Is Abbott about to securitise HECS debts?

ScreenHunter_26 Oct. 16 10.41

By Leith van Onselen

The Western Australian newspaper has reported today that the Abbott Government is considering selling-off Australia’s outstanding Higher Education Contribution Scheme (HECS) debt to investment banks, so that they can be bundled-up and sold as asset-backed security (ABS) to private investors:

The university education debt of millions of Australians could be sold off under a proposal to be examined by Prime Minister Tony Abbott’s inquiry into the state of the nation’s finances.

In a move that could boost the Budget bottom line, up to $23 billion of outstanding Higher Education Contribution Scheme debt would be effectively privatised under a plan that has already won support in some financial circles…

In a process called securitisation, the responsibility for HECS debts would be bought by the private sector and then sold to investors.

It is understood that Mr Hockey was made aware of the possibility of turning Commonwealth HECS debt into a finance product while shadow treasurer. The commission is also expected to look at the sale of Australia Post.

Let’s be clear, selling-off Australia’s HECS debts would not necessarily “boost the Budget bottom line”. Because HECS debts do not have interest (except CPI increases), by definition the sale would be at a significant discount to face value ($23 billion). The difference in effect becomes the annuity stream for investors. Therefore, while the Government would receive some funds up-front, it would lose the ongoing cash flow as loans are repaid – in effect substituting a future income stream for a smaller lump-sum.

Given that the move has “won support in some financial circles” (presumably from investment banks), we can presume that any deal would likely be weighted in their favour, not taxpayers’. After all, why else would an investment bank participate unless large profits were on offer?

The deal, therefore, reeks of another example of governments selling-off the family jewels in order to pay the bills. While such moves are financially beneficial in the short-term, they can prove costly over the longer-term as future revenue streams are reduced. There aren’t even privatisation arguments to support this sale (such as the notion that the private sector will be more efficient etc).

The skeptic in me also wonders whether the move represents a gradual shift towards the privatised US student loans model, where interest rates are set more by the market (rather than CPI as applies under HECS), and there are less favourable terms of repayment.

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Leith van Onselen
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  1. There aren’t even privatisation arguments to support this sale (such as the notion that the private sector will be more efficient etc).

    There haven’t been efficiency arguments to support most of the privatisations in the past twenty years.

    Privatisation was once a program for selling government-owned businesses operating in competititve industries (like banks and airlines) or for restructuring utilities to introduce competition (as in the now-standard separation of generation and transmission/distribution).

    But it very quickly transformed into an undisguised program of granting private monopolies and tax-farming concessions to favourites of the government, with the added benefit of raising cash without the appearance of borrowing or taxing.

    By the way, I did tell you again and again before the election that this was precisely what the Abbott government would do.

    At the time no-one seemed to be listening.

    • Well some of us were but unfortunately the Governor General would not respond to my email requests and commission me to form government.

    • +100

      The LNP are American sycophants, the American experience of the securitisation of their HEC system is;

      Student interest rate up from 3.4% to 7.4% and predicted to go above 8%.
      A huge spike in Uni student unemployment/suicide as the debt grinds them under.
      Zero new allocation to higher education.
      Banks than everybody with special Christmas gifts for their CEO.

      • “A huge spike in Uni student unemployment/suicide as the debt grinds them under.Zero new allocation to higher education”

        Is not this their way of getting rid of the troublesome intellectuals (i.e., politically motivated move)?

    • Privatisation was once a program for selling government-owned businesses operating in competititve industries (like banks and airlines) or for restructuring utilities to introduce competition (as in the now-standard separation of generation and transmission/distribution).

      But it very quickly transformed into an undisguised program of granting private monopolies and tax-farming concessions to favourites of the government, with the added benefit of raising cash without the appearance of borrowing or taxing.

      Beautifully put.

      LNP = return of the rentiers!

  2. Its truly sad that all the arm waving and carry on about balancing the budget is so one sided while completely ignoring the continual structural debt addiction Australia has. Somehow holding the debts with your right arm will make the left arm look good. As mentioned the only beneficiaries of this sort of nonsensical sale would be investment banks. Certainly education will not improve.

    Keating said it best – ” it’s like the pea and thimble trick. The Government debt or the massive private debt abroad? It’s continuing to grow.”

  3. Whoop de doo. More grist for the investment banking mill to grind out bonuses for themselves.

    Turnbull was an IB, wasn’t he? Did he dream this up?

