Background

The Australian Government, through the Department of Education, Science and Training (DEST), offers a range of assistance to approved higher education providers and eligible students to assist in providing and paying for education. Since 1989, Australian students in Australian Government funded higher education places have been required to contribute towards the cost of their education through a variety of schemes, including through the Higher Education Contribution Scheme (HECS).

In response to a review of Australia's higher education system completed in 2002, the Australian Government announced changes to Australia's higher education policy, which it enacted through the Higher Education Support Act 2003. The changes are set out by the Australian Government in the Our Universities: Backing Australia's Future (May 2003) policy.¹

The changes affected the way the Commonwealth supports students' access to higher education. One of the key changes was the replacement of the four previous loan schemes and the introduction of the Higher Education Loan Programme (HELP). On 1 January 2005, the HELP replaced existing loan schemes² and became the primary source of Australian Government assistance to students with higher education costs. The HELP consists of three different loan programmes: HECS–HELP, FEE–HELP and OS–HELP.

In 2005, the total operating revenue of higher education institutions was $14.3 billion. Of this revenue, $5.9 billion was from Australian Government grants. Other Australian Government payments included $1.9 billion³ for loans to assist students to meet their contribution towards the cost of education.⁴

HECS–HELP assistance comes as either a loan available to eligible students enrolled in Commonwealth supported places or as a discount for students paying all or part of their student contribution up-front. A HECS–HELP loan may cover all or part of the amount that a Commonwealth supported student is required to contribute towards their higher education tuition costs. A HECS–HELP discount of 20 per cent applies if the student pays at least $500 of the student contribution up-front. In 2005, up-front student contributions amounted to $396 million.⁵

For students that enter into a HECS–HELP loan or receive a HECS–HELP discount, the Australian Government pays the amount of assistance directly to the higher education provider on the student's behalf. A HECS–HELP debt⁶ is recorded by the Australian Taxation Office (ATO) for each student that receives assistance. Repayments of the loan are required when the student earns a certain level of income per annum.⁷

In 2005, 957 176 students attended Australian higher education providers. Of these, 717 681 were domestic students and 239 495 were overseas students.⁸ In 2005, the Australian Government agreed to fund 409 393⁹ Commonwealth supported places at eligible higher education providers. Of those students required to pay student contributions, approximately 77 per cent deferred all or part of their student contribution and received a loan, and 21 per cent paid their full student contribution, up-front and received a discount.¹⁰

The recording of HECS–HELP loans has significant financial implications for students, the higher education providers and the Australian Government. At 30 June 2005, around 1.1 million people had a HELP¹¹ debt. The average debt was $9 800.¹² The repayment of this debt, which can take in excess of five years¹³, affects a person's disposable income. As such, the accurate charging of tuition costs by higher education providers and recording of student loans by DEST and the ATO is of particular interest to students.

HECS–HELP funding represents a major source of revenue for higher education providers.¹⁴ Underpayment of HECS–HELP assistance can have an adverse affect on the ability of higher education providers to deliver higher education.

The outstanding HECS–HELP debt represents an amount that is recoverable through the taxation system. At 30 June 2006, the fair value¹⁵ as reported by DEST of the loans owed by students for higher education assistance was $8.2 billion.¹⁶ The nominal debt amount was $12.9 billion at 30 June 2006 and $11.5 billion at 30 June 2005. The valuation of the loans is currently subject to an actuarial review for 2006–07 financial statements.¹⁷ The accurate recording of this debt is important to provide assurance that DEST's, and the Government's, financial statements correctly reflect the amount recoverable.

Audit objective and scope

Audit objective

The objective of the audit was to assess the effectiveness of procedures and processes used by DEST and the ATO to record HECS–HELP student loans. To achieve this, the ANAO assessed the performance of DEST and the ATO against three criteria as follows:

• DEST monitored student contributions set by higher education providers for consistency with Australian Government policy;
• DEST paid HECS–HELP advance payments to higher education providers based on sound estimates, and recorded, reconciled and reported these payments; and
• the ATO has established procedures and processes to correctly record HECS–HELP loans against student tax records.

Audit scope

The audit focussed on the HECS–HELP because these loans constitute approximately 83 per cent of all HELP loans. The audit examined whether:

• student contribution amounts that are being set by higher education providers are consistent with Australian Government policy;
• the advance payments¹⁸ to higher education providers for student loan assistance are based on reasonable estimates;
• the advance payments provided to higher education providers are compared to actual student loan data, and any over or under payments are treated appropriately;
• amounts for student loan assistance are paid to higher education providers and recorded in DEST's financial accounts; and
• the ATO correctly recorded students' loan amounts against the students' tax records.

