Mon Apr 8

How do we protect students from ballooning HELP debts? A fixed maximum indexation rate would help

Written by: Andrew Norton, Professor in the Practice of Higher Education Policy, Australian National University

The indexation of student debt is arguably the federal government’s biggest political problem when it comes to universities.

Last June, student debt balances increased by 7.1%^[1], the highest rate in decades. While HELP loans do not attract interest, they are indexed to inflation as measured by the Consumer Price Index ^[2] (CPI).

When inflation remained low, this was not an issue for those with a HELP debt. But last year, as inflation rose, on average A$1,700 ^[3] was added to each borrower’s debt. The next indexation date is approaching on June 1. We won’t know the 2024 indexation rate until the March quarter CPI level is released, but it’s likely to be around 5%.

Calls for change

At the same time, community pressure is building.

An online petition ^[5] started by independent MP Monique Ryan is calling for a change to the way debts are indexed. It has amassed more than 230,000 signatures. Other independent, Greens, Liberal and backbench Labor MPs are also raising the issue in federal parliament.

Media reports regularly highlight ^[6] the stress students and graduates experience due to their rising debts ^[7].

Independent MP Monique Ryan and other independent MPs at a press conference at Parliament House in Canberra.

Independent MP Monique Ryan has been among those calling for change to the way HELP debts are indexed. Mick Tsikas/AAP

So what should happen?

In February, the Universities Accord final report ^[8] proposed setting indexation at the lower of CPI or the Wage Price Index ^[9] (WPI), which measures wage increases.

The government is now “looking at ^[10]” this recommendation (along with all the others in the report). But it should be considering an alternative.

While the WPI would have lowered indexation in recent years, in most years it is higher than CPI. This means students would not necessarily be better off.

This is why a fixed maximum indexation rate of 4% would better protect HELP borrowers against unpredictable increases in their student debt.

A lower-of two indicators indexation system

The accord’s proposed “lower-of two” indicators indexation policy aims to balance competing policy considerations: the cost to government of lending to students and minimising the risk to borrowers of unexpected spikes in their debt.

As of June 30 2023, current and former student borrowers owed $78 billion ^[12]. Due to the government’s own large debt ^[13], it pays significant interest ^[14] on the student component, which explains why it has not rushed to change indexation policy.

Any economic indicator-based indexation system risks years of high indexation. Using CPI, average indexation between 2000 and 2021 was 2.5%, in line with a strong policy commitment to keep inflation in the 2% to 3% range ^[15]. But the unusual economic conditions caused by COVID triggered an inflationary spike, flowing through to 3.9% indexation in 2022, 7.1% in 2023 and probably around 5% this year.

This has raised the question of what alternative indicators ^[16] we could use to index student debts. Suggestions include the government bond ^[17] rate and measures of wage increases.

Education Minister Jason Clare looks at a copy of the Universities Accord final report.

Education Minister Jason Clare released the Universities Accord final report in February and is now considering the government’s response. Lukas Cosh/AAP

The government bond rate

Of these options, the government bond rate makes policy sense if we consider both sides of the transaction. The bond rate is the interest rate the government pays ^[18] when it borrows money. So it is directly relevant to the cost indexation offsets, which is public debt interest on outstanding student loans.

In most years, CPI is less than the bond rate ^[19], so indexation only partly covers the government’s costs. But unusually, CPI indexation exceeded the ten-year bond rate in three of the last four years.

So, the government has made a profit on indexation, which is not a policy goal. Past proposals for “real” interest on student debt (inflation plus a margin), have always failed to secure parliamentary support. Real interest would cost all HELP debtors more than the usual CPI indexation of about 2.5%. So this is a difficult policy to sell politically, as the last two years have shown.

Wage growth indexation

The accord final report preferred a wage measure to the bond rate for indexing student debts.

WPI measures increases in hourly pay rates ^[20] for the same job. The accord report’s logic is that weak wage growth in recent years undermined the long-term capacity of student debtors to repay. So WPI would maintain a relationship between earnings and debt.

A lower-of either CPI or WPI formula, however, would not reliably save HELP debtors money. WPI has been below inflation indexation levels just four times in the last 25 years. Two of these four are the high indexation years of 2022 and 2023, but these do not reflect the normal relationship between the two indexes.

WPI is usually higher than CPI because workers seek inflation-compensation wage rises plus real wage increases. The COVID lockdown period suppressed both CPI and wage levels. Wages took time to catch up after sudden inflation during the post-lockdown economic recovery. The latest wages figures show they are now again above inflation ^[21]

Source: Australian Taxation Office, Australian Bureau of Statistics. Read more: HECS-HELP loans have become unfair for women but there is a way to fix this ^[22] A fixed indexation cap The accord’s proposed “lower-of inflation or wages” indexation policy can deliver savings to student debtors in specific circumstances. These occurred recently, but are already passing into history. A sustained period of simultaneous high inflation and high wage increases seems unlikely right now but happened in the 1970s. If it happened again student debt indexation under an inflation-wages alternative policy could remain high for years. Government bond rates ^[23] are also increasing again. The inherent variability of the economic indicators suggested as CPI alternatives makes them imperfect solutions to the indexation problem. Students and student debtors need to know their loan balances will not increase in unpredictable ways. The government needs to settle indexation as an issue now and for the future. This is where a lower-of the CPI or 4% indexation system comes in. This would create certainty about future indexation ranges. While 4% exceeds the long-term indexation average, a lower rate might not win support from a fiscally-constrained government. In most of the last 25 years a 4% maximum would have cost the government nothing compared to the current CPI system. It is a cheap solution to a politically expensive problem. Read more: The 7 new graphs that show inflation falling back to earth ^[24] The politics of student debt indexation This period of high inflation has shown that the politics of student debt have changed. Since the last time indexation exceeded 5%, more than 20 years ago, the number of people with a HELP debt has nearly tripled, to just under 3 million. Almost all of them are citizens entitled to vote. The Universities Accord final report’s recommendation to significantly increase enrolments ^[25] would also push up HELP debtor numbers, making them an even larger and more powerful voting constituency. A 4% indexation maximum would not entirely solve the political problem: 3.9% indexation in 2022 started the current wave of complaints. But the lower of the CPI or 4% would reassure current student debtors and future borrowers that indexation will never be worse than 4% and will usually be much less.