The Times Australia
The Times World News

.

The good news is the government plans to cancel $3 billion in student debt. The bad news is indexation will still be high

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

Every year on June 1, student debt in Australia is indexed to inflation. In 2023, high inflation pushed the indexation rate to 7.1%[1], the highest since 1990.

This year, if there is no policy change, student debt balances will be increased by 4.7%[2].

After sustained community pressure[3] to change the way debts are indexed, the federal government has announced plans[4] to help students, apprentices and trainees.

How will student debts change?

This announcement is part of the 2024 federal budget on May 14. It has two components.

First, indexation for student loans will be based on whichever is lower: the Consumer Price Index (CPI), which measures inflation, or the Wage Price Index[5] (WPI), which measures hourly wage rates in the same job.

Second, in a surprise move, the government will backdate the new system to 2023. The government estimates about A$3 billion in indexation debt will be cancelled, helping about 3 million Australians.

The WPI was lower than the CPI in 2023, so the 2023 indexation rate would be cut retrospectively from 7.1% to 3.2%. Based on Australian Taxation Office data, a person with average debt levels in 2023 would see their debt cut by about $800.

The change will apply to higher education HELP loans[6], vocational education VET Student Loans[7] and Australian Apprenticeship Support Loans[8]. The Student Start-up Loan[9] and a predecessor income support loan[10] are also expected to be covered.

The changes will need to go through parliament.

Education Minister Jason Clare speaks at the despatch box in the House of Representatives.
The changes, announced by Education Minister Jason Clare, still need parliamentary approval. Mick Tsikas/AAP

Is this a good idea?

While several “lower of two indicators” indexation systems have been suggested[11], the idea of choosing the lower of the CPI or WPI comes from the Universities Accord final report[12]. This was the government’s wide-ranging higher education policy review released in February.

The accord report argued a WPI cap

will ensure that the indexation of HELP debts no longer outstrips the growth in wages and the servicing capacity of debtors does not go backwards overall.

But while the government’s proposal will ease the financial pain of 2023 indexation, the WPI is not the best long-term alternative to the CPI.

It still leaves uncertainty about how high future indexation could go, including for June 1 2024.

The fine print

Student loan indexation uses a strange formula[13] that includes CPI data from the two years prior to each March quarter. The government’s 3.2% figure for 2023 WPI indexation uses the same two-year indexation calculation as is currently used for the CPI.

The March quarter WPI data needed to calculate June 1 2024 indexation is not released until May 15. Until then, we do not have an exact WPI indexation rate for 2024. But if the WPI increases at a similar rate in the March 2024 quarter as it did in the second half of 2023, the WPI rate will be around 4.3%.

As 4.3% is lower than the CPI rate of 4.7%, the WPI rate would prevail under the government’s new policy.

A 4.3% WPI indexation would be more beneficial than the current system for those with student debt. But 4.3% would still be the highest indexation level since a GST-driven 5.3% in 2001 (after last year’s 7.1% is cut to 3.2%).

When would WPI lower indexation?

On top of these complexities, the WPI has only been lower than the CPI four times since 2000.

All four of those cases reflected unusual circumstances. Early this century, the then new 10% GST caused inflation to increase. Overseas conflicts and post-lockdown imbalances in demand and supply have triggered the current inflationary spike.

The WPI is likely to be below the CPI early in an inflationary period. Workers respond to inflation with demands for higher wages, but effects are delayed. Salaries and wages are typically revisited on set schedules, such as the annual minimum wage case[14], yearly employer pay reviews and multi-year enterprise agreements[15]. These wage-setting practices create a time lag between the CPI and WPI.

But during periods of prolonged inflation, compensating wage increases plus real wage growth cause the WPI to catch up with and overtake the CPI.

This happened (by the smallest of margins) in the December 2023 quarter of this financial year. Compared with a year earlier, the WPI was up 4.2%[16] and the CPI 4.1%[17].

People walk along Swanston Street in Melbourne. Two young women stop at a crossing, carrying a shopping bag.
Student debts have climbed thanks to current inflation spikes. Diego Fedele/ AAP

The case for a maximum rate

As the government’s indexation policy moves through parliament, amendments could give borrowers more certainty. This includes the possibility of introducing a fixed maximum indexation rate to reduce the risk of student debt blowing out.

I have previously proposed[18] indexation should be the lower of the CPI or 4%.

Any indexation system that uses the lower of two variable indexation rates runs the risk both will be high for significant periods of time. A maximum indexation rate does not.

People considering taking out a student loan, or estimating how long repaying their current loan will take, could be reassured indexation will never be more than 4% and will usually be less.

Welcome news but the bigger problem remains

Retrospective lowering of indexation will be welcome news for the 3 million Australians with student debt.

