Privatising HECS would weaken Budget

ScreenHunter_1878 Apr. 01 15.00

By Leith van Onselen

The Conversation has today published an article by Scott Bowman, Vice-Chancellor and President at Central Queensland University, who advocates the government selling-off the $30 billion of outstanding HECS/HELP debts, arguing that it would get the Government out of a financial pickle without harming students:

The cost of the national student loan debt held by the federal government has gathered pace to pop the A$30 billion mark, perpetuating rumours that a debt sale could be on the cards. Should that happen, it wouldn’t be a bad thing for students…

Here’s what would happen if the HELP debt were securitised. Students would still enter into a loan contract with the government, as they always have. The government would still be the financier of that loan – that would remain unchanged too. And the government would continue being the collector of debt repayments through the Tax Office.

What would be different is that the Commonwealth would sell the rights to its $30 billion stream of long-term debt repayments at a reduced price of, say, $15-$20 billion today. Yes the government short-changes itself a little in the process, but it removes debt from its books while receiving an immediate cash injection – as opposed to waiting years to see that money trickle in.

In this scenario, nothing changes for the students. They continue to make their repayments to the ATO, most commonly via salary garnishing. But the ATO then hands that repayment to a bank that bought the right to the debt.

Not only is this the only option that spares students, but it gets the government out of its financial pickle as well. The bank wins because they love holding other people’s debt and since they don’t have to go to the polls every three years, they can afford to be patient…

Let’s be clear, selling-off Australia’s HECS/HELP debts would likely worsen longer-term Budget finances. Because HECS debts do not have interest (except CPI increases), by definition the sale would be at a significant discount to face value: $15 to $20 billion according to Bowman. So, 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 much smaller lump-sum.

Given that any HECS/HELP privatisation would likely involve selling the debt to investment banks, we can also presume that it would be heavily weighted in their favour, not taxpayers’. After all, why else would an investment bank participate unless large profits were on offer?

When you think about it, the whole idea of exchanging a $30 billion asset for a $15-$20 billion asset is pretty stupid, and would be a form of fiscal vandalism.

In October last year, Treasurer Joe Hockey hosed-down speculation that the Government would privatise HECS, announcing that it “is not current Coalition policy”. Let’s hope the Coalition’s position has not changed.

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Unconventional Economist


    • The ‘debt’ is fictitious to start with.

      HECS obligations have no correlation with the cost of delivering courses of study.

      It is just an obligation created out of thin air.

      ”Selling” those obligations to reduce outstanding government debt is a farce – the dollars to buy that income stream are not coming from some $AUS mine that the government does not have access to.

      They will be coming from a bank account or most likely an account created by the granting of ‘loan’ by a bank.

      Lets say the price for that income stream is $10B upfront and the stream ‘guaranteed minimum’ no doubt generates a 10% return

      Buyer goes to bank who loans buyer $10B at 7% and makes a few accounting entries. Bank very happy as now picking up 7% on $10B.

      Buyer writes cheque to Govt for $10B and starts paying off principal and interest and pocketing 3%.

      Govt ES settlement account at RBA goes up $10B and Bank ES account goes down $10B. Bank covers $10B with TDs or wholesale borrowing acquired at 3%.


      Bank expands money supply by $10B and clips ticket for interest along with bank pals.

      The govt could have expanded the money supply itself directly by $10B without an interest obligation and repaid $10B of existing govt debt.

      But we cannot have that now can we as it is very important to let private banks expand the money supply by way of their loan books.

  1. outsidetrader

    Whether or not it would be a good decision would depend on the price – and while an investment bank would anticipate a profit in whatever deal they struck, it not as though investment banks haven’t made poor investment decisions in the past – in which case the taxpayer would be the winner 🙂

    And suggesting the debt is worth $30 billion to the Government clearly isn’t the case. While that’s its face value, the interest is only CPI so the NPV is less than that (even if you assume a lower discount rate for Govt on account of its lower borrowing costs).

    • Ronin8317MEMBER

      If HECS is privatized, the debt from overseas students will be sold to ‘debt collection agencies’ where the student is currently living.

      • If your situated in Dubai, debt can land you in prison.

        But why stop there? If you are living in Columbia, the debt can be sold to the drug cartel. Or if you are living in Uganda, the debt can be resold onto local warlords. Or perhaps you’re in a boat of Somalia, we can sell the debt to pirates on jet skis.

  2. ceteris paribus

    The government might do better by hiring bikes to collect the debt and paying them by green-lighting their meth labs.

  3. “Let’s be clear, selling-off Australia’s HECS/HELP debts would likely worsen longer-term Budget finances. Because HECS debts do not have interest (except CPI increases), by definition the sale would be at a significant discount to face value: $15 to $20 billion according to Bowman.”

    I don’t suppose anyone else cares to ponder the profound significance of the fact that — once again — the question of Usury, and its impacts, lies at the very heart of a(nother) specific politico-economic issue.

    Will say it again: Everything in economics is a derivative of the usury function.

    • Yes – it is quite remarkable that we are talking about a situation where the government has simply created debt obligations and now is proposing to sell those obligations in such a way as to convert obligations without interest into interest bearing obligations.

      It is important to remember that there is little or no correlation between an individuals HECS bill and the cost of deliverying the course of study. If it did Science students would be hit with mammoth HECS bills to cover of those hours in labs.

      HECS is nothing more than an exercise in ‘creating’ a loan obligation. It makes banks and their loan activities look like amateurs.

      Being a creative nation why not generate debt obligations for all sorts of random concepts.

