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HECS for TAFE: The case for extending income contingent loans

Working Paper 2007-02

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The public vocational education and training (VET) system is now one of the few areas in Australia’s tertiary education system where students are required to pay up-front fees without access to loan assistance. These arrangements may lead to sub-optimal educational outcomes to the extent that prospective students reject a VET education on the basis of short-term financial constraints. In this paper we present a case for introducing an income contingent loan to the VET sector. The economic rationale is similar to that for higher education, and the Higher Education Contribution Scheme (HECS) provides a useful template. Using data from the first three waves of the Household Income and Labour Dynamics in Australia (HILDA) survey, we establish that there are indeed significant private returns to VET qualifications. An income contingent loan is argued to enhance access to these benefits, and the collection streams are analysed for different qualifications. The form that an income contingent loan might take for VET is considered, as are the implications for the Commonwealth Government with respect to potential subsidies associated with the design parameters.