Lessons In Life

Unpaid student debt continues to skyrocket as the Government writes off yet more loans as losses. By James Mathias.

Milton Friedman once said there were four ways to spend money, each yielding a different value for the spender. The worst way, generating the lowest value, was to spend another person’s money on someone else, in which case neither price nor quality were of any real importance. “This is what governments do,” he said.

The Government’s Higher Education Loans Program, the profligacy of which can be traced back to the previous Labor administration, is a good example. The total amount of tuition fees outstanding from students is currently $54 billion, which is staggering in itself were it not that the official budget figures in the 2017-18 budget estimated that this figure would be $44.7 billion – only a $9.3 billion rounding error.

The concern emerging is not however in the total debt outstanding to the Commonwealth, rather it’s what is buried deep in the financial statements of the Department of Education and Training Annual Report for 2016-17 detailing the amount of debt not expected to be repaid (DNER).

The Department’s own auditor raises the valuation of HELP debt receivable and related fair value losses as his first key concern, “The Department makes assumptions that contain a degree of uncertainty, such as discount factors, trends and payment information to estimate the fair value of the receivable,” it says.

The technical nature of this assessment was shared by the Commonwealth Actuary who has fundamentally changed the method they use to calculate this write-off, something that is translated deep into the report of exactly how much of your money loaned out is never expected to be repaid.

Prior to this new and more realistic calculation method in 2016 the Department had on its books a write off of $204 million in bad debts. The table below is cleverly disguised on page 120 of the Departments report which shows that for 2017 the DNER is actually 30 times higher at $6,050,278,000. That’s right – with a simple, more realistic approach from the actuary of the ability of these debts to be recovered, almost $6 billion extra was written off overnight.

​The average amount of HELP debt for the 2.7 million Australians who have them is $20,303 and there are now more than 159,000 people with debts of more than $50,000.

The expectation of the system is that you only begin to pay it back when in theory you complete your course and go into full-time work.

 But a continual decline is beginning to emerge for students completing their University degree with figures showing that by 2015, 73.6 percent of students who began their degree in 2007 had completed. For students that began in 2010, only 66 percent of them had completed by 2016. Considering degrees take about three years to complete, this is very alarming.

 On the flip side looking at the Vocational Education Sector (VET), the greatest single element causing the DNER to rise is a legacy issue of Labor’s failed VET FEE HELP scheme which was open to any student, with no proof they even existed, who were eligible to receive taxpayer subsidised loans for whatever course a training provider wanted and at whatever cost.

 Former Labor attorney-general Michael Lavarch described VET FEE HELP as “the worst piece of public policy I have ever seen” and for good reason. In 2012 when the scheme was opened up it was costing around $325 million per year (5,300 enrolments). In 2015 that figure had reached $2.9 billion (321,000 enrolments).

 With a completion rate of 61.4 percent the VET sector does a little better than university for completions but the average wage of a graduate is $44,000 which is $11,000 below the 2017-18 repayment threshold of $55,874. The Government in recognising this will soon drop the repayment threshold to $9 per week at $45,000.

 The $6 billion oversight in previous years to this bad debt is finally starting to be realised. Maybe the Department of Education should look at point one of Milton Friedman’s four ways to spend money.

 You can spend your own money on yourself. When you do that, then you really watch what you’re doing, and you try to get the most for your money.