From a government perspective, their 2023 indexation revenue will still be above the 2.5% indexation average between 2000 and 2021. So in this way, it is a good compromise between competing considerations.

But the government’s fix for 2023 leaves students vulnerable to times when the CPI and the WPI are both high.

Replacing the WPI with a fixed maximum indexation rate would mean the goverment’s student loan indexation policy solves future problems as well as past ones.

References

  1. ^ indexation rate to 7.1% (www.ato.gov.au)
  2. ^ increased by 4.7% (www.abc.net.au)
  3. ^ community pressure (theconversation.com)
  4. ^ has announced plans (theconversation.com)
  5. ^ Wage Price Index (www.abs.gov.au)
  6. ^ HELP loans (www.studyassist.gov.au)
  7. ^ VET Student Loans (www.dewr.gov.au)
  8. ^ Australian Apprenticeship Support Loans (www.apprenticeships.gov.au)
  9. ^ Student Start-up Loan (www.servicesaustralia.gov.au)
  10. ^ predecessor income support loan (guides.dss.gov.au)
  11. ^ have been suggested (andrewnorton.net.au)
  12. ^ Universities Accord final report (www.education.gov.au)
  13. ^ uses a strange formula (www.legislation.gov.au)
  14. ^ annual minimum wage case (www.fwc.gov.au)
  15. ^ multi-year enterprise agreements (www.fwc.gov.au)
  16. ^ WPI was up 4.2% (www.abs.gov.au)
  17. ^ the CPI 4.1% (www.abs.gov.au)
  18. ^ previously proposed (theconversation.com)

Read more https://theconversation.com/the-good-news-is-the-government-plans-to-cancel-3-billion-in-student-debt-the-bad-news-is-indexation-will-still-be-high-229284

Times Magazine

Understanding ITIL 4 and PRINCE2 Project Management Synergy

Key Highlights ITIL 4 focuses on IT service management, emphasising continual improvement and value creation through modern digital transformation approaches. PRINCE2 project management supports systematic planning and execution of projects wit...

What AI Adoption Means for the Future of Workplace Risk Management

Image by freepik As industrial operations become more complex and fast-paced, the risks faced by workers and employers alike continue to grow. Traditional safety models—reliant on manual oversight, reactive investigations, and standardised checklist...

From Beach Bops to Alpine Anthems: Your Sonos Survival Guide for a Long Weekend Escape

Alright, fellow adventurers and relaxation enthusiasts! So, you've packed your bags, charged your devices, and mentally prepared for that glorious King's Birthday long weekend. But hold on, are you really ready? Because a true long weekend warrior kn...

Effective Commercial Pest Control Solutions for a Safer Workplace

Keeping a workplace clean, safe, and free from pests is essential for maintaining productivity, protecting employee health, and upholding a company's reputation. Pests pose health risks, can cause structural damage, and can lead to serious legal an...

The Science Behind Reverse Osmosis and Why It Matters

What is reverse osmosis? Reverse osmosis (RO) is a water purification process that removes contaminants by forcing water through a semi-permeable membrane. This membrane allows only water molecules to pass through while blocking impurities such as...

Foodbank Queensland celebrates local hero for National Volunteer Week

Stephen Carey is a bit bananas.   He splits his time between his insurance broker business, caring for his young family, and volunteering for Foodbank Queensland one day a week. He’s even run the Bridge to Brisbane in a banana suit to raise mon...

The Times Features

Metal Roof Replacement Cost Per Square Metre in 2025: A Comprehensive Guide for Australian Homeowners

In recent years, the trend of installing metal roofs has surged across Australia. With their reputation for being both robust and visually appealing, it's easy to understand thei...

Why You’re Always Adjusting Your Bra — and What to Do Instead

Image by freepik It starts with a gentle tug, then a subtle shift, and before you know it, you're adjusting your bra again — in the middle of work, at dinner, even on the couch. I...

How to Tell If Your Eyes Are Working Harder Than They Should Be

Image by freepik Most of us take our vision for granted—until it starts to let us down. Whether it's squinting at your phone, rubbing your eyes at the end of the day, or feeling ...

Ways to Attract Tenants in a Competitive Rental Market

In the kind of rental market we’ve got now, standing out is half the battle. The other half? Actually getting someone to sign that lease. With interest rates doing backflips and ...

Top Tips for Finding the Ideal Block to Build Your Home

There’s something deeply personal and exciting about building your own home. You’re not just choosing paint colours or furniture, you’re creating a space that reflects your lifes...

The Home Buying Process Explained Step by Step

Buying a home is a thrilling milestone, but it can also feel like navigating a maze without a map. With paperwork, finances, and decisions at every turn, understanding the home-b...