No HECS, thanks – we're Americans

Two prominent Democrats – Evan Bayh and Rahm Emmanuel – have introduced legislation to reform higher education student subsidies. So far as I can tell, their proposal offers some administrative simplicity, but not much in the way of real reform. It’s always puzzled me as to why Americans have eschewed the HECS scheme – one of Australia’s most popular policy ideas, now adopted by the UK, Israel, Thailand, and others. In a long paper on HECS, Bruce Chapman implies that one issue may be the failure of the Yale Plan in the 1970s, which has made some American policy wonks think that income-contingent loans can never work. It would be a pity if that were the case, since HECS is both more efficient, and more equitable, than the current US system.

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11 Responses to No HECS, thanks – we're Americans

  1. “one of Australia’s most popular policy ideas,”

    And one suggested by an American, Milton Friedman, half a century ago.

  2. Andrew Leigh says:

    Yes! I was almost going to mention this. Just as the Democratic Party has have now claimed as their own the idea of negative income taxes (another Friedman idea), so they should do the same for HECS.

  3. Sacha says:

    But did Friedman derive the idea from anyone else’s work?

  4. gordon says:

    It’s likely to be all a bit historical soon, I’m afraid. The “Top 8″ universities want to abolish caps on full-fee-paying students, and that will inevitably bring the HECS system to an end.

  5. Andrew Leigh says:

    Sacha, as far as I’m aware, Friedman came up with it himself. (As did Chapman — it was only when he was writing it up for an academic journal that he came across Friedman’s prior work.)

    Gordon, there’s no reason that uncapped prices and HECS couldn’t co-exist. One is about how much the university charges, while the other is about the mode through which the student pays it. (Indeed, if this weren’t true, it would be silly to talk about HECS for the US, since no-one is ever going to succeed in imposing government control on US private university fees.)

  6. derrida derider says:

    But … but … but …. it’s a TAX.

    Brother Andrew, don’t you realise that all taxes are instruments of Satan and would only ever be put forward by thieving librul Democrats? I’m sure there’s something in Deuteronomy confirming this.

  7. Damien Eldridge says:

    I suspect that in a regime of unregulated university fees, the HECS system would involve caps on lending, with the students making up any difference between the university free and the HECS cap. It is difficult to believe that any government would commit to making an uncapped loan. I think this is a sensible system to head towards so long as there is enough competition between universities to prevent fee gouging. If this is not the case, then some form of price cap may be needed.

  8. Sinclair Davidson says:

    DD – love the attitude. You’re coming along. But you should really refer to D’Varim, not Deuteronomy. :)

  9. christine says:

    My call (and I’ve thought about this rather a lot, since Canada’s in a similar position to the US, here), is something like boiling frog syndrome.* There is some existing loan system, with some positive fee level in place. It will always seem preferable to adjust your loan scheme slightly to whatever problems you’re feeling (eg increasing tuition fees) rather than adjust to a different system altogether.

    The student unions in Canada, though, argue it’s because if you have an income-contingent loan scheme, which makes it easier for students to pay for their education, governments will use this to increase fees. They cite Australia as the classic case, blithely unaware that fees were going to happen regardless, and HECS was just the nicest/fairest way to do it. Seriously, student unions over here just froth at the mouth at the mere mention of ‘income contingent loans’. (Which of course makes one question whether they really do prefer loan repayments to be unresponsive to future income.)

    Whether governments would be willing to make uncapped loans or not would likely depend in part on the extent of the interest rate subsidy, I’d think. And perhaps making sure people going o/s have to pay up?

    I think Friedman came up with the idea himself – seems to have been part of his PhD thesis? Regardless, the article in which it appears is very nicely written, as is a lot of Friedman’s stuff, and anticipates problems with particular details of student loan programs really quite well. It’s quite an impressive effort.

    * Yes, I know it’s apocryphal.

  10. wilful says:

    More generally, Americans do seem to suffer more than most from a “not invented here” syndrome.

  11. cba says:

    Some background on US student lending:

    * the fed runs two programs: one involves directly lending to students and the other involves private lenders making the loans guaranteed by the feds.
    * the guaranteed program began life in the 60s and is obviously very popular in the lending industry
    * Clinton introduced direct lending in 94 with stated aim to eliminate the guaranteed program and because of the perceived high cost of administering the guaranteed program (and there is some truth to this). Push back from the lending industry and the congress prevented this from happening. Political preference for the two programs go the way you would expect.
    * Direct lending includes income contingent repayment options, but these never really took off. Unless you force everyone into this option it’s obviously not going to work very well (self-selection problems etc).

    The failure of a HECS style program to get off the ground shouldn’t be a surprise when you look at the US attitude to universal health care.

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