Is HECS still delivering on its original promise?

Bruce Chapman:
When it was first designed, the situation was that if you earned above a certain income, you paid on the basis of the proportion of your entire income. What we should have done is to make the system like income taxes. People wouldn't have noticed it. It's pretty complicated, but I think it's much fairer and a better way to have designed the system and more preferable to what we did.

Tahn Sharpe:
Welcome to INTHEBLACK, a CPA Australia podcast. I'm Tahn Sharpe, editor of INTHEBLACK and host of today's episode. Nearly four decades ago, Australia introduced a bold idea: a way to open up university education without asking students to pay upfront. The Higher Education Contribution Scheme, or HECS, reshaped how millions access higher education and has since influenced systems around the world.

But today with rising debts, shifting fee structures, and growing concerns about fairness, the question is whether the system is still fit for purpose and beneficial to people and the economy. Joining me to explore this question is the architect of HECS himself, Dr. Bruce Chapman AO, Emeritus Professor of economics at Australian National University. Bruce, thanks so much for joining us.

Bruce Chapman:
My pleasure completely.

Tahn Sharpe:
Now to start with, take us back to the late 1980s. What were the key pressures or policy failures that made HECS necessary? And I guess what I'm asking is what were the problems you were trying to solve when you first designed HECS?

Bruce Chapman:
The situation was that the incoming minister, whose name is John Dawkins, who's Minister for Education, not just higher education, he was facing a major problem with respect to what's called the school retention rates. Let me explain what that means.

The school retention rate is a proportion of people in their cohort who completed high school and that number and the Labor government period from 1983 onwards, that number had almost doubled. It started about 33 per cent and it was 65 going up when he wanted to think about doing something about fees or at least thinking about the possibility of reintroducing fees.

The important historical point is that there were university fees, but they were abolished by the Labor government in 1974 and there had been a period from 1974 to 1987 where there were no charges. So what John Dawkins needed to do to expand the system was to find a revenue base, and that revenue base, in his view and in the view of that cabinet, could reasonably come from the graduates themselves.

And the reason behind that, which I think is pretty strong, is that if you have a so-called free education, that is when nobody who goes into university pays anything, it means that all the taxpayers are paying the cost to produce a graduate.

Most taxpayers even today are not graduates, so you're asking people outside the system to finance the professional lives of some of the most advantaged people in the country. So that was kind of a motivation on equity terms, but the basic fiscal imperative was to find some money to make the system better. And when it was introduced, he said at the time and said much after that, "All of the money we raise here will make the system bigger." And that's what happened.

Tahn Sharpe:
Now the revolutionary thing about HECS, when it was constructed, was the income contingent repayment model that was kind of at its core. How did you arrive at that model?

Bruce Chapman:
That's a pretty weird question for me to confront because it's not in the textbooks. Well, it was in some specialised articles about the nature of the financing of education. I spoke to a lot of my colleagues and my friends about my own concerns with having a university charge and the major concern always would be if it stops people from enrolling.

So the challenge was to find some instrument whereby people did not have to pay anything when they enrolled, but because you needed the money, paying later when you can afford it was the trick.

Well, trick to means was the instrument to do that. And I did then find some literature not about income contingent loans, but about equity in human capital, I won't go into the details, and they basically mean that, "Let's ask graduates to contribute, but only when they can."

And that means not having any charges upfront but later. So it was kind of a team effort. There were people in John Dawkins' office who had spoken about this very briefly when I was first there. So there was kind of a group of people who thought this was the way to go.

Tahn Sharpe:
HECS now has been adopted, or adapted indeed, globally. Why has it proven so influential internationally?

Bruce Chapman:
Yeah, let's get the data in perspective. There's about four countries that have imitated or copied HECS basically completely: the United Kingdom and Wales and New Zealand and Hungary. And there are many other countries such as the United States, such as Korea, such as Thailand, Colombia and Chile that have started to move that way and have actually done some things in that direction.

