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How the uni student debt trap will hobble tomorrow’s workforce

The budget hits students with a one-two punch, with fees increasing and debt set to skyrocket. La Trobe Business School accounting lecturers Lachlan McDonald-Kerr and Venkat Narayanan examine what’s in store for future students.

As part of its “everyone needs to contribute” approach to reducing the national debt, the government has announced major changes to higher education funding, such as deregulation of the sector beginning in 2016; the removal of caps on chargeable fees; and an increase in HELP repayments by way of lower repayment thresholds and higher repayment indexations. And higher fees and higher repayment indexations will mean students leaving university in the future will be saddled with a huge amount of debt, just as they enter the workforce.

Unless paid upfront, higher fees will manifest in a debt that students will have to repay after they find employment and earn more than $51,309 (2013-14), $53,345 (2014-15) or $50,638 (2016-17) per year. Current legislation means universities can’t charge more than a certain amount per course per year:

These fees mean those students who undertake three years of undergraduate study would incur HECS/HELP debts of $30,225; $25,839; and $18,132 for band 3, 2, and 1 respectively (many courses go beyond this three-year minimum, which would increase these totals). But the government is cutting the amount of money it provides to each course by about 20%, and caps on the amount universities charge students will be scraped from 2016.

As shown in the above table, if we take a conservative estimate of a 20% increase in the fees charged by universities, this would mean that students would instead be in debt to the tune of $36,270; $31,006; and $21,758 for band 3, 2 and 1 respectively. A 20% increase in fees is likely to be a conservative estimate, with the most prestigious institutions (Australian National University, Monash, University of Adelaide, University of Melbourne, University of New South Wales, University of Queensland, University of Sydney and University of Western Australia) likely to use tuition fees as a proxy for their status and brand, while other universities and private providers will be left to compete on the basis of price.

This increase in tuition fees to students is accompanied by a 30% reduction in the funding for Commonwealth-supported places. This effectively means that students will now fund an additional 20% of the cost of their higher education, either by paying up front or by adding to their HECS/HELP debt.

Saddling higher education students in this cycle of debt is problematic for a number of reasons and is sure to have detrimental consequences for the higher education sector and its varied stakeholders. Far from the government’s rhetoric of reducing debt for future generations, the funding cuts to higher education announced in the budget mean that higher education students (i.e. the current generation and the next entrants into the workforce) will bear a disproportionately higher burden in reducing overall national debt.

The full extent of this increased burden on students will hit students twofold: a) because of the possibility  of much higher tuition fees (conservatively about 20%); and b) the increased share of fees that students have to bear (about 30%). This measure alone has the possibility of effectively raising the amount of student HECS/HELP debts by 50%. At present the amount a student owes the government is not subject to interest, but is indexed based on the CPI, which is typically between 2-3%. The government’s proposal is to effectively charge interest on student loans tied to the 10-year government bond rate to a maximum of 6% (the current government bond rate is 4%). When seen in combination, these measures may well result in the average three-year degree costing well over 1.5 times what is currently does, and will take longer to pay off.

Under the conditions we have described thus far, employability will likely be the primary driver of students’ course selections, whereas matters such as aptitude, desire, or academic intrigue may be seen as less important. All in all this is likely to lead to an approach to education that does not value education at all, but rather values only the economic benefit derived from being educated. In this form education ceases to be education, since such education only produces workers who fuel the economy.

And what better way to entrap young people into a system than to start them off in their working lives with the burdens of debt?

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  • 1
    Richo T
    Posted Monday, 19 May 2014 at 2:08 pm | Permalink

    employability will likely be the primary driver of students’ course selections, whereas matters such as aptitude, desire, or academic intrigue may be seen as less important.”

    Err… how would be that different from now? There ain’t much point spending several years doing a degree that isn’t going to improve your job prospects in the real world. We can’t all live in an academic sheltered workshop.

  • 2
    Mark Duffett
    Posted Monday, 19 May 2014 at 2:13 pm | Permalink

    many courses go beyond this three-year minimum

    I’d substitute ‘most’ for ‘many’, certainly in engineering and most science streams. In the latter case, a 4th i.e. Honours year is the de facto minimum for employment in related fields.

