A HELP debt bubble?
By David Lawson
Click here for this data in Excel: Debtwatch; CfESI
An issue that is often over looked here in Australia is the rising cost of education. University students are liberated from the up-front cost of education through the Australian Governments Higher Education Loan Program (HELP). While in other countries like the United States the student loans market is privatised, which has contributed to their highly priced tertiary education system. Though, after looking over the numbers here in Australia it seems that the public credit funding through HELP could be having the same inflationary effect on education.
According to the latest statistics of the Australian Consumer Price Index from the ABS,’Education’ had the greatest rise out of all the categories that recorded a 352.2 index for March 2012 since the 1989/90 base year of 100. This was followed by the ‘Alcohol and tobacco’ category at 315.7 and the ‘Health’ category at 283.2. When breaking this Education price index increase down into decades the nineties only saw an increase of 66.79% versus the naughties increase of 147.25%. With such a significant jump over the naughties decade there must be greater forces at play…
It could be argued that one of the leading factors in driving up education prices here in Australia has been the HELP debts. The statistics for total HELP debt published in the ABS Year Book Australia 2008, Feature Article 2: Higher Education Loan Program from 2001 to 2006 indicates that this debt has been growing at an average rate of 12.52% per financial year over the period.
| Financial Year: | Total HELP Debt: |
| 2001-2002 | $ 8,061,921,000.00 |
| 2002-2003 | $ 9,093,866,000.00 |
| 2003-2004 | $ 10,208,045,000.00 |
| 2004-2005 | $ 11,511,874,000.00 |
| 2005-2006 | $ 12,924,579,000.00 |
Unfortunately, I was unable to obtain data beyond this point. Although, assuming an average yearly growth rate of 12.52% I have estimated what this debt would look like:
| Financial Year: | Total HELP Debt: |
| 2006-2007 | $ 14,543,269,580.89* |
| 2007-2008 | $ 16,364,687,012.43* |
| 2009-2010 | $ 18,414,221,061.18* |
| 2010-2011 | $ 20,720,441,340.10* |
| 2011-2012 | $ 23,315,495,556.49* |
*Estimates
Moreover, what will happen when wage growth can no longer be sustained from a lack of credit growth in both the private and public sector of the Australian economy? Wages will eventually fall, which will increase the real cost of HELP debts. But this has not yet occurred.
According to the ABS Labour Price Index, quarterly wage growth (excluding bonuses) in the private and public sectors averaged 0.93% from January 2000 till December 2008. Over this same time frame private and public credit growth was plentifully increased by 177.83%. The Labour Price Index has really not slowed since the beginning of 2009, averaging 0.86% quarterly growth, but the lowest growth point since September 1997 was witnessed in the September 2009 quarter, at 0.39%, one year after the global financial crisis hit broad news headlines.
There are obviously many other factors at play in causing the price of education to rise here in Australia over the naughties, but access to credit through the Australian Governments Higher Education Loans Program should not be overlooked.
Discussion (23) ¬
When the unrestrained logic of private and corporate profit as a primary economic force clicks in to the irresistible force of technological advance and efficiency, is when educators will wish they had considered the productive factor and hence the value of the Cultural Heritage of that same progress. Academia is one of the biggest targets of the right wing regressives, their pundits and the corporatocracy, and no one is safe from the mad dash toward their smallish Valhalla.
Better to recognize and work for the awakening to the communal ownership of progress…..before we’re all standing around in rags eating Soylent Green and being recycled. The one eyed technocratic perspective is alive (kind of) and still has a lot of religious zeal left in it…before it dies along with the rest of us and the environment.
Good article , generational spending power is incredibly important to maintaining a healthy economy……Harrry Dents generational spending waves work tells us that turning our young and bright into debt serfs in their most important years is incredibly short sighted . Menzies championed free tertiary education yet the politicians we have today on both sides champion this debt based model……at the project rated of growth of GDP and student debt, student debt will be 100% of GDP within 30 years…..a totally unsustainable model
Interesting. The merchants of debt are always looking for new niche markets in which to peddle their product, with very questionable outcomes for the overall wellbeing of society.