Now, I've spent a good deal of time in the last 15 years talking to international governments or governments overseas, obviously, and scholars and academics about the loan systems that they currently have. Now, just about every higher education system in the world has a loan system because if you want people to pay, you can't ask them to borrow from a bank because they've got no collateral.

So governments are aware of this and so they put in place loan systems. And the loan systems, apart from income contingent, which is HECS, are ones which are just like your mortgage, you pay a certain amount every month, it doesn't change, it's always the same, and then you stop paying after you've reached the repayment period end, which is in the United States, for example, about 10 years.

Now, if you have that kind of a system, you run the risk of some people in the future not being able to repay. And if things get really, really bad, not only are they anxious from not being able to pay, but they can be defaulted out of the system. And once a student or a graduate is defaulted out of any loan system, but a student loan system we're talking about here, that's kind of the end of them financially because it ruins their credit reputation.

So if you do not repay a student loan in the United States, in Canada, in Colombia, in Thailand, you're in trouble. And not only that, but governments don't get any more money from you for the loan system. So they're kind of the big background points that have encouraged governments from all around the world to find an alternative way of doing it.

And the alternative way of doing it, which is what we call income contingent loans, which is HECS, says basically it doesn't matter if you don't have any money at a particular point in time. Let's imagine you get very sick or let's imagine you're looking after aged parents or let's imagine you wanted to spend full-time looking after a child and you've got a student debt, all of that's deferred, and that's kind of the most important point.

And I think governments have come to that realisation, some of them without much support from us. And when I say us, I mean my colleagues and I've done a lot of work on this, and sometimes we get wonderful support that can get a little bit unbalanced because of the nature of the politics, but those processes are going on. We can trace them all to the alternative system, which is people not being able to pay and having to default at great loss to themselves and to the government.

Tahn Sharpe:
Now I wanted to look at how HECS has developed over time and that will probably lead us to the 2020 Job-Ready Graduates package, but we'll stay off that for a second. I just want to sort of clarify firstly, has the HECS scheme itself stayed true or drifted from its original design?

Bruce Chapman:
I think in concept, it's the same thing. And the basic concept, the essential idea, is twofold. Nobody pays upfront, everyone can enrol without money, and secondly, you only pay when and if you can. So they're the characteristics, they're the features, they're the defining aspects of HECS and none of that has changed.

We've had a lot of different governments over 39 years, well, actually it's about 38 years, that have all done things differently in terms of the detail and some of it I think was okay and some of it I think was really very poor economics, but no political party has ever said, "We want to abolish the system."

And I think that the original ideas of Labor using the money to expand the system are fairly compelling because the system is now three times higher. And in the earlier stages that came about because the Labor government then used all the money.

So if you had an alternative, the alternative in concept would be, "Well, we have a bank loan," nobody wants a bank loan, "or we pay upfront and give scholarships to people." Well, that's got its own problems. Where things have changed is the detail and sometimes these details can be very important. For example, there's an income threshold of repayment of which you earn below that, in a particular year you pay nothing.

When that was first designed in 1988 and enacted in 1989, that was average income, which in current dollars is about 72,000 per annum and nobody would have to pay if they had a year in which their income was lower than that. That's moved around a lot. I think I counted seven different changes to the first income threshold of repayment, that's critical. Less important issues, but still important was the rate of repayment. So if you've got a certain income, you've got to repay a proportion of that income.

When it was first designed, it was 1 per cent and then it went up to 2 per cent and at one point it started at 4%. It's always been progressive. It's gone up more than that. We could talk about the Job-ready Graduates package, which has got unfortunate features of its own, but the essence of HECS has never really been challenged or addressed as something to be changed.

Tahn Sharpe:
Okay. So a few changes there around the minimum limits and the repayment amounts, but broadly in line with the same structure that it came out with. You mentioned that no governments have really looked to abolish it, but in 2020, the Morrison government, I believe, brought about the Job-ready Graduates package and that dramatically reshaped course pricing. Could you explain what in your view happened there and what went wrong?