      How about a ICS. “Infrastructure Contribution Scheme” where we all cop a $5,000 charge/debt each year for receiving ‘benefits’ from infrastructure to be paid from future income. After a few years that ICS debt could be flogged off to some bank who then picks up a stream of income representing capital plus a nice rate of interest.

      How about a BCS “Breeder Contribution System” ! The possibilities are endless.

  4. I suspect there’s a hidden long term agenda here.

    The plan would be to (a) privatise HECS and then (b) abolish it. The system would be replaced by an American style student loan scheme. Debts would still be payable if the student were overseas. Or dead. The old scheme would be granfathered but all new students would have to take it or lump it.

    The government would remove itself from the process: no more payments through the ATO, and payments irregardless of salary. If the government wanted to encourage particular vocations (eg nursing) they’d just offer loan scholariships or some sort of fee subsidy.

    Speaking of which, as a corollary, all unis would become full fee paying and government funding massively reduced. Between cutting / abolishing CSIRO and cutting uni funding, government investment in research and academia will be massively reduced.

    On the bright side, the mining tax will be abolished, everyone on the top tax bracket will get a tax cut, and anyone in Australia who wants a STEM career will get the hell overseas. Academic research in general will be stunted and think tanks will fill the void.

    • I agree that would be the longer term plan. But if I was running a university, I’d be watching this one with my breath held.

  5. Ronin8317MEMBER

    HECS debt is not like normal debt, and the risk/reward is inverted. Due to the nature of HEC, the debt with the highest likelihood to be repaid also has the highest yield, where as the debt with no chance of repayment pays 0 repayment. The only way to value the debt is to forget the value, and look at it purely from as an annual revenue stream. The current government policy (introduced by Rudd) allow an unlimited number of HECS students, and the total cashflow is negative since 20% of the loans being made is every year is never repaid. This is not as ‘asset’ by any stretch of the imagination.

    The only way the HECS debt can be privatized is with a government guarantee. In such a case, it is merely a taxpayer rip off and profits is being channelled it to the banks.

  6. It would seem very similar to the government selling a zero coupon inflation linked bond. Which they could do easily without involving the Vampire Squid and its friends through the AOFM.
    I bet these investment banks are calling Joe daily about this. They want something for nothing and wont give up until they get it.
    These investment banks have turned into corporate welfare Queens.

  7. What constitutes “current Coalition policy” could change from day to day depending on what suits. If we could be more confident that the funds raised would be used wisely, some of these short term thinking biased sell offs might make sense. Based on their track record I wouldn’t hold out much hope.

    Even when talking sagely about debt reduction, people tend to forget about some of the poor spending decisions that got us the debt in the first place. While investment bankers are not immune from making mistakes, they only have to be a bit smarter than govt and treasury – not a terribly high hurdle. It’s likely to end in tears for the taxpayers.

    I’m no economics boffin but, providing there were controls, could we not just print what is required to fund our students through uni, then cancel the dollars as they are paid back?

  8. thomickersMEMBER

    HECS is a poorly underwritten loan system.

    whoever buys the asset should ensure that they yield 13-15%pa in order to take into account departures/low incomes/chronic youth unemployment/timings of cash flows.

  9. There is an irresistible logic to this for those voracious, efficiency worshipping, free marketeering investment banker wankers 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 – but we all know they won’t be. To get this off, it will be structured to ensure Investors bear minimal risk. Regardless, 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.

    • From Brad Delong, to Barack Obama to Sarah Palin – many have questioned the worth of a basic Arts degree in today’s world.

      Probably time to scrap them entirely, free the curricula from a raft of soft options, release teaching staff to the challenges of the high school system and encourage those that contemplated a BA to get a real job.

      And yes, such efficiencies could be achieved by the method you suggest. Well done.

      • Reasoned like a mining engineer. Christ, you’re getting odious. You’re like halitosis made flesh. Give some thought to fucking off for a good while to clear the air here.

      • I like the word odious. Haven’t heard it much since my kid was young – he had a book, The Odious Toad. Fitting you should be the one to remind.

        Good evening Sir Spleen.

      • My course was science based, but in a perfect world, I believe everyone should have to do an arts course with the

        subject ‘ethics’ included in each of the three years before being allowed to enter any other course.

  10. @Jackson congratulations on rorting the Aussie taxpayer.

    Its not like the rich rort the system or anything ..

    Its not as if the Corporations pay their fair share ..

    come on, the poor fella doesn’t even have access to negative gearing .. He’d be stupid to play fair all by hmself

  11. Why don’t we just sell off future income tax receipts to pay down current debt as well? I’m sure an investment bank would pay reasonable money to acquire the future income tax of all MBBS or mining engineering graduates. The Government could still collect the tax and then pay it to the bank.

    Actually, this would be quite interesting, because it would create an incentive for the bank to improve the incomes of the tax payers they owned. More income is more tax, which would mean more profit for the bank.

  12. Well, my salary could do with some garnishing; would certainly make it more palatable.

    • # Best comment of the day #

      Especially when one commenter said that an arts course was a waste of time.
      Says something about the hubris of the younger generation…
      even using google, the option of garnishee might arise.

  13. I know the government will be lawyered up (and fudge some new statutes if required), but you can’t just transfer debt obligations without the consent of the debtor. It’s a form of bondage.

    If I had a HECS and some bank or ‘debt collector’ was looking for payments I’d tell them to GAGF.

  14. The Debt will go on to the bank’s books as an asset, which can then be used to pyramid some more debt money on, which those same poor schmucks will borrow to pay for houses, cars etc. Those fascists that make up the Canberra regime is selling your children to the highest bidder!