Lawson seems to be arguing the same thing that the economist Mark Zandi did when he argued that government loans and subsidies are not particularly cost-effective for taxpayers because
Still it is necessary to put all this in perspective. CNBC did a study called “America’s Biggest Types of Personal Debt” back in 2009. At that time it says there was $568 billion of student loans outstanding, but $14,600 in mortgage debt. So while student debt has exploded since that time and mortgage debt has contracted a tad, outstanding student debt still pales in comparison to outstanding mortgage debt.
Here’s the link to the CNBC article:
http://www.cnbc.com/id/30438711/America_s_Biggest_Types_of_Personal_Debt?slide=10
“There are obviously many other factors at play in causing the price of education to rise here in Australia over the naughties, but access to credit through the Australian Governments Higher Education Loans Program should not be overlooked.”
If anybody should be the recipient of the increase in social wealth, it should be the children. Instead, over the past half century, the wealthier countries decided to give this dividend to the academic elite and the corporate parasites that have attached themselves so firmly.
A university education should be quite affordable for those willing to do the work. Instead, many universities are simply a place to play and party and stuff one’s face, while at the same time depleting their parents savings or worse, taking on debt.
Debt is the scourge of humanity. Indebting the children of a society is moral decay of the highest order.
Page 25 of http://www.ato.gov.au/content/downloads/cor00305922_2010TAXSTATS.pdf gives 2008/09 as $17.821b and 2009/10 as $19.903b.
The average debt per person with a HELP loan and the change in HELP debt on a per person basis may paint a clearer picture. I understand that the set-point of $45,000 in which one is required to repay the HELP loan may need to be indexed at a greater rate than income based on the increasing cost of education thereby creating a deficit for the government if loans aren’t repaid. But as a final year student in a field under demand I think education in this country is affordable due to the starting salaries my profession is fetching. Those studding other degrees may strongly disagree though.
This post contains several inaccuracies. First, the idea that student loans in the United States are largely privatized is simply incorrect. Please see the following: http://www.nytimes.com/2012/05/13/business/student-loans-weighing-down-a-generation-with-heavy-debt.html?pagewanted=all
“The current balance of federal student loans nationwide is $902 billion, with an additional $140 billion or so in private student loans.”
The amount of federal student loans is over six times the amount of private student loans. Second, even if most of the loans were private student loans, the federal government has basically backstopped the lenders against losses by insuring the loans against default.
Third, by saying that student loans in the United States are largely privatized, you distract from the real issue at hand. Our federal government is the one that is blowing this bubble up, and taxpayers will be the ones to bear the cost when it bursts. Many of the federal student loans being doled out are being used to pay for attendance at for-profit colleges, which have higher default rates than other colleges.
Just because one agrees with the government funding education doesn’t mean one should place the blame for high education costs on the private sector (in the United States). The government is the one that is blowing up this bubble: both through its issuance of federal student loans and through its guarantees of private student loans.
Interest rates do not reflect the risk inherent in investing in the education of each student in the United States at all (I doubt they do elsewhere either). For example, every student that is offered a particular type of loan gets the same interest rate. It doesn’t matter if the employment prospects in your particular field are crap or if your grades are crap, you get the same interest rate as the best student in the field with the most opportunities.
Pretty big loosening of the definition of a bubble. For mine you’ve gone from debt driven asset price inflation fuelled by speculative expectation of capital gains, to any form of debt just growing really fast.
Especially given that HELP is a specific type of debt, which bears no interest (except for inflation indexing) and no obligation to repay unless you are earning above a certain threshold. It’s a pretty fair model for financing education whilst maintaing access equality.
If the post was meant as a joke then the humour is too subtle for me to pick up. If this is a serious post, then this website is becoming the sensationalist today tonight of economic blogs.
