Opinion
The government’s HECS change is good, but another tweak is still needed
Millie Muroi
Business ReporterTiming is important – and that’s one of the clear shortfalls in the federal government’s surprise for young people with student loans over the weekend.
The decision to limit increases in student debt via the federal Higher Education Contribution Scheme (HECS) to the lowest rate between inflation or the wage price index – and the decision to announce it now – is clearly somewhat of a tilt at winning over young voters who will hit the polls next year, and was undoubtedly timed to make sure the news didn’t get lost in the commotion of the upcoming federal budget.
Many university graduates will benefit from the Albanese government’s HECS changes.Credit: Rob Homer
Of course, it’s positive news. The nearly 290,000 signatures racked up on independent MP Monique Ryan’s petition to fix HECS debt may not all have been from young people, but it showed when they rally with the support of empathetic members of the wider community, change is possible and that their voices matter.
It’s a welcome change for a demographic which has often been ignored in policymaking, and which has been hit especially hard by cost of living pressures.
The changes mean a student with the average HECS debt of $26,494 will have roughly $1200 wiped off their debt. This is because the government is backdating its new policy to essentially come into force from last year: the closest the government can get to time-travelling.
Since the HECS program was born more than 30 years ago, student debts have been increased – or indexed – every year to match the inflation rate. Last year, those with HECS debts were shocked to find their loans indexed by 7.1 per cent: the increase meant many people (despite making compulsory repayments) ended up with a debt figure that was roughly the same – or larger – than before they made repayments.
At the same time, wage growth has been significantly slower than inflation over the past few years, meaning the ability for people to pay back their debts has gone backwards.
That’s where the government’s changes are useful. It means that student debt indexation will never outpace wage growth: indexation will always either be in line with or below wage growth if inflation grows faster than wages.
But there is one fix the government has left out – or conveniently forgotten – and it’s all about timing: we need to apply indexation on a date that ensures repayments made by people throughout the year actually count.
Right now, HECS debts are indexed on June 1 each year. It’s a convenient time for the government’s administrative purposes because it’s late in the financial year, meaning they can have a more accurate picture of how much money might be coming in and off their books in the new financial year.
But it means people with HECS debts are having some of their income withheld for repayments, yet not counted until after their loans have been ratcheted up for indexation.
Every pay cycle, employers withhold a portion of pay from any employee who has a HECS debt and earn more than the minimum threshold amount ($51,550 a year in the 2023 to 2024 period). Those withheld funds are eventually processed and recorded by the Australian Taxation Office, but not until tax returns are lodged. That’s usually months after student loans are indexed.
It means a student who has paid off $3000 from a $30,000 remaining loan would have the indexation applied to the $30,000 figure instead of the actual remaining debt of $27,000. In some cases, someone who has effectively paid off the last leg of their student debt can end up with more debt for a further year because their repayments throughout the year weren’t counted until after indexation had taken place.
This is a clear accounting problem the government must fix. It’s a blatantly unfair timing quirk which leaves people trapped with more debt even when they’ve paid it off. The longer we leave it, the more people will be left with unjustifiably higher debt. The government knows the importance of timing – it should act on it.
Millie Muroi is a business reporter and regular columnist.
The Opinion newsletter is a weekly wrap of views that will challenge, champion and inform your own. Sign up here.