Bruce Chapman:
Do I have three hours? What went wrong? The first point is when this was introduced, the minister at the time, Dan Tehan, said the reason that they wanted to change the price... What you're saying is completely accurate, that the prices for different courses, humanities, medicine, engineering, whatever, they were changed radically and the most significant increases were for humanity students and they also decreased some prices like for medical specialists.

When the minister introduced this, he said, "The reason that we're doing this is to change people's choices about education and about occupation." So if you're thinking about studying philosophy or history, how about you think about studying something that's less humanities-oriented, I don't know, engineering or some psychology or maybe that. And the presumption behind that is you can change people's choices, but there's no evidence to say that you can change choices by changing the HECS price.

In fact, all the evidence is that changing the HECS price will affect people, but it won't change their behaviour. If your debt goes up, you're affected, you're unhappy, but it won't change your choices. And when you think about it, it's kind of fairly obvious. Just think about your own background. Why are you doing what you're doing now? And to study to get there, would you have changed radically your plans if the prices have been very different?

And keep in mind that these prices aren't something you choose like in a supermarket and you make a quick choice between one brand or another, the prices you face in the future and we know that they're not as significant because of that. But the other critical point is that people are who they are. They've got talents and abilities and interests which far transcend the relative prices.

So that was the basis. And if that was truly the basis, and I couldn't tell, I thought it was so misplaced they couldn't be serious, but they did say it several times, it was never going to work. But that's the first point. The second point is in the course of 2023, I was helping with what was known as the University's Accord Review and my job was to look at the prices and the price setting.

And I went back to the whole time since we started this, since I first started being involved in 1987 all the way through to 2023, and there were about six or seven different changes to the prices. And I asked myself, "On the basis of this experience and these arguments and what happened, what is the right way to charge?" That question had never been properly put, even though governments of all persuasions were changing the price basis.

And I came down to the following: the fairest way to charge and the best way in my view is to charge on the basis of expected future income. Now, we know that if you study law, some of those people will not end up lawyers and some of those people will end up in legal aid, some of them will be corporate lawyers, but we do know generally from the data that people who study law do very well in the labour market, mostly as lawyers.

What about medical specialists? Well, medical specialists is the highest earning graduate group there are. They do extremely well in the labour market and they're the people that you want to contribute the most. Generally, that had been the case, but the people you want to contribute the least, although to still pay, were the graduates who were facing relatively low lifetime incomes.

The most obvious example is humanities. The poorest paid graduates, they're doing well compared to non-graduates, but the poorest paid graduates are humanities graduates who are women. There are other groups that don't earn a lot of money who, if you thought fairness underpinned, you would like to pay relatively less amounts of money, for example, nursing.

So the whole structure was changed radically, in 2021 it came to be, for no good reason and for poor reasons because you were moving away from the optimal or the best way of having a charging system. I think that this is one of the worst pieces of public policy in education that we've ever had and I'm not alone. Most of my economist mates who are in this area shake their heads in disbelief often for very different reasons, but this was a really, really poor piece of public policy that didn't achieve anything much.

It made people unhappy and worse off. It did allow the government at the time to save some money, that might've been its motivation, I don't know, but the original motivations as stated were nowhere near what would be good economics.

Tahn Sharpe:
You mentioned this search to find the right way to charge. Do you think that CPI indexation is held within that right way to charge? Is that a piece of the puzzle?

Bruce Chapman:
I do. When I say the right way to charge, we know what the right way is, it's income contingent loans, but if I use the word way, I meant the relative prices, a way being, do you charge humanities less and medical specialists high? Yes, that is the way to go with respect to prices. But let me take you to your question, indexation. This is one of the hardest things to understand unless you've got some kind of background in economics or finance, but I'll do my best and it goes like this.

When the government incurs a HECS outlay that is somebody enrols in a university and they pay nothing, the government gives the university that amount of money. So for example, let me just make one up, business costs about $15,000 per full-time annum for the government to have a business economics place.