  • 3
    Pamela
    Posted Monday, 19 May 2014 at 2:13 pm | Permalink

    More Stupidity from government- the educated young will leave Australia rather than be saddled with debt. Already my young contacts are saying - why come home to an unimaginative ecologically and morally bankrupt government which has no appreciation of innovation, development and the future.
    Look at the stats - how many are leaving, what age education bracket, how long do they stay away?
    My daughter is paid to do post-graduate study in Europe.
    Abbott Govt is crippling the young while claiming to be saving them from future debt- what a bloody lie.
    Already the deregulation of education has seen shysters arise from the muck- delivering courses with “guaranteed” jobs at the end! More lies. My son has just completed one such and yes what a surprise not one in his course was given a job! More lies

  • 4
    Migraine
    Posted Monday, 19 May 2014 at 2:21 pm | Permalink

    A thought: the Commission of Audit recommended against privatising HECS/HELP debt, noting that the effective interest rate was too low to make it attractive to the private sector without a major price discount that would undermine the intent (assuming the only intent in selling off student debt was to reduce government debt).
    A UK treasury review came to a similar conclusion. It didn’t stop the UK government from selling off some student debt.
    The conservative government here seems to be getting an awful lot of its policy ideas from the Conservatives in the UK, especially in relation to education. And they have just raised the interest rate on student debt. Does this address the issue raised by the Commission of Audit? Could part of the intent behind the move be to make HECS/HELP debt a more attractive prospect? Will the next move be for Australia’s Tories to follow the lead of their UK cousins, and turn to the market?

  • 5
    Liberstand
    Posted Monday, 19 May 2014 at 4:25 pm | Permalink

    Good article and good comments.

    In short, straddling young people with a huge debt as they enter the work-force should be a criminal offense. But then handing them over to the private sector for collection is like opening the door to the wolves.

    User pays gone mad and the witches have cast the spell, sorry, I mean “Hex”..

  • 6
    Dogs breakfast
    Posted Monday, 19 May 2014 at 4:33 pm | Permalink

    And what better way to entrap young people into a system than to start them off in their working lives with the burdens of debt?”

    That is what worries me most.

    the opportunity for these young people to travel, to broaden themselves, to live full lives and maybe come back and enrich our country with their broad and international perspective may be lost.

    And then we will all just be insular, sheepish, burdened. Australia does not need to go back to the insular days of the 50’s and beforehand where very few people had travelled, and parochial policies and attitudes abounded.

    We are only just escaping the legacy of those years now.

    Don’t send us back there. Nobody in their right mind wants to live in that place any more.

  • 7
    Liberstand
    Posted Monday, 19 May 2014 at 4:36 pm | Permalink

    And what better way to entrap young people into a system than to start them off in their working lives with the burdens of debt?”

    You would be forgiven for thinking it’s part of a wider programme. Also, the govt of the day gets a huge windfall by onselling it’s loan-book and resolves itself of any social responsibility. Which bureaucrat and or politician dreamed this one up?

  • 8
    Susan Caley
    Posted Monday, 19 May 2014 at 4:52 pm | Permalink

    @poster No:5 - Dog’s Breakfast

    ” and beforehand where very few people had travelled, and parochial policies and attitudes abounded “

    Such as?…..

  • 9
    Boston the Dog
    Posted Monday, 19 May 2014 at 5:57 pm | Permalink

    Liberstand:

    ……..should be a criminal offense”. So should the use of “s” instead of “c”.

    Your sentiments however, are spot on!!

  • 10
    Ben Gray
    Posted Monday, 19 May 2014 at 6:11 pm | Permalink

    It’s hard to argue that students are getting value for money now, much less with increased fees. Simply put - in ‘ye olden days’ a university education was a shortcut to a professional job, but this is demonstrably false now. These days a university qualification is so watered down that it is the modern equivalent of the high school leavers certificate, required for any job. And there is a strong argument to be made that uni’s have done an awful job at actually teaching and training young minds.

    Instead of making uni free, encouraging unlimited places, or raising the cost, Government should focus on reducing credentialism in our society and offering alternative pathways for people to enter the professions - exams and testing to demonstrate skills and knowledge and supporting/encouraging employers to provide this training.

  • 11
    Bento
    Posted Monday, 19 May 2014 at 6:37 pm | Permalink

    Why does the tone of these discussions so frequently treat young people (even the well-educated for Crikey’s sake) as idiots who need Government to do so much for them anyway? People who get saddled with debt?! Don’t insult the tax payers that they borrow from to fund their education.

    Surely our best and brightest can do a cost/benefit analysis of the offering. They can then decide whether or not to undertake the wonderful privilege of higher education, and a debt to repay the society that provided them with it.

  • 12
    AR
    Posted Monday, 19 May 2014 at 6:46 pm | Permalink

    grade inflation, ie dumbing down, makes the gall of charging for most of the course in the third tier a con trick.

  • 13
    AR
    Posted Monday, 19 May 2014 at 6:47 pm | Permalink

    oops.. 3rd tier shown as Band 1.

  • 14
    Liberstand
    Posted Monday, 19 May 2014 at 7:37 pm | Permalink

    ” Government should focus on reducing credentialism in our society and offering alternative pathways for people to enter the professions - exams and testing to demonstrate skills and knowledge and supporting/encouraging employers to provide this training.”

    Yes, spot on Ben. Govt focus on keeping kids in universities and colleges after high school is just treading water before the inevitable. It also hides govt inability to create employment and feeds the educational institutions. Was it Keating who replaced the “Lucky Country” and coined the phrase the “Smart Country’? That’s all fine if there’s jobs at the end of the employment cong-line.