    How much of a discount would the investment banks consider acceptable? My guess = As much as possible. 10%? 25%? 33%? Anyone like to hazard a guess?

    • maybe the offer should go out to HECS holders, whoever wishes may repay as a lump sum at 60c in the dollar.

      • sorry Phroneo, you are quite right, oh damn, I also didn’t consider that would also keep their lump sums out of houses. What a disaster, lucky you pointed it out before I promoted it any further!

      • +1 – I would look at reducing my (considerable) HECs debt on those terms, especially since they have reduced / removed the early payment discounts (perhaps in a move to this situation)

        If it aint broke why fix it? – If they need more money then just diddle with the repayment schedule

      • Brilliant proposal Dogbert. The only drawback is that only a small proportion of our indebted young might be flush enough to benefit.

        But still good public policy.

      • What is unclear to me is how this dumbass idea would work in practice. Currently HECS repayments start when an ex-student earns $51,309 pa. The annual income figure for HECS is calculated from the amounts shown on the ex-student’s tax return for taxable income, reportable fringe benefits, total net investment loss, reportable superannuation contributions and exempt foreign employment income.

        The amount repaid each year by the ex-student is a percentage of the income figure he/she earned that year and is on a sliding scale from 4% to 8% depending on the quantum. HECS repayments are based on the ability of the debtor to pay with repayment s based on salary earned in any year, not on the principal and interest of the amount “borrowed”.

        So if I understand it the ATO will be providing investment banks with the income details of taxpayers so that the banks can calculate the applicable repayment schedule which would more than likely change each year once the initial earnings met the threshold. Unfortunately, Mr Abbott it is currently illegal for the ATO to share such information to private entities so guess what. HECS would have to change to a commercial model similar to the USA. Now if only we can figure out how to dump Medicare and follow our North American friends up that road as well.

  4. Who needs an education anyway? ALL you need to do when you come of age in this country is TO BORROW MONEY and BUY HOUSES.

    NO HECS debt involved at all!

    (there’s a hell of a lot of other debt mind you… but, meh)

    • Yes, why bother with tertiary education at all? When you can earn $200/hr as a tradie, more if you’re on a minesite?

      The old joke about the doctor who became a plumber comes to mind….

  5. Oh FFS.

    Do we have to make every dumb mistake the US has done?

    Their total student loan debt recently passed $1 trillion and you have a perverse job market that asks for college education but in order to achieve that, you must take on NON-DISCHARGEABLE loan debts of 6-figures that can effectively ruin their lives, since not even declaring bankruptcy can absolve them.

  6. I wish we could flag everyone who voted for this guy, or preferably, either of the major parties. They should then be first in line if/when any asset confiscation is required to solve any future debt / banking crisis.

    As Leith wrote, it’s just selling family jewels at a discount in order to have a nice surplus to boast about. I can only imagine how much noise he’d make if Julia or Kevin had tried this stunt to get a surplus.

  7. Dumb, dumb, dumb
    The only way this makes sense for us taxpayers is if the private sector can fund the debt at less than government borrowing rates, or if the private sector makes too aggressive assumptions in regards to the rate of payment. Clearly the first is invalid, and although we won’t know about the second until after the fact, its bleedingly obvious that the putative buyers are going to put such a risk premium/discount on it that it will get sold too cheaply.
    Potentially p*ssing away billions of value to con a few gullible journos/voters about how government debt is being reduced

  8. What kind of terms will be attached? Will the taxpayers be forced to pick up the tab if a HECS loan is not repaid? There are outstanding HECS debts with no prospect of repayment, ever. Would those be ‘sold’ as well as a package, or will they remain on the government’s book?

  9. People assuming that debt will be repaid. With Abbott committing himself to overpriced housing and excessive immigration it will become fashionable for graduates to permanently move overseas.

    • That’s why in the US banks pushed for student loan debt to be non-discharge. 1976 Congress voted for 5 years non-discharge. In 1998 it was changed to life unless circumstances of (very difficult to meet) undue hardship.

    • “People assuming that debt will be repaid.”

      I would guess that the sale price will not assume that at all. The debt will be so heavily discounted that it will be basically throwing tax-payer money away.

    • It’s already fashionable to leave amongst young professionals, although many I have talked to still think they’ll be coming back in 10-20 years time…

  10. I would have thought putting the proceeds of an MRRT/RSPT into providing free/nearly free tertiary/technical education (and/or research, ala Twiggy) instead of propping up the most unproductive members of society with new Maseratis would have been a better legacy for Mr Abbott and Co.

