While the Biden administration was making global headlines at the end of August for its latest student loan forgiveness provisions, the Australian was announcing a plan to pay off the student loans of nurses who work in that state for a minimum of two years. These are both forms of loan extinguishment – one as a social measure and one as an incentive to plug a skills shortage. But both of these are poorly designed and unsustainable in the longer term.

In both countries, the student financing system has come under strain because of high levels of debt borne by individuals and skills shortages in certain fields. This mismatch of graduates and job vacancies holds back productivity – the thing that makes people’s lives better. And some of this mismatch exists because there is no incentive for students to complete a qualification or to work in their field of study.

Universities Australia’s analysis of government data shows that bachelor’s degree completion rates have been dropping for more than a decade. Four-year completions declined from about 47 per cent in 2005-06 to 42 per cent in 2017, and six-year completions fell from 67 per cent in 2005 to 62 per cent in 2014-15.

These data mix international and domestic students, which likely masks a greater attrition rate for domestic students. In some areas, completion rates are in real trouble. Department of Industry figures show that for IT education, there were about 39,000 university enrolments but fewer than 10,000 graduates.

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Each semester that someone studies, their debt mounts up. The closer they get to graduation, the more forbidding it appears. The incentive to complete is the salary premium derived from having a degree, but the above data suggest that this is not enough for everyone.

Loan extinguishment can incentivise completion – but only if it is offered only to those who actually complete. In the US, it is being offered to everyone with a Department of Education loan who earns less than $125,000 a year. And it is unclear whether current and future students will benefit from any loan forgiveness.

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Loan forgiveness can also incentivise people to work in their skill area, at least for a time. But Victoria’s scheme is poorly designed because rather than specifically targeting people who completed their degree in the state, the retainment bonus applies to all nursing graduates who work in Victoria, regardless of where they did their degree – thereby incentivising domestic migration, with consequences for neighbouring states.

Actually, Australia already has incentives to complete degrees, just not for Australians. It encourages international students who finish to stay and earn money with a highly prized 485 work visa. In principle, Australia solves a skills shortage and the consequences of an ageing population with freshly educated bodies from abroad.

Loan extinguishment would encourage the completion of degrees that are vocationally appropriate to an economic or social need. I call this “Smart-”.

Let’s use nurses as an example again. The government could pay down, say, 25 per cent of a loan on graduation and another 25 per cent after the graduate works in the medical system for two years. The paydown could be more for working in a regional area or field of particular need. But importantly, the system must be national, to avoid interstate distortions of the labour market, as in the Victoria case.

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Smart-HECS could be tailored to assist equity groups, such as disabled, Indigenous and the long-term unemployed, with additional paydowns. It could also be a useful and targeted form of foreign aid: newly skilled doctors or engineers, for instance, could be deployed abroad to aid in development or with crises, in exchange for having more of their student loan cancelled.

Of course, designing Smart-HECS would require bureaucrats to pick winners. Whose degrees are more valuable to the state? But again, Australia does that already in the visa area, with carefully chosen vocations earning points towards immigration status – so a framework exists that can be utilised.

Smart-HECS could be extended into the VET area and apprenticeships. Australia needs plumbers and electricians as much as doctors and nurses.

The Smart-HECS model would rebalance the benefits of graduation between domestic and international students while still enabling equitable access to tertiary education without fees at the point of enrolment.

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It is an idea whose time has very much come.

Danny Bielik was the tertiary education adviser to former New South Wales education minister Adrian Piccoli. For six years, he hosted the weekly Courses and Careers Show on radio 2GB, 3AW and 4BC. He has led a number of education institutions and now resides in Singapore, where he is involved in the edtech industry.