I read a story about a student saddled in debt on graduation and came up with an idea that might help.
1. Make sure the debt is unsecured, with out collateral.
2. When one graduates refinance at a lower rate and/or get your collateral back if pledged. Once graduated the loan risk is lower now that one has a degree, meriting a lower interest rate.
3. Learn accounting and some net present value analysis so you know the real costs. And avoid as much of those exponential costs as possible.
4. Less expensive schools.
Same graph Log10 scale.
Graph in Log_10 scale.
@Joseph Gauthier
I was preparing to blast your comment with both barrels for its factual inacuracy.
But upon doing a little bit more research I discovered that, due to a change in U.S. Federal law in April, 2010, your comment appears to be quite accurate. I need to get up to speed on this issue!
Wikipedia gives a short blip on the background of student financial aid in the United States. As Wikipedia states,
Before that time private lenders did originate the majority of student loans in the United States.
Readers might find the political sparring over the change in law interesting. It was a hard fought battle, with the banks lobbying fiercly against the change:
So I would say your conclusions are correct. Private lenders were all but eliminated from the student loan loop in 2010, but this did not solve the underlying problem, which is that education costs are growing much faster than wages and salaries.
I think the second part of your conclusion, the causality that education costs are being inflated by easy credit and a debt bubble (a conclusion which seems very much in agreement with Lawson), is not as clearly demonstrated, but I nevertheless agree.
Whether student debt fits the definition of a “bubble” or not is to me beside the point. This article highlights another sector being funded through disproportionate expansion of private debt. Since the growth of private debt at a rate that exceeds the rate of wages growth is a core theme of this site then this article is absolutely relevant and more like “Four Corners” than “Today Tonight” imho. I think TITINT has a point about the title but not the substance. Good article.
I believe the great lesson of the 20th century will be that the most efficacious method [by far] to control populations is through debt.
Create a society of debt-slaves and people will rationalize away any- and every damn thing.
Where is the leadership within the professional classes that must take responsibility by finally declaring that this insanity end?
“I believe the great lesson of the 20th century will be that the most efficacious method [by far] to control populations is through debt.
Create a society of debt-slaves and people will rationalize away any- and every damn thing.”
Correct.
And that (slavery instead of freedom) is just another reason for a debt jubilee/reduction/elimination. It also points up the superiority of a mandated option for a Dividend paradigm for most if not all of consumer finance.
Consumer debt and an enforced loan paradigm actually IS, emphasis IS a black and white, freedom versus slavery issue. The only question is what is the appropriate balance of BOTH loan AND dividend.
It truly is a BOTH/AND universe. So lets wake up to that fact and craft our systems accordingly.
You’re welcome.
I don’t think it’s a case of costs rising as a result of expanding debt triggering the inflation mechanism. It is more likely a case of decreasing government subsidy being replaced by HELP, further since there is no obligation to pay back HELP the rate of new loans will for some time outpace the rate of repayment until it gets to a point where there is enough graduates earning enough money such that the rate of repayment equals the rate of new loans.
If this was a 4 corners style article, then the finer details would be discussed from various perspectives. Today tonight takes snippets of information and massages them into a story, often creating false implications to feed the sensation starved audience.
During the noughties there were changes to the education environment that would explain the changes. First there were increases in the amounts charged. These are unlikely to change greatly, until there is a change in government at which time there may be greater flexibility for universities to charge, but this will be unlikely to be limitless. Another important change was the expansion of postgraduate courses, which must be getting close to equilibrium. Finally during this time there was full fee undergraduate courses for domestic students which is no longer possible. So fairly soon the rises will be in line with GDP.
The fallacy of looking at overall figures…
Having studied in the 90′s and again in the recent past, I have not seen the cost of individual units rising all the greatly (ie lowest tier unit at RMIT in 1991 cost not that much less than its equivalent unit in 2011 – IIRC the difference is roughly 25%- easily checked ) – exceptions do occur – especially in the in “in demand” courses on the highest tier (medicine & engineering.
