Fees-free switch could knock $500m off govt debt
There are lots of eyes on how the Government will manage to fund its $14.6 billion tax package.
Its plan to pay for tertiary students’ “fees-free” year of education in their third year rather than their first year could help more than expected. Most attention has focused on the fact that a significant number of tertiary students drop out of their studies, so the Government will pay the benefit to fewer students.
But there may be a bigger immediate benefit, as it means there will be two years when it won’t need to pay any students’ fees at all.
The Government’s intention doesn’t appear to be to pay anyone two years’ fees.
That means it would only start paying the third-year fees once all the students who had already received their first year’s fees had completed their third-year studies and moved on.
It will be in effect paying for the fees-free year in arrears, rather than in advance. Think of it as the opposite of what often happens when people sign up with a new utility and are asked to cough up two months’ payment at once.
The cost of fees-free education has bounced around as student numbers have overshot or undershot forecasts and the “overs” and “unders” get squared out.
But the former government paid $387m under the fees-free policy in the year to June and budgeted $317m in the current financial year.
Assuming the Government stopped paying first-year fees at its first opportunity at the end of next year, it would have no fees to subsidise in the 2025 and 2026 calendar years, when it could expect to “save” something of the order of $750m. There would seem to be a catch of sorts, though.
Most first-year students could be expected to tack their fees on to their interest-free student loans. If all students did that, the $750m of cash “savings” would appear destined to be cancelled out by the extra lending the Government would be providing in loans to students to fund their first-year fees.
But – and this may be the final twist – that extra lending will presumably be recorded as an asset on the Government’s books, given the idea is that those loans are eventually repaid.
The asset value of student loans on the Government’s books is written down by about a third when loans are made, to reflect the fact they are soft loans and there will be some defaults.
The upshot is that there seems reason to expect the fees-free switch would cut the Government’s net debt by about $500m by the end of the 2026 calendar year.
Any extra fiscal boost the Government got from the third-year student drop-out rate could only accumulate from 2027 onwards. That’s not within the current term of the Government, but still partly within the forecast period within which it is obliged to attempt to bring its operating budget into the black — so definitely a bonus for the books.
A word of caution though. The Treasury says it can’t confirm the key assumptions in this analysis without knowing the detailed policies and implementation plans.
Tertiary Education Minister Penny Simmonds says the Government has yet to be briefed by the Education Ministry on the costs of the changes to the scheme or make decisions on its final design.
The fees switch will mean students will be sitting on more debt for longer, but given student loans are interest-free while they are studying, there seems no reason to think that would negatively affect their finances.
That’s so long, of course, as they complete their studies and they can tack their first-year fees on to an interest-free student loan.
If the answer to both questions is ‘yes’, students could in fact stand to benefit slightly, assuming their third-year fees end up costing more than their first year fees due to inflation.
The Government would weather any higher cost of third-year versus first-year fees, but given the drop-out rate, it could still expect to come out fiscally on top over time as well hundreds of millions of dollars less indebted on paper before then.