Creative Education
2011. Vol.2, No.5, 466-469
Copyright © 2011 SciRes. DOI:10.4236/ce.2011.25068
An Introduction of a Financial Model for the Australian
Higher Education
Jin Li1,2
1College of Education, Southwest University, Chongqing, China;
2Office of International Cooperation and Exchange, Henan University of Urban Construction,
Pingdingshan City, China.
Received September 22nd, 2011; revised October 30th, 2011; accepted November 5th, 2011.
This study examines the global trend in shifting university costs from national governments to individual stu-
dents and families, with a specific focus on the existing cost-sharing model in Australian higher education. The
Australian system is worthy of consideration by other nations as a possible mechanism for enhancing access to
higher education for i n d ividuals who might otherwise not possess the opportunity to participate.
Keywords: Income-C ontingent Lending, Public Policy, Student Loans
The rising cost of higher education is a significant and
growing public policy issue facing governments around the
world. Many nations are struggling with the conundrum of how
to expand educational access in an era of smaller governments,
shrinking tax bases, and growing demands on federal budgets.
This is made more difficult given changing beliefs regarding
the relative mix of private and public returns to higher educa-
tion, and an increasing “user pays” philosophy to match the
growing conviction that the individual is the primary benefactor
of university-level study.
Consistent with this change is a global trend of shifting an
increasing percentage of educational costs from governments to
individual students and their families. Within this context,
Governments in the majority of countries allow universities and
colleges to charge students for tuition. Researchers and policy
analysts are devoting increasing attention to the growing
worldwide use of student loans to fund higher education, and in
many of these countries, for example, Canada and the United
States, the financing process is assisted by the provision of
commercial bank loans backed with a government guarantee of
repayment. The availability of bank loans is usually limited to a
subset of the student population, and eligibility and available
amounts are often determined with reference to both age and
family income. In Australia, however, there is a quite different
system of student financing. It is called HECS or the income-
contingent repayment.
The Background of the HECS System
The Australian higher education system consists of 42 degree
granting universities, the vast majority of which are public. The
system is largely federally controlled, with the national gov-
ernment playing a significant role in setting student enrollment
quotas, establishing tuition rates, and providing institutional
funding. While tuition varies by academic program it is consis-
tent across institutions, so that a student in an Arts course, for
example, pays the same tuition at any public university in the
What Is HECS
The Australian system, known as the Higher Education Con-
tribution Scheme (HECS), is a relatively well-known and re-
spected financing model that is designed to help the federal
government recover a portion of instructional costs while help-
ing to minimize the number of students who are kept away
from universities because of an inability to pay. The Australia n
Higher Education Contribution Scheme (HECS) was intro-
duced in 1989 replacing the previous system (since 1974) in
which students were not charged tuition fees. The purpose of
HECS was to increase the funds available for higher education
to promote its expansion without imposing fees on students
which would restrict participation in higher education to those
who could not afford the fees. The core element of HECS is a
deferred, income contingent loan in which students are charged
tuition fees but later pay back part of the cost of their university
education through the taxation system. The scheme allows stu-
dents to defer all tuition until after graduation, at which point
fees are repaid through an income-contingent tax. The accumu-
lated debt does not accrue interest but is subject to an annual
adjustment for inflation. It involves former students repaying
some of the direct taxpayer costs of higher education, but only
if and when graduates’ personal incomes exceed a minimum
threshold. It is progressive in that those earning the highest
incomes repay their debts fastest, and therefore have fewer
years to benefit from the government subsidy implicit in the
debt having a zero real rate of interest. The HECS system was
designed to increase private contributions to the higher educa-
tion sector without the impost of student fees. It is characterized
by students’ paying a proportion of the cost of their university
education through the taxation system once their income rises
above a threshold level. Those on higher incomes have a higher
rate of repayment than on lower incomes but the total amount
repaid is independent of the level of income so HECS is quite
different to a graduate tax.
Since its introduction in 1989, HECS has enabled the Austra-
lian government to significantly expand the number of available
student places in public universities without decreasing access
for individuals with fewer resources.
J. LI 467
Why Did the Australian Government Introduce
There are several rationales for the Australian HECS system.
Primarily, HECS reduces the cost to government of financing
higher education. In 2002 HECS contributed about $1.8 billion
or 16% of the total expenditure on higher education (ABS
2005). Reducing the per capita cost means that more money can
be spent on increasing participation. According to OECD (2004:
Table 3.3; 2007: Chart C2.1) indicators the proportion of young
persons at university (Type A Tertiary education in OECD
terms) in Australia is amongst the highest in the OECD.
