Student Debt and Our Fiscal Future

Grace Drinan

In November 2022, the Greens introduced the Education and Other Legislation Amendment (Abolishing Indexation and Raising the Minimum Repayment Income for Education and Training Loans) Bill 2022. Under this Bill, indexation for all study loans would be immediately frozen and the current minimum repayment threshold for HECS/HELP debt would move from $48,361 to the median wage, which is approximately $62,400. This Bill would have helped ease the burden of the current cost of living crisis, given inflation has risen to a 32-year high. It would have seen all Australian students, of which there are approximately 3.2 million, free from the burden of indexation on their student debt. Additionally, it would have allowed students to access more of their salary to combat the cost of living.

Since the Bill was not passed, all student debt has been subject to indexation at the rate of 7.1%, based on the inflation rate of the last 2 years. That rate means an extra $1,759 will be added to the average student debt of $24,770. Indexation increases the time it takes for students to pay off their debt, impact the future economic prospects of young people starting their careers, and leaves students with even more debt. This article will take a closer look at the history and position of student debt in Australia compared to the United States and the United Kingdom.

HECS/HELP in Australia

HECS was implemented on 1 January 1989 after the Committee on Higher Education Funding recommended that higher education students should pay off their student debt through income tax obligations. The HECS/HELP scheme changed throughout the years, from when tertiary education was free in 1974, to the establishment of the income threshold at which students have to begin repayments. In 1989, the year HECS was introduced, the repayment threshold was an income of $22,000. The income threshold at which repayments must be made fluctuates every financial year. For example, in the 2018-2019 financial year, the minimum income threshold for compulsory repayments was $51,956, and in the 2019-2020 financial year, it was reduced to $45,880. Once an individual’s taxable income surpasses the income threshold for that financial year, they are required to pay back a flat percentage of their total income, which increases as taxable income grows. This system has continued to function because those who graduate from university tend to earn higher wages, and thus have the capacity to repay their debt.

Data from the Australian Government shows that since 2005, the average time to pay off HECS/HELP debt completely has grown by 2.2 years, currently sitting at 9.5 years, reflecting the increasing size of debts students have been taking on. In the 2021-2022 financial year the people with the most amount of student debt were women 20-29 years of age, with men in the same age demographic following closely behind. Policies implemented which change the income threshold or amend the repayment system will predominantly impact young people who are establishing their careers and finances. The high inflation rate for this financial year will affect young people who have a limited capacity to pay off the debt and they may end up paying this debt for many more years to come. Furthermore, it will have implications on the capacity of young people to enter the property market, due to the impact the increasing debt will have on their borrowing power in conjunction with the existing barriers to entry. Those who can afford to pay off their HECS debt or have parents who can therefore have an even bigger advantage than ever before.

To put Australia’s student debt crisis in perspective, let’s compare it with the systems in the United States and the United Kingdom.

United States

As of September 2022, about 48 million United States borrowers collectively owe over $1.6 trillion in federal student loans. In 2020-21, graduates of a four-year bachelor’s degree in public and private colleges finished their degrees with an average debt of roughly $43,000 AUD. Data has shown the average student took on 25% more debt from 2009 to 2021 in the United States because tuition has increasingly become more expensive. Furthermore, students have an incentive to borrow more as pursuing higher education generally equates to a higher income. For example, in the United States, a person with a bachelor’s degree earns 1.8 times the amount a person with a high school diploma does.

In the United States, student loans are either taken out through a federal loan or a private loan from a bank and can be used for any expense associated with college. For undergraduates with a federal loan, the interest rate set by Congress in 2022-2023 was 4.99%. In the United States, financial experts and the US Department of Education say that 10 years is the ideal timeline for paying off loans, according to the Education Data Initiative. However, on average it takes students 20 years to repay their debts.

United Kingdom

The United Kingdom has a similar income-based style repayment system to Australia. A student will start making repayments when their income is at $46,947 AUD, at which point they pay 9% of their income towards their student debt. Depending on the loan plan a student is on, their debt is written off after 25 to 30 years. United Kingdom students graduate with the highest rate of student debt in the world, at approximately $70,000–90,000 AUD. In the United Kingdom, payments are collected for up to 30 years, after which time any remaining amount is forgiven.

Where this leaves us

This comparison demonstrates two things. Firstly, what we all knew: it is expensive to be a young person in today’s world, although this is certainly the case for some more than others. Secondly, the student debt policy in Australia is comparatively better than in other countries. Australia’s income tax system is acknowledged by experts to be one of the better systems of student debt. While indexation of HECS/HELP loans in the context of a cost of living crisis in Australia is disheartening, to say the least, and perhaps the system could undergo reform to mitigate the impact on young people in the future, it may be helpful to acknowledge that in comparison to other systems in the world, we can be considered to be in a better position.

Should the law be subject to reform? The natural answer, one would think, is yes. One may go even further, demanding rapid and rigorous legal change with a revolutionary ethos. The issue with reform, the revolutionist claims, is that change under a corrupted system is a fool’s errand — whether the corruption is prejudicial, financial, or administrative. Ineffectual reforms initially seem benign, appearing to the observer as a mere inconvenience. However, as legal systems are enveloped in vast, contradictory sources and muddled interpretations, the protest against the law develops thus:

‘Our law has grown in its complexity to the point of self-sufficiency — to maintain the law, working lawyers require assistants (lawyers) to interpret the law written by legislators (lawyers). The law more closely resembles the classifieds of a legal newspaper rather than a mechanism for justice. Therefore, let us demolish our corrupt laws and replace them with what is true and good.’

Or, with the brevity of Voltaire: