Interest free tertiary education in Australia

A reader, Lachlan Wells, wrote this to me:

There is a system used here in Australia called HECS which is similar to what the named economist proposes except that you only pay what your degree is worth. The government loans you the money interest-free (but CPI indexed) and pays your entire tuition. After you reach a certain income threshold a percentage of your after-tax income is deducted from your pay to start paying off the debt.

This internalises a few issues that exist with the model you propose. Chiefly, if you are going to pay 4% of your income for life, you may as well go and study all the time and only have a crappy job on the side (at least that is what I would do since I love learning: if you are paying already, it is an incentive to get your moneys worth!). Also it is a government loan and not a loan through the university itself, so it can be deducted from income directly alongside income tax (so no messy tracking of income) and the money is not geared to any particular major (if it is an Arts degree in philosophy or an Engineering degree in microelectronics, the degree is paid for by HECS, so the university gets the funds it needs without the incentive of only churning out higher income degrees).

HECS is at least one thing I believe our government got right; most government programs have more faults than positives!

That was a response to the article I wrote on debtless university education. Thanks Lachlan for sharing the information.

So this HECS is Higher Education Contribution Scheme. As I understand it, it’s been replaced with HELP, Higher Education Loan Programme. But it’s also apparently listed as HECS-HELP, so take note.

The criteria to apply for HECS-HELP assistance is that

you are a Commonwealth supported student and

* an Australian citizen or
* the holder of a permanent humanitarian visa.

This university education tuition fee thing seems to be getting worse. It turns out that Britain’s plan to triple their tuition fees got a whole bunch of students and teachers riled up.

Disclaimer: You are advised to contact the appropriate authorities on relevant, up-to-date information. Criteria for application, loan repayment conditions and other nitty gritty details might change.

Debtless university education through eternal slavery

My friend Christopher has always been vocal about education. During one of our regular meetings, he relayed a possible solution to the debt carried by university graduates, proposed by an economist in America (I don’t know the name). So while I can’t give you a reference to research on your own, I believe the idea is still worth a discussion.

[Ed: Christopher gave the name of the economist. It’s Moshe Milevsky, and he’s from York University, Canada (not America, oops…)]

Now if you’re a student about to enter university education, or have been through a university education, you can understand the enormous amount of debt carried by you. Before you even step into the corporate world of the working class, you’ve already incurred a heap of debt. If you’re unfortunate, that’s on top of whatever credit card debt you’ve gotten yourself in. I myself had a student loan of more than 17,000 Singapore dollars to pay off before I graduated. I slaved and saved for over 2 years before I paid that off.

You don’t pay the university fees, but you still pay…

Anyway, the solution? Instead of taking an upfront loan from the bank, the student gets a free education from the university. Free as in, don’t have to pay school fees upfront to the university.

However, once the student graduates, he is to pay to the university a certain percentage of his income. For life. For eternity. Till the day he dies.

The percentage will be based on the type of work he does and the educational certification he receives. For high paying professionals such as medical doctors and lawyers, it’s 4%. For white collar jobs such as computer programmers, accountants, managers, it’s 3%. In Singapore, the polytechnic is considered a “lower” form of education than the university (as in a polytechnic diploma/degree is lower than a university degree). Polytechnic graduates will pay 2% of their income to the education institute. There’s also the ITE, Institute of Technical Education, whose graduates my friend has deemed a 1% of their income. ITE graduates are generally considered to be “lower” than polytechnic graduates. Singapore is a competitive place…

An example

Now for the sake of argument, let’s say a 3-year university education costs about US$ 14000 in total. Let’s say the salary for the graduate is US$ 5000 per month, and he has to pay 3% of this salary to the university every month. You can always plug in different values for the following discussion. Let’s also assume that the salary remains unchanged (unlikely, but for the sake of argument and ease of calculation…).

3% of US$ 5000 is US$ 150. With an education costing US$ 14000, the graduate will pay it off in close to 8 years.

I know that’s a lot of assumptions, but I want you to pay close attention to this. The graduate has no debt to speak of. That’s the good part. You will have a tertiary education if you’re willing to work hard to graduate. Now for the bad part. After 8 years, you will continue to pay to the university 3% of your salary, even though technically speaking, you’ve paid off your “loan”.

Now my friend says this should work out fine over the long term. I’m too lazy to work out the calculations, assuming I even know what equations to use. He’s the finance guy, so I’m inclined to at least give him the benefit of the doubt.

Let’s put things in perspective. After you graduate, you might be say 22 years old. After working for that 8 years of “paying” the “debt”, you’ll be 30 years old. Let’s say you continue to work energetically till you’re 55 years old (which is optimistically young for retirement, in context with our current economic situation). That’s 25 years of income you’re giving to the university. For free. If you consider the fact that your salary is most likely to increase every year, we have one conclusion.

That university is going to be very rich. Imagine all the graduates out there working perpetually for you.

Take note when you incentivise

I pointed out to Christopher that whenever some factor is incentivised (particularly with money), that factor will be optimised, for better or worse. I’m reminded of something Joel Spolsky wrote on software bugs (I can’t find the article! Urghh…) He said something about an incentive for software testers if they find bugs. The more bugs they find and record, the more they get of whatever they’re incentivised with. So what happened? Testers found all kinds of bugs. Even trivial bugs that barely fulfill the criteria of being a bug. “The spec said it’s supposed to be red. Is that a light shade of mauve? File as bug.”

So what happens when the universities realise that they have armies of graduates pouring money back to them for all of eternity? They might go create more graduates who make higher salaries. What might those be? Those academic fields where the economy pays well for, for example, medicine, law, accountancy, banking, biotechnology and computer science. The arts and philosophy majors are doomed, I tell ya. The education syllabus might well be skewed towards commercially profitable disciplines.

Universities will be more inclined to partner with companies, finding lucrative positions for their graduates. Because the higher the graduates are paid, the more the university gets.

I’m not saying there aren’t profitable jobs for each discipline. I’m saying you optimise what you measure. And in this case, it’s money.

Another friend said that universities will do course-correction with the economy. If there are too many accountants and too few engineers, then just direct resources to the engineering faculty, and less to the business faculty. I suppose it could work. What of the lives of the accountant graduates that the university destroyed? It could take 3 years for the university to course-correct, by which time you’d have graduated into a world where there are accountants everywhere. Universities grooming polymaths such as Singularity University and Project Polymath aren’t that prevalent.

Christopher said, the whole point was that, with this surplus cashflow, more money can be devoted to research, the arts, culture, history. The disciplines where it’s either risky (you cannot guarantee eradication of HIV or cancer with research), or have little commercial value (at that point in time). I just believe humans have a way of rationalising that incentive. Whether it’s good or bad depends on the recipients, and whether debtless university education was worth it.

I don’t even know how to enforce the payment by the graduates. How would the universities keep track? Should the banks or some financial representative be involved? Should the companies hiring the graduates be involved? Should the government be involved? What if the graduate immigrates?

The shift of power between education and financial institutes

I actually have a deeper concern. I believe universities primarily support themselves through student fees, donations, and possibly entrepreneurial efforts by students and teachers. What would happen when they find themselves loaded with large amounts of money? Our mutual friend said that, with all the professors in the economic faculty, the universities would know what to do. Perhaps.

I bring you the story of the Knights Templar. They started off with little money, due to their vows of poverty. But as they grew in power and influence, so too did their wealth. As this wealth and power grew, they started becoming a banking institution. A written piece of paper with a monetary value and their stamp of approval is considered legitimate. They started out as a religious order, and they became a bank as well.

Now, student loans are usually granted by banks. What will happen if students no longer needed to get a loan from the bank to study at a university? Maybe not much, student loans can’t make up a large part of a bank’s revenue, right?

But.

What if people started getting ideas that they don’t necessarily need to get a loan from the bank? What if they can borrow from the university? Entrepreneurial pursuits will likely get an approval from the university, particularly if the founders are graduates from that university, or the startup is related to or endorsed by the university. Will there be tension between the education institutes and financial institutes? Are universities more trusted than banks, given the recent economic meltdown?

So tell me, if you are given a choice between paying for your university education, or paying the university a fixed percentage of your salary for the rest of your life, which would you choose? Leave a comment.