Barr (2004) argues that income contingent loan schemes are
economically desirable since they provide price signals, in-
crease flexibility and choice, and promote access through ex-
pansion of the higher education sector. In an earlier article he
makes the point that free tuition is not affordable in mass higher
education systems. In addition, there is the social equity argu-
ment. Free university education means that workers on low to
average wages substantially subsidize the university education
of the children of higher income families, whom as a result of
their university education will, on average, receive much higher
incomes. Therefore, “free” university education involves a
substantial transfer of money from low income to high income
households. In addition, it cannot be argued that HECS is no
longer appropriate since university degrees do not deliver the
income premiums they once did. Despite the substantial in-
creases in the proportion of the Australian population with uni-
versity degrees, the income premium to university degrees, in
the region of 30%, is no lower among younger cohorts (OECD
2004: Indicator 11). In other words, there has been no change
over-time in the rate of return to university education. Univer-
sity degrees provide even stronger returns to wealth. As can be
seen frome Figures 1 and 2, typical Australian with a bachelar
degree earn higher than those without the degree. HECS en-
sures that those who enjoy the benefits of a university education
contribute to its costs.
The Development Process of HECS in Australia
After a 15-year period where no tuition was charged in Aus-
tralia universities, the Higher Education Contribution Scheme
(HECS) was introduced in 1989. HECS initially required most
undergraduate students to pay an annual fee of 1800 Australian
dollars for their university education, and the income threshold
was $27,675 (Chapman, 1997).In order to avoid disadvantaging
individuals of lesser means, the fee was deferred until students
graduated from or left the university. Students who were able
and chose to pay the fee upfront were given a 15% discount.
Deferred fees did not accumulate interest, but were annually
adjusted by an amount equal to the rate of inflation. Repayment
was made through a HECS payroll tax and contingent upon
income. While no payment was required until a student earned
over $22,000 annually, an amount of up to 3% of one’s total
income was deducted from his/her paycheck depending on the
level of earnings above the minimum payment threshold.
Various adjustments in the HECS system have been made
since its introduction. The discount for paying fees up-front was
increased to 25% in 1993.
In 1997, the conservative Coalition government reduced the
income threshold to $21,000 (in 1996 dollars), accelerated the
repayment schedule, and introduced three tiers of fees at $3300,
$4700, and $5500 per year. The tiers were designed to par-
18 21 2427 3033 36 394245485154 57 60
Annual Inco me
Year 12
Figure 1.
Typical Australian female age-earnings profiles: 2004.
18 21 24 2730 33 36 3942 45 4851545760
Annual Income
Year 12
Figure 2.
Typical Australian male age-earnings profiles: 2004.
tially reflect the teaching costs and expected income returns
associated with different courses (Chapman, 1997). Medical,
dental, veterinary science and law students were charged the
highest rate, while arts, humanities, and nursing students were
charged the lowest rate. The other major change in 1997 was
encouraging the up-front payment of tuition fees by offering a
25% discount (which is essentially the same as imposing inter-
est). Up-front payment means that the government receives the
income sooner and provides increased flexibility to students for
payment. However, only a minority of students choose to pay
up-front. Approximately 80% of full-time students chose not to
pay up-front but take the deferred payment option, although a
higher proportion of part-time students pay up-front (Long &
Hayden, 2001).
The Advantage of HECS Compared with Bank Loan
Bank and HECS repayments can be very different in impact.
Table 1 gives us a clear idea of the HECS income thresholds
and repayment rates. From the table, we can see that when in-
come below $35,000, one needn’t repay the money. The more
the income, the higher the repayment percent.
As can be seen from Figure 3, HECS system adds no addi-
tional load to the unlucky women when she was struggling to
make her ends meet. Though the amount of the repayment to
the bank is consistent, it exerts great pressure to the unlucky
women because the amount comprises a large portion of her
income. So the biggest advantage of HECS system is its con-
sumption smoothing effect compared with bank loan.
What Pre-Requirement for the Implementation
of HECS System
As has been shown through a review of related literature and
Table 1.
HECS income thresholds and repayment rates.
HECS Income Thresholds and Repayment
Rates:200 4/ 2005(debt = $16,000)
HECS repaym ent incomes
in the range: (A$) per year Percent of income
applied to repayment
Below $35,000 Nil
$35,001 - $38,987 4
$38,988 - $42,972 4.5
$42,973 - $45,232 5
$45,233 - $48,621 5.5
$48,622 - $52,657 6
$52,658 - $55,429 6.5
$55,430 - $60,971 7
$60,972 - $64,999 7.5
$65,000 and above 8
22 2324 25 2627 28293031 32 3334 353637 38 39
Full TimeFull TimePart Time
Figure 3.