    BTW, Norway has free tertiary education – even for foreigners (you just have to live there which is pretty expensive, but then again, so is Australia)…..

    • But Norway saves the money it makes on its oil into a dedicated wealth fund, doesn’t it? Like a normal resource-rich country should.

      Oh, wait…

    • Taking a longer view, I think one needs to understand the role of tertiary education as a positional good.

      This was discussed at length on Macrobusiness last August (here) and on Bagehot’s Notebook back in May 2012 (here).

      If one takes a realpolitik view, the five functions of any education system – roughly in decreasing order of importance – are:

      1. To ensure that the limited positions of power, privilege and prestige in the coming generation go to the children of those who enjoy power, privilege and prestige in the present generation. These are, after all, the people with sufficient influence to determine the design of the education system. They are hardly likely to allow a system which disadvantages their own kiddies for the sake of strangers.

      2. To keep urchins off the streets in order to keep the crime rate down.

      3. To condition young people in the behaviours necessary to live peaceably under the evolutionarily unnatural conditions of high-density urban dwelling.

      4. To indoctrinate young people into believing that the regime acts in the interests of all its subjects and not just for the benefit of the politically powerful.

      5. To teach the skills needed to maximise profits in a complex technological economy.

      Objective 1 is clearly positional in nature.

      There are various ways in which positional advantage can be passed on from one generation to the next. One of the most obvious is to make young people pay for their education. This is an effective deterrent to those who do not come from wealthy families.

      Other deterrents in use include:

      a) making prestigious degree courses needlessly longer (for example by turning them from undergraduate courses into post-graduate courses) in order to disadvantage children of poorer parents who would find it harder to stay at university for the longer period of time; and

      b) changing university selection so that it is based less on academic achievement and more on other intangible qualities. A host of possibilities arise:

      – giving preference to bilingual children (more readily achieved by the privileged, although other measures would be needed to weed out the children of first-generation migrants);

      – giving preference to co-curricular achievements (especially those more readily achieved by privileged children). This is one areas where the independent schools are especially active; and

      – giving preference to children who have taken a pre-university “gap year” (especially an expensive overseas gap year involving volunteering that costs money but doesn’t earn it).

      Taking a long view, I think what we are seeing here is more of the process by which the 20th century ideals of Equality and Democracy are being steadily wound back in favour of privilege.

      Those ideals were never an inevitable consequence of some “March of History”. They arose out of very specific technological and economic conditions.

      Those were conditions in which an evolutionary advantage (and that includes economic and military advantage) could be obtained by training individuals to the high levels of skill needed to run a technological – but not fully automated – economy.

      Having invested such a vast amount in them, Rulers “valued” those individuals. Conversely, those individuals had significant bargaining power relative to the ruling elite. They could demand a better deal for themselves and their children.

      But there was never any Law of Nature dictating that such a situation would continue forever.

      For the developed countries, that era has passed. The combination of globalisation (providing access to cheap labour around the world) and computerisation/robotics has tilted the playing field back in favour of the privileged.

      And the privileged are in the process of returning social arrangements to what they consider to be the historical norm.

  11. This is a good idea. There’s no reason why these loans should be on the government balance sheet.

    The question is how would they use the proceeds? I suggest paying off existing government debt to alleviate upward pressure on the AUD and release capital to the private sector. Doubt that will happen though.

    • Why is it a good idea to merely shift the debt from one sector to the other?

      The debt still remains, the amount remains the same, but the interest bill goes up.

      What earthly purpose has been served by discharging one debt (government) and building up another debt (private) with an absolutely zero change in national indebtedness? And an increased interest bill to boot?

      Now, the reason it makes sense for government to advance loans itself is that those who go to university usually get higher salaries and pay higher taxes. So the government return is not only the interest paid on the loans, but also increased taxation receipts. Sounds like a good deal for the government to me.

      Increase the cost of student loans, and less students will take it up (you know, supply and demand). Less students take it up, less taxation revenue for governments later on.

      later on is when we are having problems with our aging population.

      So, this ‘good idea’ will end up with either of two situations:

      If there is no change in total amounts of loans taken out, then there is no change in total debt, merely that it has gone from one thimble to another. Plus students will have to take on higher interest for no national benefit whatever.


      If, however, supply and demand works and students don’t go to uni, there will be a reduction in tax revenue due to their lower wage rates. That lowering of revenue will occur when we need more revenue for an aging population.