    Biston The Dag - As you can see I am good at it.

  • 15
    Liberstand
    Posted Monday, 19 May 2014 at 7:40 pm | Permalink

    A - as in conga.

  • 16
    Steve777
    Posted Monday, 19 May 2014 at 7:53 pm | Permalink

    Young people crushed by debt, facing insecure employment and no safety net if they lose their jobs make for a docile and compliant workforce. Welcome to Australia’s future.

  • 17
    Liberstand
    Posted Monday, 19 May 2014 at 8:59 pm | Permalink

    Pamela - It was a Labor govt that first introduced the “Hex”. This was a huge shift away from the Whitlam years with basically free education back in the early 70’s. Howard and the coalition govt continued it on and then proceeded to remodel it to the US user pays system.

    That man Gough, you gotta love him.

  • 18
    Ripped
    Posted Monday, 19 May 2014 at 9:15 pm | Permalink

    Agreed Liberstand.

    There are many things dislikable re the US. But the main two detestable aspects of living in Hamerika is their Health system and Education user pays policy.

    Education user pays was definitely introduced in Oz by Howard with his hamerikan mimicry and it looks like health is not too far behind. Welcome to Hamerika, no I mean Australia, no I mean hAmerika…aggghhh, whats the diff!

  • 19
    Susan Caley
    Posted Monday, 19 May 2014 at 9:28 pm | Permalink

    Bring back the Whitlam years when being a member of the labor party actually meant something.

    @Dog’s Breakfast - I am still waiting.

  • 20
    Liberstand
    Posted Monday, 19 May 2014 at 10:20 pm | Permalink

    @Ripped - Howard did n’t introduce it, it was the Hawke and Keating Labor govt . Howard toiked it to the user pay system it is now.

    Hope you are well.

  • 21
    Tyger Tyger
    Posted Monday, 19 May 2014 at 11:41 pm | Permalink

    There ain’t much point spending several years doing a degree that isn’t going to improve your job prospects in the real world.” (Richo T @1):

    Except for the fact that many of the greatest ideas the world’s ever known have come from people spending “several years” - often entire lifetimes - in “academic sheltered workshops” and other cloistered environments doing precisely what you deride. Who do you think made possible “the real world” you so blandly take for granted, ffs, if not the creators, thinkers and dreamers? If it wasn’t for them your “real world” would be a cave.

  • 22
    Chris Hartwell
    Posted Tuesday, 20 May 2014 at 7:44 am | Permalink

    Oh well, surely salaries for professionals will increase, commensurate with the increase in cost of attaining a professional degree, right?

    Right?

    … guys?

  • 23
    Posted Tuesday, 20 May 2014 at 8:10 am | Permalink

    This is a very weak analysis which makes a simple arithmetic mistake. Commonwealth subsidies of university programs are currently an average of 60% of the total financing of undergraduate programs - student fees make up the balance of 40%. So a cut of an average of 20% in Commonwealth subsidies would require an increase in fees of an average of 30% for universities to maintain their funding levels.

    For a real if conservative analysis of likely fee increases see Sharrock, Geoff (2014) ‘How much student debt will you be facing post-budget?’ the Conversation, 15 May.

  • 24
    MJPC
    Posted Tuesday, 20 May 2014 at 9:53 am | Permalink

    Hold on, smokin’ Joe told the Q&A crowd audience at Penrith last evening that the changes will usher in a land of “milk and Honey” for uni student after several probing questions on the HEC’s issue.
    Wasn’t one of the COA’s recommendatiosn to privatise the management of HEC’s debt? Maybe the LNP will hold that one to next years budget; after all the banks need alternate sources of income to keep them in the profits they have been accustomed to. The age of entitlement is not dead for some.

  • 25
    R Man
    Posted Tuesday, 20 May 2014 at 10:31 am | Permalink

    Tyger Tyger

    Except for the fact that many of the greatest ideas the world’s ever known have come from people spending “several years” - often entire lifetimes - in “academic sheltered workshops”.

    Yes and a lot of them have done so in institutions such as Harvard, MIT, Stanford, Berkely, Princeton, Yale. The US under a deregulated environment have 8 of the top 10 highest ranked institutions in the world.

    The claim by the author that deregulation will spell the end of academic discovery is laughable.

  • 26
    Posted Tuesday, 20 May 2014 at 10:33 am | Permalink

    No, privatising the HELP debt is such a bad idea that even the Commission of Audit rejected it.

  • 27
    Glen
    Posted Tuesday, 20 May 2014 at 11:24 am | Permalink

    An immediate 20% increase in university fees*, and no one noticed (except McDonald-Kerr and Narayanan). How can this be? There’s only one possibility … careful, planned deceit.

    (* No other outcome is feasible. What university can accommodate a 20% income reduction while maintaining its student count?)

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