Also overlooked is the @ $1800pa HELP rebates/forgiveness for teachers and nurses (all you need to do is work as a nurse or teacher for 2 weeks in the year to qualify).
Another factor in the rise is the “melbourne” model which increases the cost of doing a professional degree by almost mandating a masters as the only “useful” profesional degree – I also now see 1 year GradDips deprecated in favour of masters degrees.
Sadly what has happened is that in my field (teaching) the unis in all are pumping out many times the primary and secondary PE and art & music teachers than can be reasonably employed. The last I heard from a lecturer who taught me & is now in Qld) is even if every primary teacher over 50 left tomorrow in Queensland and had to be replaced there would still be some 1500 graduates excess to need, and that is even before the class of 2012 graduates.
This means that there will be many graduates who will easily reach the threshold working in say, retail, who will be repaying a degree they receive no “considerable personal private benefit” (a quote form Amanda Vanstone when interviewed on HECs on tv many years ago) from.
Also overlooked is the fact that the loan is repaid through the taxation system ie as my income increased the repayment has also increased (actually swallowing up half of of my 2.5% increase)
Hi Glenn,
Thanks for the thoughtful response — I’m glad you decided to look into what I said before jumping the gun. :-]
The student loan issue varies by country, so it is an issue that requires quite a bit of examination (both current and historical). Like you said, Congress eliminated the federal guarantee for privately issued student loans in April 2010. Honestly, I wish I had been paying attention to this issue back then because it would have been an easy way to make a killing in the stock market. Consider Corinthian Colleges Inc, which is one of the largest for-profit higher education institutions in the US: http://www.google.com/finance?q=corinthian+college
And, just take a look at what happens to the stock price after April 2010. One thing worth looking into is how students are paying for these for-profit colleges now. To my knowledge, students are able to receive federal loans to attend these for-profit colleges, which means the default risk has been transferred to the federal government (granted, the default risk always rested with them since they guaranteed the loans, but yeah). If one were able to find a for-profit college that was providing its own students with loans, it would probably be good to delve in the books a bit because they probably have quite a few bad loans that will materialize on their books. Just an idea I suppose…
And yes, I can recall when I attended the University of Texas at Austin that I obtained my loan through Bank of America. That was in 2007. But, in 2010, I began to obtain my loans through the Department of Education instead.
If you aren’t aware, the interest rates for federal loans have also been reduced from 6.8% to 3.4% in the past several years. To be honest, I don’t think there was anything wrong with the law that was passed. In the end, the default risk rests with the government anyways (since they guaranteed the loans), so why allow the banks to collect these profits if the government is going to have to pay out in the end anyways? It’s better for the government to take the profits as well, at least when they have to bail the program out, they will have made some money off of it. There’s a good chance they will end up losing money though.
And yes, it did not solve the underlying problem because Congress essentially did not change anything. All they did was transfer the profits from the bank to the government. The default risk always rested with the government.
As for the root cause of why education is so expensive, I tend to believe it is because it is so highly subsidized, but I’m not going to bother writing more as to why I think that is.
I can relate to this well.
I am about to complete a masters course that has taken 1.5 years to complete. Total HELP debt owed is nearly $40,000. Compare this to my undergrad, that took 3 years, and cost $15,00 completed 7 years ago. I had a lot more face to face and practicals in my undergrad but it was commonwealth supported.
My issue is that I cannot see where that money has been spent on my education. I can however see that the universities are buying up real estate and renovating buildings even though the current buildings are not fully utilised. It would appear that this is where all the money is going.
While I would not call it a bubble yet, it is definitely not providing value for money and is most likely unsustainable.
The problem isn’t as severe as Lawson is indicating. Repayment schedules are completely reliant on the capacity-to-pay of the individual. I’d like to see some statistics on how much of a burden it is relative to the JOB THESE PEOPLE GO INTO (as opposed to overall wage growth/decline).