      Losers from this ‘good idea’ are:
      Government and taxpayers.
      Aging population.

      Who might the winners be?

      Coalition MPs.

      So, it is a good idea from the pov of bankers and coalition MPs but a bad idea from the pov of taxpayers, students and those heading to retirement.

      Ok, clear to me now.

      • What earthly purpose has been served by discharging one debt (government) and building up another debt (private) with an absolutely zero change in national indebtedness? And an increased interest bill to boot?

        The government now has billions of dollars to work with instead of having loans.

        There’s no increase in interest. HECS/HELP debt is indexed at CPI. They can’t change this retrospectively.

      • There’s no increase in interest. HECS/HELP debt is indexed at CPI. They can’t change this retrospectively.
        So it’s about screwing future generations for a quick buck today ?

    • HECS effectively lends out money at negative real interest rates, this is why it has to stay on the government’s book, as it make no commercial sense.

      Please note that the government is not selling the HECS debt, they’re merely selling the future income stream from HECS. Currently the HECS debt is around 23.6 billion, with over 6 billion of it being considered as non-recoverable. That’s almost a 25% default rate!! This is the real worry : if the debt can only be sold with a government guarantee, wouldn’t this make it one of the worse case of crony capitalism?

      • What government guarantee? There’s no mention of that.

        It just sounds like you are jumping to conclusions when the details remain uncertain.

        Just because the debt doesn’t charge high interest rates doesn’t mean it doesn’t make commercial sense. The debt will be sold at a discount to reflect the low repayments and non-repayment risk.

  12. I’m not an accountant, but…

    As I see it, the HECS/HELP scheme is a net cost to the government, with the costs being the differential between the cost of borrowing (Govt bond rate) and the returns on the loan (CPI), and also the costs of the various write-downs associated with the loans (such as those who never repay.

    This presumably currently appears in the Budget as a relatively stable line item which results in a marginal decrease in the surplus / increase in the deficit.

    If the Government chose to sell off all the loans to a third party, wouldn’t it need to crystallise all the probable ongoing costs associated with the loans at the point in time when they were sold? That is to say, when a HECS loan is issued, the Government balance sheet adds an asset of value X, but when that loan is subsequently sold for X-Y, doesn’t it crystallise a loss of Y? If a company sells an investment for $1 that it paid $2 to acquire, surely it doesn’t get to book a $1 profit, does it? In which case, wouldn’t the HECS proposal make the budget look worse in the short run and better in the long run (by effectively bringing forward a stream of losses and getting them off the books in a single financial year?)

    Perhaps my inability to do more creative accounting is why I don’t work in the sector…

    • I am happy to be corrected but I believe Government budgeting is done using cash accounting…so when Treasury talks about surpluses and deficits as I understand it they are talking about the cash position.

      From an accrual accounting point of view yes you would be correct.

  13. “… up to $23 billion of outstanding Higher Education Contribution Scheme debt would be effectively privatised …”

    The Grattan Institute in their report titled, “Mapping Australian Higher Education, January 2013” stated that the HELP debt stood at $26.3b. And the HELP debt not expected to be repaid at $6.2b.

    So I wonder how they got to the $23b figure quoted by the newspaper?

  14. I thought the debt was directly on the RBA’s balance sheet and was in fact an important deflationary tool.

    Since this is clearly incorrect, here’s how it will go down:

    1) The market will be set up.
    2) Existing HECS/HELP will be grandfathered
    3) Future HECS/HELP will attract an interest rate of at least CPI + 2%
    4) The ATO and RBA will step aside leaving loans directly managed by the private sector – payments will no longer be deferred until a decent wage is achieved.
    5) Future deregulation will ensure the CPI + 2% becomes old hat. New loans will be made at a commercial rate.
    6) Straya becomes a bunch of rock digging dumbasses
    7) Sometime in the future a recession hits, debts accumulate, defaults rise
    8) The debt will become immune to default
    9) Suicides and emigration will prevail
    10) Debts will be bought by the RBA (under pressure from the presumably ‘returned to their roots’ Labor party of the time). A large sum will be forgiven. The original HECS/HELP scheme will be reinstated.
    11) Repeat.

    HECS/HELP is really the brain-child of Milton Friedman in his book “Capitalism and Freedom”. To a large extent it has proven an excellent system.

    It’s fucking tragic that it is being led to the slaughter house like this.

