether the budget is in deficit or in surplus, or whether HECS is 0.1% or 50% of all spending.

    This will generate revenue for governments much the way lending generates money for banks

    The government can book revenue from this in the same sense that it can book nominal revenue from the CPI indexation, if it chooses to do the accounting that way; certainly the government is shifting red numbers off their own balance sheet on to those of students. But regardless of how many times you reassert it, it is NOT making lending profit in the same was as a bank does, unless there is a substantial difference between the rate at which it is borrowing, and the rate at which it is lending money under HECS-HELP. The day the CBA starts charging for a 5 year fixed rate mortgage the same interest rate it is paying 5 year term deposit holders is the day what you are saying may bear some resemblance to reality. And in fact HECS-HELP still represents a (vastly reduced) net financing subsidy to students under these changes, because the government is bearing by far most of the counterparty risk.

    I do not agree in any way shape or form that student loans having compounding interests rates at the bond rate is good economics

    I don’t know who you think is arguing this, but its not me. I am saying that the language you are using to describe the policy is factually wrong; I haven’t up until this point expressed ANY judgements on whether the policy is a good idea in any normative sense.

    As it is, I disagree with most students paying fees at university period;

    Well then I sit somewhere between you and Tony Abbott. I think it is perfectly reasonably for the government to recoup some of the costs of tertiary education from students, since degrees provides a mix of public and private gain; unlimited free university education for all ends up being a form of middle- and upper- class welfare as everyone is so quick to harp on about in other contexts, which is precisely why Hawke/Keating introduced HECS in the first place. But as things stand I’d be increasing rather than reducing the size of government subsidies to students, especially before going about anything like further fee deregulation.

    But to talk coherently and accurately about the current state of and proposed changes to higher education, you have to be aware that CPI-indexed HECS-HELP loans do in fact represent a subsidy, just as much as the proportion of the upfront costs of a course the government pays directly. This is not a question of differing opinions, about policy or anything else; it is finance 101. I invite you to ask any single person you feel has relevant expertise in finance or economics.

  13. narcoticmusing

    The reserve bank doesn’t fund government expenditure in any meaningful sense Indeed, NO form of debt funds government expenditure in any meaningful sense.

    And bonds are, in fact, by far and away the main way all well-off governments, including the Commonwealth, borrow money.
    Yup, and yet, not their only source of funds and not even close to being a main source of funds. Ergo, no need to make a one-to-one connection between Government funds being used for student loans and government borrowing. They are NOT the same thing. They are not linked in any way.

    As for course fees, that was a very separate point and bug bear of mine. I probably shouldn’t have included it as it can divert the discussion but it is a major irritation. I agree that the HECS/HELP scheme is a government subsidisation of the fees universities want to charge to cover their costs. My point there was the disturbing trend of Australian universities looking to students to fund university expenditure, rather than research funding university costs and the university being the one that is subsidising the student fees. They are diminishing in their public good when students become their dominant revenue stream. This is not merely the universities fault, but a growing trend in Australia to pull away from R&D in general which has wide reaching consequences.

  14. narcoticmusing

    Jordan, I hear you, I really do. I should also reassure you that I’m being purposefully simplistic for this particular space, because it is not actually necessary to bring in all of the matters that make up a fiscal and financial budget system. I am intimately familiar with this and do not require you to explain it to me.

    Nevertheless, you are yet to make a case that there should be a one-to-one link to bonds in order to justify the bond rate. If HECS has a one-to-one then all funding should – either we use the bond rate or we don’t. Either the bond rate is the cost of funds or it isn’t. Of course it isn’t.

    And please $29b is actually peanuts when considered in the context of GDP capacity, but you know what is even more peanuts? The HECS/student loan load and the funding that is being cut to universities that would justify them needing to increase their fees. It is pithy. And yet, this money is being withdrawn to address a revenue problem. Total madness. The best way to deal with the gap is to generate revenue, not cut costs that will contract the economy but that is obviously a broader debate about how ridiculous this budget is in doing significant harm without actually making a single damn gain.

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