According to media reports this morning, the government is planning to cut the discount on student contributions paid up-front from 20% to 10%.
According to The Age’s version of things, ‘the government will justify the cut on the grounds that the benefit goes mostly to wealthy families.’
But contrary to common impressions, the discount was not intended as a benefit to anyone other than taxpayers. Because it is very expensive to lend money at zero real interest, students paying up-front can save the goverment money. In a couple of scenarios I did last year, for male arts and law graduates earning median incomes in professional or managerial jobs, it was slightly cheaper for the federal government to pay the discount than to pay the interest subsidy on the HELP debt.
However, the economics of the discount depend on how long students would otherwise take to repay. For quick repayers (or people who would pay upfront anyway), the government would be better off not giving the discount. If students are going to repay slowly, the discount looks like a better deal for taxpayers. Another factor is that up-front payment removes the risk of non-repayment.
Whether or not halving the discount makes financial sense for the government depends on the behavioural response. If there is little reduction in current up-front payments – in 2009 about 17.5% of students received a discount, paying around $530 million at a cost to government of about $110 million (I have discrepancies between sources on these figures, but these numbers give the general picture) – then the decision to cut the discount is a good one.
A 2006 survey of student finances has some findings on who pays upfront. It includes both subsidised and full-fee students so it is a general guide (it reports higher rates of upfront payment than DEEWR).
For full-time undergraduates in this survey, most of those who did pay upfront received some or all of the money from their parents. My hypothesis would be that these payments are not heavily influenced by the up-front discount. It is a continuation of on-going parental support, with possibly some slight sensitivity around the total cost.
For part-time undergraduates, in 7% of cases parents pay and also in 7% of cases the student’s employer pays (17% for part-time postgraduate coursework students). Perhaps the increased cost without the discount would cause the employer not to pay in some cases as it makes the course more expensive, but I think this would be the minority situation.
The other major predictor of up-front payment is that the student has a full-time job (according to the ABS, about 14% of undergrads and 46% of postgrads work FT). About half of them in this survey make at least a part upfront payment. This group is the one that is most likely to have their incentives changed.
However it’s probably reasonable to assume that this group would be relatively quick repayers anyway, and so the government wasn’t going to save a lot by removing the risk of paying interest subsidies on a slow repayment loan.
Overall, my conclusion is that halving the discount is not likely to cause a major switch to deferral by students who might otherwise take a long time to repay, and therefore the government will get net savings from this change.