    But as they say, you can’t spell slaughter without laughter. Someone’s going to be laughing all the way to the bank at the slaughter of the future of Australia.

    Conservatives. Fuck them all.

  15. This has an irresistible logic to investment bankers and those in politics who move in those circles or one day hope to. On the face of it, it seems like a potential win-win provided the cashflows are discounted/risk adjusted realistically (they won’t be). But even then it’s not hard to imagine the trajectory of this approach.

    The secondary market won’t be long in opening up, rating agency analysis, demand from investors for higher quality/lower risk debt pools (i.e. a bias toward HELP/HECS fees related to degrees in medicine, law, etc), a higher discount to face value on more risky courses, the eventual argument from Govt that the ‘market’ will no longer accept debt pools related to higher risk courses (i.e. Arts, humanities, etc) therefore those courses will no longer be eligible for HELP/HECS support, and the eventual utopia of investment banks, rating agencies and foreign debt holders determining an acceptable spectrum of taxpayer supported curriculum for public universities.

    This approach will ultimately be extended to aged care, where the government will securitise aged care residents’ liability to govt for the provision of care, to be paid from the sale of assets upon death. Lord help you if you don’t own your own home, or had to purchase one sometime after 1997. But you’ve got to love the efficiency of this approach. A free market worshipping investment bankers’ wet dream.

  16. So the proposal has support in some financial circles? Well knock me over with a feather.

    Do “some financial circles” ever have a thought that isn’t anchored to their own hip pockets?

    BTW I seem to recall that HECS was introduced to provide a way of financing higher education. So I assume that the proceeds of any securitisation will be channelled straight out to the unis, hence it will be budget neutral. Right? 🙂

  17. Good grief! Will the finance sector charge interest on their newly acquired asset, being this debt? They do seem to be the industry of free lunches, and the ones to exclaim such lunches don’t exist.

    The skeptic in you should deepen UE.

    Makes me wonder if the Howard-Costello Government actually paid off Labor’s debt, as they proudly boasted, or shifted (shifty-ed) it.

    I can’t grasp how people, even in this blog/forum, toss terms at each other like, Tory-Nuff, or ALP Apparatchik. There is/was nobody to vote for, just look!

    • Howard & Costello were the geniuses who wanted to buy back (cancel) the entirety of the government’s debts in the early 2000’s (sorry, Labor’s debt) at (then) generational lows in yields (highs in prices), and sell Telstra, whose price had just halved post-tech boom. Yep, great financial managers.

    • Mav, I think there is something very wrong with these courses.

      I am constantly failing dismally, but the system is awarding me with Grade 1A+ Honours.

      What gives?

  18. ROFL Ronfire, tradies on $200/hr you ought to leave the crack to the entertainment personalities

  19. If they could sell the debt and use that money to generate a return greater than that gained by holding the debt, is that such a bad idea?

    • Yes.

      Because they’re going to have to sell it at a massive discount to allow for the uncertainty of repayments, the higher cost of borrowing for companies rather than government and to account for the profit motive.

      I’ve heard very rough rumours of around $6-8 billion for the $23 billion debt.

  20. Nobody has mentioned potential sale of Post. I’ve been waiting for that float for about a decade. That is the last utility left for the government to sell

  21. My initial reaction is to dismiss this as an ideologically driven policy, but after thinking about it, I would be interested in knowing more about what is actually being proposed. If the Government sells the asset for $16 billion ($23b discounted) and immediately invests the proceeds in upgrades to the university sector, while retaining the HECS system to fund future students, it may be worth considering. $16 billion invested now in university infrastructure would boost education exports and probably lead to innovation and productivity gains for the economy as a whole. All good for the economy as the mining boom ends. Of course, an alternative might be for the Government to simply borrow the money by issuing bonds and then invest in the education sector. No complicated privatisation gimmickry.

    Allowing voluntary repayment is bad if you want to privatise the debt, since it would remove the segment most likely to repay their debts and leave the junk HECS debt to sell at a massive discount. Wonder why Labor changed the rules recently. Bipartisanship in action?

    • 16 billion would soak into the current extremely inefficient tertiary sector like a spilt beer at a beach party.

  22. This is debt that is sold to the young and vulnerable and cannot ever be discharged and will most likely turn full recourse in the hands of the private sector.

    Sorry young guys the boomers are eating you alive, and selling your country out from under you.

    But you helped vote them back in and wasted the chance to use the senate wisely – so suck it up