Australia student debt relief proposals ‘regressive’

Scrapping indexation and raising repayment thresholds for student debt would be “regressive” because taxpayers of modest means would end up footing more of the bill for better-heeled graduates, Australian bureaucrats have warned.

In a submission to a Senate committee, the Department of Education argues that “even comparatively minor” changes to repayment thresholds can come at a significant cost to the budget – and therefore taxpayers – because the amount of accrued student debt is enormous.

“Funding for income-contingent loans is complex and must balance financial sustainability and value for money with the need to ensure fairness and equity,” it says. “In a restricted fiscal environment, government funding [must be] used in a way that meets both of these needs.”

Prepared jointly with the Department of Employment and Workplace Relations, the submission warns of “perverse outcomes” from a Greens bill to freeze outstanding debt and raise the repayment threshold to median wage level.

While the departments have not modelled the impacts of the changes, they estimate that the proposals would cost the government more than A$2 billion (£1.1 billion) over the next four years – and some A$9 billion in “ongoing revenue effects” – leaving taxpayers shouldering “a greater part” of higher education costs.

“Australians with higher education qualifications [have] higher average incomes than Australian taxpayers overall,” the submission points out. “This means that many Australians with lower incomes are, through their taxes, subsidising the cost of higher education for high-income individuals without realising any of the direct individual benefits…themselves.

“While this is inevitable to a certain degree, any consideration of how higher education is funded should keep this…in mind.”

The proposals could also disadvantage debtors by discouraging them from earning more than the median salary or making voluntary repayments to reduce their debt balances. Outstanding student debt can affect people’s eligibility for home loans, the submission points out.

“It is…in individual students’ interest to repay their loans quickly; but changes to thresholds essentially make payments more discretionary. The consequence of changing thresholds may make the adverse effects of these debts worse for debtors, not better.”

Some submissions to the committee have advocated basing indexation not on the consumer price index (CPI) – now at a 33-year high of 7.8 per cent – but on economic indicators that are currently lower, such as wage growth or the Reserve Bank of Australia cash rate.

But the departments’ submission says CPI is tipped to fall back to 3.2 per cent by late next year. It says CPI-based indexation has rarely exceeded 3 per cent over the past decade, falling as low as 0.6 per cent in 2021.

A major Productivity Commission report has proposed that the government could use either CPI or real wage growth as the basis for indexation, choosing whichever measure is lower in any given year. Others suggested indexation mechanisms include the government’s 10-year bond rate.

Australian National University policy expert Andrew Norton pointed out that both the bond rate and the cash rate had often exceeded CPI. “There is a case for just riding out the…indexation controversies of this current inflationary spike,” he blogged.

“The Greens proposal to abolish indexation could easily lead to offsetting savings that would make things worse overall for people seeking to further their education, such as tighter caps on tuition subsidies and stricter borrowing limits.”

john.ross@timeshighereducation.com