A potential change in the HECS up-front discount from 20% to 10% has been flagged. A brief discussion is here. This is supposed to raise money for the government in the short term. Will it?
This is a nice little exercise for a first year economics class. There are two ways to pay for tertiary education in Australia – upfront with a discount or via a deferred payment scheme operating via taxes. So the real question relates to the elasticity of demand for ‘tertiary education paid upfront’. For the government to raise total revenue by raising the cost of paying upfront (and the reduction in the discount is just that – a rise in the ‘price’) the elasticity of demand for ‘tertiary education paid upfront’ must be less than unity (in absolute terms). In other words, the 12.5% rise in price (i.e. the discount goes from 20% to 10%. So the rise in price from the current discounted level is 12.5%) must lead to a fall in quantity of less than 12.5%.
Is this likely to happen? I am not sure. The driver will be the marginal student/parent who pays upfront. There are some students/parents who will always pay upfront. There are some who will never pay upfront. The issue is those students/parents who are close to indifferent – who might pay up front with a 20% discount but not a 10% discount. I do not know how many students/parents are in this situation – and I am not sure the government has done the work on this either.
Now for this to be at a level for a first year class we need some interesting wrinkles. Here are three:
- The government could save money if some students drop out of university due to the change AND the government can reduce funding to the tertiary sector due to that reduction in student numbers. This could occur, but is probably only a very small effect. Much more likely, the student who no longer pays upfront will switch to the substitute product – tertiary studies with deferred payment.
- If students do substitute to deferred payment this will have a negative effect on the long term cost for the government. There are two reasons for this. First, the discount for upfront payment is generally less than the benefit from deferral in present value terms. In other words, on a sensible rate of discounting the government makes more money (in NPV terms) if students pay up front rather than defer. Also, deferral raises the risk of non-payment. Some students never pay back – for example because they never earn above the relevant income level. So any short term gain due to a reduced discount must be weighed against the long term cost of substitution to deferral.
- It is not obvious why most of the students/parents who pay upfront do so. The product (tertiary education) is the same. The difference is the way it is paid – upfront or deferred. Even at the 20% discount, work by Professor Bruce Chapman from ANU (and apologies – I do not have a link as I saw Bruce present this work a few years ago) suggested that for most students payment up-front was more expensive in net present value terms than deferral. In other words, if your parent (or you) is about to pay your HECS fees, tell them not to. Rather if you are a full-time student studying pretty much anything except law, take the money and put it in a term deposit (in the student’s name). Roll it over until the now-graduated-student earns above the income threshold, then take the money and payoff the HECS debt. In general, there will be money left over. So if the 20% discount is not great value, a 10% discount is even worse value. It will be interesting to see if this leads to a large shift to deferral – costing the government money.