The audit excluded the repayment phase of HECS–HELP loans administered by the ATO through the Income Tax Assessment process.

Overall Conclusion

Overall, DEST was effectively monitoring student contributions set by higher education providers for consistency with Australian Government policy. DEST has also established effective procedures and processes to pay HECS–HELP advance payments to higher education providers based on sound estimates, and to record, reconcile and report these payments.

There were two main areas in the administration of HECS–HELP where the ANAO considered DEST could improve administrative practices. The first concerned strengthening its monitoring role in relation to student contribution amounts charged by higher education providers, confirming that they were acting in a manner consistent with the legislation. The second concerned the need for a more timely reconciliation of HECS–HELP payments to enable DEST to report HECS–HELP payments in the financial year that they were made.

DEST has implemented controls to provide assurance on the integrity, completeness and accuracy of HECS–HELP data transferred from the higher education providers to DEST, and also from DEST to the ATO to record student HECS–HELP loans. The ATO has established effective procedures and processes to record HECS–HELP loans against student tax records.

Key Findings

Setting Student Contributions (Chapter 2)

DEST has established procedures and processes for ensuring the requirements of the Higher Education Support Act 2003 are met by higher education providers, and that amounts charged to students, are accurate. Specifically, DEST developed sound guidance to assist higher education providers to interpret and implement the requirements of the Higher Education Support Act 2003. DEST also implemented a series of controls designed to provide assurance that higher education providers comply with legislative requirements on the charging of fees.

However, DEST would benefit from documenting its compliance procedures. This would assist staff to monitor higher education providers' compliance with legislative requirements on the publishing¹⁹ and charging of student contribution amounts and tuition fees.

DEST performed a number of validation checks on the accuracy of amounts charged to students. However, as part of its monitoring role, DEST could institute sample checks of amounts charged by higher education providers for consistency with published rates or with the schedules of student contribution amounts provided to its Minister. This would provide further assurance that higher education providers were acting in a manner consistent with the legislation.

HECS–HELP Payments (Chapter 3)

DEST has procedures for the estimation, payment and reconciliation of HECS–HELP payments. DEST's approach to calculating the estimate for 2005 produced a reasonably accurate result. DEST estimated an amount of $1.72 billion for HECS–HELP payments to higher education providers whereas the actual amount of HECS–HELP assistance accessed was $1.65 billion. This was a difference of approximately $70 million (four per cent).

However, DEST has not documented its procedures for the preparation and approval of the HECS–HELP estimate. This increases the risk of inconsistency in the preparation and approval of the HECS–HELP estimate which could affect its accuracy.

DEST made advance payments to higher education providers based on the estimated value of HECS–HELP assistance that each higher education provider will require, and in accordance with the payment schedule that was specified in the manual for providers.²⁰ DEST has implemented processes and controls to provide assurance that these payments are made as required.

DEST received the data required to perform a reconciliation of HECS–HELP by 31 March 2006.²¹ However, internal validation processes delayed completion of the reconciliation until December 2006, eight months after the scheduled date.²² This resulted in delayed recovery of HECS–HELP assistance overpayments made to higher education providers and an opportunity cost to the Commonwealth.

The net reconciliation variance of approximately $70 million represents an amount that was receivable by the Department. Although not material from a financial statement perspective, the receivable would have been better accounted for in the Department's financial statements at 30 June 2006. DEST was not in a position to do this because of the delay in completing its reconciliation. The delay meant that all recoveries and additional payments were made in one instalment (the final instalment for the calendar year), in mid December 2006. DEST accounted for these variances at the time of these adjustments in December 2006, rather than in the earlier financial year, 2005–06.

DEST procedures for the reconciliation of HECS–HELP assistance were not documented to support the correct and consistent implementation of these procedures. This could result in higher education providers being incorrectly funded.

Australian Taxation Office Recording of Student HECS–HELP Debts (Chapter 4)

Higher education providers must transmit to DEST student enrolment information captured on the census date.²³ This enrolment information includes the actual amount of HECS–HELP assistance provided to the student, and is the source for the ATO recording of student HECS–HELP debts.

DEST has implemented controls to provide assurance on the integrity, completeness and accuracy of HECS–HELP data transferred from the higher education providers to DEST. However, these controls could be enhanced to manage the risk that a higher education provider will not follow the correct submission processes by submitting an unencrypted enrolment file to DEST. DEST advised that it will enhance its controls in 2008, by using new software which will prevent higher education providers from submitting unencrypted files to DEST. DEST has also established processes to provide assurance on the complete and accurate transmission of this data to the ATO to record student HECS–HELP loans.