The government gives the money to the university and the university has $15,000, which they use to supply the place. Now, over time that $15,000 becomes less than $15,000 in purchasing power terms with a relatively high rate of inflation, that can be reduced in purchasing power terms by 50 per cent in a smaller period as 10 years. So what indexation does is to correct for the purchasing power value of the money.

And that's why it's kind of reasonable because the money that the people will be paying back will be the same in what we call present value terms, the equivalence in purchasing power as it was when they got their place. And that's why it's reasonable. I might add that if this was a normal loan, it wouldn't be indexed just to price inflation. It would have several percentage points above it because you need a return or governments or business needs a return on investment and that's more than inflation.

It'll always be two or three percentage points above inflation. So the system at the moment is quite subsidised and it was kind of difficult for me to understand why there was such a kerfuffle made about two or three years ago when indexation was challenged, but I think I've worked it out. And the reason is that for about the last 20 years until 2024, there really wasn't any price inflation. So the average was 2 per cent, 3 per cent.

People didn't really notice it, but in that year, 2023, '24, it was 7% and going up. And that was kind of scary, and that's where there was a lot of concern about this. Before then, there wasn't inflation of any notable amount for about 20 years. So people had got used to inflation of very small levels and had been taken for granted, but the 7 per cent was big and strange and that led to the political concerns, which did not really have an economic basis to them, but that's where that indexation debates became very big in 2025.

Tahn Sharpe:
I'll note that the government introduced a 20 per cent debt reduction in 2025. I think you touched on that, Bruce. Was that the right fix or do you think that was a missed opportunity for deeper reform?

Bruce Chapman:
I can understand where it came from because if there's one thing we all agree on, it is that the debts have become too high. I don't think they're too high for the most advantage groups, medical specialists, lawyers, I've used those examples before, but they're far too high for people at the graduate lower end of the lifetime income distribution. So I think the correct way of doing this would be to realign all the prices.

And what the government did instead of that, they didn't ask me anything about it, but what they did was to reduce the debts across the board by 20 per cent. I think it would've been preferable if they had been targeted, and the best way to target would be to change the relative prices.

The government's aware of this because it was noted very strongly in the University Accord Review that the prices were not the right prices. The minister has responded to that saying, "We can't do everything at once and things are expensive," although I don't think that would be very expensive, but they chose to have the debt reduction. I hope the next change that comes about is the change to relative prices, but it's going to be the politics that dominates this discussion and not the relationship to economics.

Tahn Sharpe:
I suspect you're right. Final question, Bruce. If you were redesigning HECS today, would you change anything about it?

Bruce Chapman:
I would, which sounds a bit technical, but when it was first designed, the situation was that if you earned above a certain income, you paid on the basis of the proportion of your entire income. So if you earned $70,000 and that was a threshold and the amount was 10 per cent, then you'd pay 7,000, or more likely 1 per cent, you pay 700, and that creates a big wedge at the first threshold. What we should have done, and I'm partly responsible for this, is to make the system like income taxes.

You have a threshold where there's no payment at all, then you introduce on the marginal basis just like income, for every extra dollar, then you pay a proportion. Now, I've been aware of the problems for quite a while. It never seemed to be a significant issue, but it started to become very important when that first repayment rate was 4 per cent.

Part of my job was to analyse that and to suggest a different way, and the different way was always to replicate the income tax system, to have no charges at all up to a certain level and beyond that on a marginal basis. Blessed, the government did that. The government made that change. People wouldn't have noticed it. It's pretty complicated. It's a technical detail, but I think it's much fairer and a better way to have designed the system and a bit more preferable to what we did.

Tahn Sharpe:
A worthy change then. Bruce, I had a feeling this would be a fascinating discussion and I was not disappointed. Thank you so much for joining us today.

Bruce Chapman:
My pleasure.

Tahn Sharpe:
For all our listeners eager to learn more, check out the show notes for links for additional resources from CPA Australia. And don't forget to subscribe to INTHEBLACK and share this episode with your colleagues and friends in the business community. Until next time, thanks for listening.