The big story: Debt Repayment as a proportion of taxable income for
an unlucky graduate: females.
an in-depth qualitative study of the experiences of students in
Australia, a HECS type system can result in numerous benefits
to both national governments and participants in higher educa-
tion and can be used as a model for countries that are trying to
address problems related to inequitable access to higher educa-
tion. While a number of particular economic, political, and
cultural factors enable the system to work effectively in Austra-
lia, these variables may not exist in the same form in other na-
A number of critical issues would need to be addressed be-
fore a system similar to the Australian HECS model could be
implemented in countries possessing the required resources and
necessary infrastructure. These include the role of private fi-
nancial institutions in student support programs, the potential
scope and cost of an income-contingent loan scheme, and the
opportunity to conduct pilot studies, perhaps in a single or
small number of states, provinces, or universities. Governments
must devote serious consideration to the limits of financial
strategies to address social and cultural problems related to
higher education. While a lack of adequate financial resources
undoubtedly keeps millions of otherwise qualified and capable
individuals out of universities, many other psychological, so-
ciological, cultural, and structural variables also are involved in
maintaining, if not exacerbating, class inequality in higher edu-
cation. For example, debt aversion and related sociological
barriers to higher education will likely not be solved through
the implementation of an income contingent loan scheme.
Rather, these issues require additional and varied uses of time,
talent, and financial resources to discuss, research, and problem
solve for the long-term benefit of society.
Given the role of education in promoting economic devel-
opment and social mobility, it is important to more fully under-
stand the process by which certain individuals decide that the
benefits of a university degree outweigh the various costs of
attendance. Additional research can assist a wide variety of
individuals who help shape the educational aspirations and
opportunity structures of youth—parents, teachers, and school
guidance and careers counselors among others—to better rec-
ognize and understand the needs and concerns of adolescents
and the various forces that influence thinking about future plans
and goals. This knowledge can enable those who teach, counsel,
encourage, mentor, and motivate youth to do so in a manner
that communicates empathy and understanding while expand-
ing students’ views of what is possible and achievable. Univer-
sity admissions and promotion officers might apply the insight
gained from research to the development of more effective
educational outreach initiatives. Research might also assist
public policy makers in creating programs that more success-
fully target talented, lower income youth and promote access to
various forms of educational opportunity. These efforts are
necessary to help reverse the trend of talent wastage among the
low-income youth of many nations, to improve the lives of
individuals by removing obstacles in the pursuit of their goals
and aspirations, and to promote stronger, more cohesive socie-
ties for future generations.
The Effect of the HECS System in Australia
A common criticism of HECS and associated policies is that
it increases socioeconomic inequality in university education.
There are several reasons why HECS may increase socioeco-
nomic inequality. Students from lower socioeconomic back-
grounds are more debt adverse so are less likely to participate
in higher education than students from more advantaged back-
grounds. The option of a 25% discount in course fees for up-
front payment (later revised down to 20%) favors students with
wealthy or high income parents. Similarly, such students are
advantaged by the flexibility allowing universities to charge
up-front fees to a maximum of 25% of enrolments (later in-
creased to 30%) per course. Marginson (2005) speculated that
the HECS system in its original formulation—all universities
were deemed of equal standing and a standard tuition fee—had
minimal impact on social access, but the 1997 and subsequent
reforms to the HECS system had increased social stratification
and closure.
There is little evidence that HECS increased socioeconomic
inequalities in higher education. Andrews (1999) found no
change in the proportion of low SES students (identified by
area-based measures) enrolled at university since the introduc-
tion of HECS and the 1997 reforms. He concluded that HECS
had little to do with the low participation rates of low SES stu-
dents. Similarly, Aungles et al. (2002) concluded that “the in-
troduction of HECS and its variants since that time, have not
discouraged overall participation in higher education among
persons from a low SES background”. However, they noted a
substantial decline in the number of low SES males applying
for places in the most expensive courses. Chapman and Ryan
J. LI 469
(2005) found that wealth inequalities in university participation
had not increased after the introduction of HECS, and partici-
pation at university of those in the middle of the wealth distri-
bution had increased.
Since the introduction of HECS in Australia, income contin-
gent loan schemes have been introduced in other countries. In
1992, New Zealand implemented a scheme where students can
borrow from the government for both their tuition and living
expenses. In the United Kingdom a HECS-style scheme began
in 2006. Institutions are allowed to charge students £3000 per
annum, which they repay once their annual income exceeds
£15,000 (DES 2004). Governments in other countries where
university education is presently free are likely to consider
HECS-like schemes if they wish to reduce the costs of higher
education or increase the number of university places by re-
ducing the per capita cost to government (Chapman & Green-
away, 2006).
The Australian system can serve as a source of insight and
guidance for policy makers who are seeking solutions to new or
perennial issues related to higher education acce ss and equity.
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