Unknowns make HECS a risky investment

University students are out on the streets protesting about it, but the Abbott government is highly unlikely to sell its $20 billion-plus HECS student loan portfolio. Education Minister Christopher Pyne stirred up a hornets' nest last Monday when he said the government would consider it, but obstacles to a sale are probably insurmountable.

University students are out on the streets protesting about it, but the Abbott government is highly unlikely to sell its $20 billion-plus HECS student loan portfolio. Education Minister Christopher Pyne stirred up a hornets' nest last Monday when he said the government would consider it, but obstacles to a sale are probably insurmountable.

In the end, it comes down to the quality of the loans. The risk the portfolio carries can't be measured with anything like the precision needed to attract buyers. There are two obvious ways to overcome the problem: sell the portfolio cheaply, or make borrowers pay more. The first idea is bad business. The second is risky politics.

Securitised mortgage debt was the widely held asset that triggered the global financial crisis when owners discovered that the debt was worth much less than they had paid.

Creating a security that is backed by debt and then selling those securities to the market at large raises money efficiently, but it also increases the distance between the owners of the debt and those who are servicing it.

It is crucial that the new owners of the debt understand the quality of the borrowers they are taking exposure to, and the global crisis was precipitated because the owners of securitised and re-securitised mortgage debt did not. Quarantined from the borrowers, they had relied on blanket credit ratings that vastly underestimated how much high-risk mortgage debt was in their blended portfolios.

The same risk would be created if the government tried to sell its student loan portfolio. It is a very different proposition to the lotteries revenue that the NSW government will consider selling once it has sold other assets, including the Port of Newcastle, for example.

Syndicates have already begun forming to buy that income stream because the financial dimensions of the lottery business and the revenue it generates are well known, and the income that the lottery operator, Tatts Group, pays the government - 10 per cent of gross receipts - is the equivalent of a first-ranking credit. Tatts must pay the government in full before it pays itself a cent.

The tertiary student debt portfolio is much harder to value. The loan system was founded by the Labor government in 1989. It began as an undergraduate university course funding system, but has expanded over the years to cover vocational education and postgraduate courses, changing in 2006 from HECS, the Higher Education Contributions Scheme, to HELP, the Higher Education Loan Program, when the Howard government allowed universities to raise fees by 25 per cent.

Loans are scaled according to rough estimates of debt servicing ability - those undertaking a medicine or law course can, for example, borrow more than someone studying for an arts degree - and the amount repayable is indexed to inflation.

Student borrowers do not have to repay money until they are working and earning a minimum annual income - $51,300 this financial year. Repayments start at 4 per cent of annual income and move up on a sliding scale to a maximum of 8 per cent on incomes of $95,288 and more.

The debt portfolio has grown more than 100-fold since HECS started, driven by rising tertiary enrolments and higher course costs, and at June 30, 2012, had a face value of $26.3 billion. But the government only put a "fair value" of $19.4 billion on the portfolio.

The Grattan Institute notes in its report, Mapping Australian higher education, that there is minor loss of value because the government is funding the scheme with borrowings that cost more to service each year than the extra amount it picks up from inflation-indexing of the amounts it is owed.

But it says that the bulk of the write-down - $6.2 billion or 23.6 per cent of the face value - is debt that the government does not expect to be repaid; money that was loaned to students who have ended up in jobs that do not earn enough to trigger repayments, others that are not working at all, and others who have moved overseas.

Even the debt that is "good" is long-duration, despite the fact that the income trigger for debt repayment is only 69 per cent of average adult annual earnings.

A total of $471 million loaned 21 years ago is still not fully repaid, and $884.2 million loaned 12 years ago is still on the books, for example.

All up, there are 1.46 million individual borrowers. Each person's debt servicing capacity depends on what degrees they earned, what jobs they have, what industries they work in, even what part of the country they are employed in.

It also depends on personal circumstances, and what other financial obligations exist.

This is the sort of information a bank requires from a loan applicant before it agrees to lend money, and none of it is available for the loan accounts in the HELP portfolio.

There are ways around this, but they are financially unattractive and politically risky. The government could, for example, make the portfolio more attractive to buyers by discounting its face value even more heavily than it already has, to compensate for the lack of credit information.

Another description for that is fire sale.

It could also increase the value of the portfolio by lowering the income threshold for repayments, forcing borrowers to pay earlier. The protests that have accompanied Pyne's anodyne comment that the government would at least consider a sale shows how contentious that move would be.

There is little enthusiasm for the idea in key ministries, including Treasury, and for good reason.

mmaiden@fairfaxmedia.com.au

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