The ATO has established processes to provide assurance that HECS–HELP debt indexation is applied correctly and debts are recorded against the correct student tax file records. The ATO produces and distributes HELP information statements for each person with a HELP debt, after the indexation process. The notice details the balance of each person's HECS–HELP debt and any movements that have occurred during the year, such as new debts, repayments and indexation. The ATO has established a mechanism to resolve disputes about the accuracy and the amount of HECS–HELP student debt.

The ATO received 44 000 enquiries about HECS–HELP in 2005–06, of which only 37 were categorised as complaints. Some of the 37 complaints were customer service issues rather than higher education loan enquiries.

Recommendations

The ANAO made two recommendations concerning DEST's recording of student loans. DEST has agreed to both recommendations.

DEST's Response

The Department of Education, Science and Training (DEST) welcomes the findings of the Australian National Audit Office (ANAO) that overall DEST effectively monitored student contributions for consistency with Australian Government policy and had established effective procedures to pay advance payments based on sound estimates and to record, reconcile and report these payments. DEST accepts the ANAO's recommendations that documentation of existing procedures and processes be improved, further checks on charging of student contributions be introduced and improvements be made to the timeliness of reconciling HECS-HELP advance payments. DEST has already completed part of the work to consolidate existing documentation of processes and procedures. DEST believes that existing mechanisms allow students to ensure they are charged the correct student contribution for their studies but will undertake a sampling of student records to check whether there are instances of providers charging incorrect amounts. DEST has developed further the processes for reconciling HECS-HELP payments in a more timely manner. DEST has conducted a mid-year review which will adjust 2006 HECS-HELP advance payments so that the variance in the final reconciliation should be reduced.

ATO's Response

The correct recording and ongoing management of student loans under the Higher Education Loan Programme is important to the Tax Office. We welcome the ANAO's recognition of the Tax Office's established processes which provide assurance that HECS–HELP debt indexation is applied correctly and that debts are recorded against the correct student tax file records.

The Tax Office notes there are no recommendations concerning our performance in your report.

Footnotes

1. <http://www.backingaustraliasfuture.gov.au/reforms.htm&gt;.

2. The four schemes were the Postgraduate Education Loan Scheme, the Bridging for Overseas–Trained Professionals Loan Scheme, the Open Learning Deferred Payment Scheme and HECS.

3. This amount comprises $1.6 billion for HECS–HELP and $289 million for FEE–HELP.

4. Higher Education Report 2005, DEST, January 2007, p.5 . <http://www.dest.gov.au/sectors/higher_education/publications_resources/…;.

5. ibid., p. 5.

6. A HECS–HELP debt is the balance of the student's loan.

7. In 2005¬–06 compulsory HECS–HELP repayments commenced when a student's income reached $36 184.

8. Higher Education Report 2005, DEST, op. cit., p. 10.

9. ibid., p. 27.

10. ibid., p. 75.

11. On 1 June 2006, all existing HECS debts were combined with HECS–HELP, FEE–HELP and OS–HELP debts, to become accumulated HELP debts.

12. Higher Education Report 2005, op. cit., p. 81.

13. The repayment term is determined by the size of the debt and the income of the person who has accumulated the debt. For example, a person with an average annual income of $50 000 and a HELP debt of $10 000, will take around five years to repay their debt if they make only compulsory repayments.

14.  In 2005, HECS–HELP funding was in excess of 11 per cent of the total operating revenue of higher education providers as calculated from the Higher Education Report 2005, op. cit., p. 6.

15. The Australian equivalent to International Financial Reporting Standards (AIFRS), require the debt to be measured at fair value. Fair value is determined by taking the initial debt and deducting amounts that are not expected to be recovered, ie providing for bad and doubtful debts.

16. Department of Education, Science and Training, Annual Report 2005–06, pp. 314–315. http://www.dest.gov.au/portfolio_department/dest_information/publications_resources/profiles/dest_annual_report_2005_2006.htm.

17. ibid.

18.  The Australian Government, through DEST, provides the amount of student contribution that students are borrowing to higher education providers throughout the year in which the students incur the debt. DEST pays the higher education providers based on how much DEST considers students will borrow. This payment is referred to as an ‘advance payment'.

19. Higher education providers are required to publish schedules of student contributions.

20. Administrative information for providers: student support, DEST Funding and Student Support Branch, Higher Education Group, April 2006.

21. <http://www.dest.gov.au/sectors/higher_education/publications_resources/summaries_brochures/resources_for_student_administrators.htm>.

22. DEST completed its first reconciliation process in December 2006 for the 2005 calendar year.
Administrative information for providers: student support, op. cit., p. 101.

23. 31 August for census dates in the first half of the year and 31 March for census dates in the second half of the previous year.