Last week the Government secured the required votes in the Senate to pass the Higher Education Support Legislation Amendment (Student Loan Sustainability) Bill 2018. It now looks likely the Government will succeed in passing its proposed changes through the Senate when parliament sits again in August. The amendment will replace the existing HECS-HELP repayment schedule with a new schedule lowering the income at which repayments commence from $55,874 to $45,000.
The changes have been predictably unpopular with students and millennials. Junkee a left-leaning youth news site responded to the news with student focused articles such as, ‘We Asked 7 Students What The HECS Changes Mean To Them’. (Spoiler Alert: they all hated the changes and complained that graduates would now be forced to live in poverty).
The HECS-HELP system requires that graduates repay their HECS-HELP debt via the tax system – effectively increasing the amount of tax they pay. If, in a financial year the taxpayer earns below the first threshold, they are not required to make repayments in that financial year. Under the current system graduates who work in lower paying jobs have avoided repaying their debt. This situation has removed the investment risk of picking certain degrees and has moved that risk to the taxpayer. Students who choose degrees in fields that are over saturated with graduates or fields with limited market value have little fear of ever being required to pay for their education. Those degrees are ultimately paid for by the taxpayer – some of whom never had the privilege of attending a university.
Many have argued that imposition of repayments on lower paid graduates will prove overly burdensome and cause financial hardship; however, the proposed change will reduce the effective marginal tax rate graduates experience when they are required to start repayments.
The introduction of a $45,000 first repayment tier will make those affected slightly worse off. But, it will also make the commencement of repayments more gradated and less dramatic. The new threshold will start at 1% of $45,000 making the weekly repayment just $8.65. This contrasts with the current HECS-HELP schedule that kicked in at 4% of $55,874 making the weekly repayment a significant $42.98.
Unlike income tax, HECS-HELP repayments aren’t progressive, so as one climbs up the schedule tiers the new rate is payable on a graduate’s entire taxable income. Table 1 shows that under the proposed new schedule the effect on after-tax income will be less significant than the current schedule due to the more graduated introduction of repayments.
Table 1: Comparison of after-tax income before and after proposed changes to the HECS-HELP Threshold
|Income||Income below existing HECS-HELP threshold
|Income above existing threshold HECS-HELP
|Income below proposed new HECS-HELP Threshold
|Income Above Proposed new HECS-HELP Threshold
|Income Tax + Medicare||$10522||$10823.53||$6899.50||7072|
|After -Tax Income||$44,478||$42,815||$37600.50||$37,478.00|
The effect of having a relatively high first-tier on the repayment schedule and a large increase of in university enrolment numbers since the 2012 introduction the demand-driven model of university funding has made the existing HECS-HELP scheme unsustainable. The total amount of outstanding HELP debt has increased from $25 billion dollars in 2012 to $54 billion in 2018 (shown in figure 1). Most alarmingly the proportion of outstanding debt not expected to be repaid (DNER) is estimated to be 25% (this figure drops to 18% if vocational loans are removed). If these forecasts are correct then the Australian taxpayer will be required to cover $13 billion dollars in unpaid student loans, the cost of funding the ABC for 13 years. This is an unjust burden on the Australian taxpayer.
Figure 1: Total amount of outstanding HELP debt 2005–06 to 2016–17 financial years ($m) (Source: ATO, Taxation Statistics 2015–16, published 27 April 2018.)
The HECs system was one of the great achievements of the Hawke-Keating era. It made possible the great expansion of Australia’s university sector and the increased numbers of university students in the last 30 years. A university education is no longer reserved for an elite few, but has been made accessible to the general population. While, many might yearn for the good old days of Whitlam’s free education those doing the yearning may never have got into a university in the first place under the old system. If the university sector is to continue to expand it will need to be sustainable. Graduates should be expected to repay their student loans and the risk associated with investing in higher education should lay with the student as ultimately, it is the student who benefits from their studies and the potential higher income they can earn. Education is normally an excellent investment; but like all investments one must weigh the risks. For too long the taxpayer has borne that risk.
Can you read more of Justin's writing at www.justinscampbell.com