On 1 June 2023 some 3 million Australians, owing over $74 billion, had their outstanding student loan debt increased by 7.1%. It comes as average loan debts have increased over the decade to 2021–22 from $15,200 to $24,800 (derived from Table 6).

Higher loan debt generally increases the period over which repayments will be required, thus reducing disposable incomes in future years. The average time to repay debts in full has already increased from 8.2 years in 2011–12 to 9.5 years in 2021–22 (Table 3). In addition, this debt is treated as equivalent to credit card or personal loan debt in considering borrowing limits, reducing the capacity of debtors to obtain other loans, such as for housing.

The high rate of indexation this year has led to calls for change by the Greens and the crossbench, while the Opposition has called for ‘urgent action’ to address the issue. So how did we get here?

Background

Student loans were first introduced in 1989, when the Higher Education Contribution Scheme (HECS), now HECS-HELP, was created. As described by then Minister John Dawkins, HECS would require those who benefitted from participating in higher education to make a small contribution towards the cost of their study, to finance a substantial increase in higher education funding. These contributions could be paid up-front, or via an income-contingent government loan.

Since 1989 there have been numerous changes to the loan scheme, including the introduction of several other income-contingent student loans with the same repayment arrangements (for more information on the range of student loans see Higher Education Loan Program (HELP) and other student loans: a quick guide).

Student contributions and repayment thresholds have also changed significantly. The initial contribution rate was a flat $1,800 per annum, while in 2023, student contributions under HECS-HELP range between $4,124 and $15,142 per year, depending on the field of study.

Under the initial HECS, compulsory repayments were made through the taxation system once taxable income reached $22,000, some 85% of the annualised full-time Adult Weekly Ordinary Time Earnings (AWOTE). The maximum repayment of 3% of income was payable for incomes over $35,000 (134% of AWOTE). By 2021–22, compulsory repayment of loans commenced when repayment income reached $47,014 (just over 51% of AWOTE), while those with income over $137,898 (just over 150% of AWOTE) had a repayment rate of 10%.

Indexation

In introducing the scheme, Minister Dawkins noted that ‘the annual course charge, the outstanding debt and the personal taxable income levels above which payment is required will be indexed to keep pace with inflation’. The indexation arrangements for contribution rates, outstanding debt and repayment incomes are all specified in the Higher Education Support Act 2003 (HESA). While they are all linked to the All Groups Consumer Price Index (CPI), the calculation for each differs.

The student contribution rates are set for a calendar year, based on the annual CPI increase at December of the previous year (section 198-15 of HESA). Thus the contributions for 2024 will be the 2023 rates indexed by the December 2022 CPI annual increase of 7.8%.

Outstanding debt is indexed each year on 1 June by the sum of the CPI index for each of the 4 quarters to March, over the sum of the 4 quarters to March the previous year (section 140-10 of HESA). The calculation for the June 2023 indexation is set out in Table 1 below.

Table 1: CPI index numbers for HELP debt indexation factor

Source: Australian Bureau of Statistics (ABS), Consumer Price Index, Table 1.

Therefore, the indexation factor for 1 June 2023 is 517.9/483.7 which equals 7.1%. This is slightly different to the annual rise in the CPI, which compares the index at March 2023 to March 2022, and results in an increase of 7.0%. However, in 2022 student loan debt was only increased by 3.9%, while the March quarter 2022 CPI annual increase was 5.1%.

The repayment income thresholds are indexed for the following tax year based on the 2019–20 figures included in the legislation (section 154-25 of HESA). This uses the sum of the CPI index in each of the 4 quarters to December of the previous year over the sum of the index for the 4 quarters to December 2018. This reflects changes introduced in the Higher Education Support Legislation Amendment (Student Loan Sustainability) Act 2018 which changed the basis of indexation from Average Weekly Earnings to the CPI (p. 18). See Table 2 below for calculation for the 2023–24 income year.

Table 2 CPI index numbers for HELP repayment thresholds indexation factor

Source: Australian Bureau of Statistics (ABS), Consumer Price Index, Table 1.

Therefore, the indexation factor for 2023–24 is 509.2/453.2 which equals approximately 1.124. This means the repayment thresholds have increased by 12.4% from the 2019–20 figures, resulting in an increase of 6.6% over the 2022–­23 repayment incomes.

Repayment of loans

If debtors voluntarily repay some of their loan prior to 1 June, this amount is deducted from their outstanding balance prior to indexation.

Compulsory repayments are calculated through the tax system. Those debtors working in Australia will have regular deductions from their salary or wages though the Pay As You Go (PAYG) system to cover the compulsory repayment. However, the amount paid via PAYG is not credited against the loan debt until after that year’s tax return is processed. This means that while an estimated 90% of the repayment due for the financial year is likely to have been made prior to 1 June, none of that is credited until after the indexation. This has led one commentator to argue for changes to the calculation and timing of the indexation of outstanding debt, with Minister for Education Jason Clare acknowledging that the timing ‘doesn’t make sense’.

Conclusion

Perhaps strange, given it was initiated over 30 years ago, and effects the lives of so many Australians, student loan arrangements have not previously been comprehensively reviewed or evaluated (p. 4). The terms of reference for the Review of Australia’s Higher Education System, due to report by December 2023, include consideration of ‘contribution arrangements’, but it is unclear how much focus it will give to loan arrangements. Millions of Australians are likely to watch with interest.