Student debts are set to be slashed in June after legislation passes through parliament.
But experts say the $16 billion debt erasure wiping 20 per cent from each person’s current student loan balance won’t be music to every student’s ears.
Here is everything you need to know about the looming relief for millions.
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Eligible students won’t need to do anything themselves — the Australian Taxation Office (ATO) will automatically process the reduction which will wipe a fifth of each person’s debt on June 1.
HELP, VET Student Loan, Australian Apprenticeship Support Loan and other student support loan debts are all eligible for the reduction.
The reduction is a “one-off” and Australia Institute senior economist Jack Thrower told 7NEWS.com.au that the reduction “will just apply for debts as they stand at June this year.”
“People talk about how indexation gets applied to your debt before your repayments come in, but this reduction will happen before that indexation.”
How will the changes affect repayments
The average HECS debt for someone in their 20s is currently about $31,500.
“They will get about $6300 off if there is a 20 per cent reduction,” Thrower said.
For someone with this average sum of debt, who is below the repayment threshold, and who has not made a single repayment, it would take an estimated nine years of annual indexations to bring the HECS balance back to where it was before the reduction.
That projected example is based on indexation rates within the RBA’s ideal bandwidth of about 2.5 per cent, rather than “those huge indexations that they had to sort of had to reverse with the indexation credits,” Thrower said.
Since then, the indexation method has changed so that it is no longer based solely on inflation, but on whatever is lower out of the inflation rate and the Wage Price Index.
But more changes to repayment rates and the repayment threshold are also expected next month.
Repayment threshold and rate changes
The repayment threshold is set to increase from $56,156 to $67,000 in June, if the Senate agrees to the changes.
Repayment rates will then be based off of any income earned over that figure.
For someone earning $68,000 — which is $1000 above the new threshold — they will only pay 15 per cent of that $1000, which is $150.
For the same earner, under the current set-up, that would be a saving of more than $1200.
That 15 per cent rate goes up to 17 per cent for anyone who starts earning above the next threshold, which is set at $125,000.
Thrower said that both the one-off 20 per cent reduction, and the new repayment rate “is welcomed.”
“Average (student loan) debts for people in their 20s have more than doubled since 2006, and grown a lot quicker than inflation,” he said.
Skewed repayment timelines
Current data suggests the average amount of time needed to pay off a degree is about 10 years, but Thrower said that “the reality is probably even worse” due to the “strange” way that this projected timeline is calculated.
He said that “the average (timeframe) is not just based on people who repaid (their debt) that year, it’s of all student debts that have ever been repaid (within the recorded data)“, meaning recent figures are skewed by historical debts that took less time to pay.
But Thrower said that “this number keeps going up, which is quite worrying.”
The average amount of time needed to pay off a degree had ballooned by about three years since 2006, he said.
“People can talk about how inflation has gone up, but the fact that its actually taking people longer means that these debts are affecting people for a longer period of time, even if you adjust for these things,” he said.
The Department of Education listed “reduced income or career breaks” as two of the “many factors that can affect how long it takes to repay a loan.”
“While you may pay back your debt over a slightly longer timeframe, you will only need to make higher compulsory repayments when your income reaches a point where you can afford to do so.”
‘Doesn’t deal with the source of the problem’
In recent years, students fearing what appeared to be exponentially increasing indexation rates borrowed money to pay off HECS debts.
For these people, and for the new students yet to accumulate their massive debts, the one-off 20 per cent reduction in June will be of no benefit.
But Thrower said that — just like the indexation credits of recent years — neither these credits, nor the impending 20 per cent increase “deal with the source of the problem, which is that degrees are too expensive.”
“Degrees have become a lot more expensive over time, especially since HECS started,” he said.
“I believe it was something like $1800 per year for any degree when HECS started, and that’s grown a lot quicker than inflation for most degrees. So now we’re seeing around $50,000 for a three-year arts degree.
“These expensive degrees are why these debts are getting so big, and this one change from the government (the 20 per cent reduction) isn’t reversing that.”
Discussions were had during the University Accord — a 12-month review into the higher education system — about reversing the degree fee price increases brought forward under the Morrison government in 2021.
Some degrees doubled in cost for students, in a move the government said would drive students into STEM and other in-demand disciplines, but The Australia Institute analysis shows that only 1.5 per cent of students actually swapped their field of study.
But details about the discussed reversal of Morrison’s Job-ready Graduates scheme were not included in the final Accord report and have not been formally floated.
