Albo's HECS changes: fairer and cheaper, or regressive and expensive?

On Sunday, the federal government decided to "wipe" a few billion dollars' worth of student debt from Australia's Higher Education Contribution Scheme's Higher Education Loan Program (HECS-HELP), in a plan Prime Minister Albanese said would make student loans "fairer and cheaper".

Before getting into the nitty gritty of the changes, a bit of background is important to understand why this has happened. For those not familiar with Australia's higher education system, HECS-HELP basically includes a subsidy for Australian students (we charge international and certain domestic students a lot more), as well as an optional loan if you can't afford – or don't want – to pay upfront. The name is a bit of a mouthful because since its creation in 1989 it has undergone a few reforms, so to avoid confusion I'm just going to call it HECS (its original name).

In normal times, HECS is relatively uncontroversial. That's because HECS isn't your normal loan; no credit checks are necessary, it's interest free, and you don't even have to repay the principal until you earn above a certain threshold, with the real value of the debt preserved through an annual indexation to consumer prices (CPI). In fact, it's such a good deal that it almost always made financial sense to take a HECS loan, regardless of your socioeconomic status, because paying up front would cost you more in terms of the opportunity cost of that money – whether it be paying off other debts, saving for a house, or even building up a share portfolio. That present value calculation became even more one-sided after the government scrapped the up-front payment discount.

By comparison, a student in Ontario, Canada can get a student loan without credit checks but has to pay floating interest of the Prime Rate plus 1.0%, the total of which is currently 8.2%. And unlike HECS, Ontario's loans have no income threshold: you only have six months after you graduate or leave full-time studies before you need to start repaying your loan. Ouch!

The pandemic changed the calculus

However, we're no longer in normal times. The post-pandemic inflation caused the indexation of HECS last financial year to reach 7.1%, so for the first time in decades it made sense to pay off as much of it as possible before the 1 June indexation date. But many people either didn't know, didn't have the cash, or intended to pay it off but were caught out by a quirk in the scheme whereby indexation is set on 1 June each year and processed by the Australian Tax Office (ATO) on 1 July (i.e. in the new financial year). The indexation is only calculated on balances up to 31 May, so anyone who made a contribution after that date would have been indexed on debt they already repaid.

Now, technically, there's nothing inherently wrong with this process; these lags also take place when the debt is first accrued, so while the ATO 'gains' by using 31 May for its calculation date, it 'loses' at the start – a student commencing study in February won't have any of their debt indexed for a full year after it was originally borrowed. Those lags persist throughout a student's study as they accumulate more debt, so they're actually ahead of inflation most of the time.

But the media and politicians don't care about what's technically right or wrong. I'll let the Education Minister, Jason Clare, explain what the government has just done:

"The Universities Accord recommended indexing HELP loans to whatever is lower out of CPI and WPI.

We are doing this, and going further. We will backdate this reform to last year. This will wipe out what happened last year and make sure it never happens again."

Essentially, the 7.1% increase on 1 June 2023 will be reduced to 3.2% (which is what the wage price index, or WPI, was that year) and this year's upcoming increase will be reduced from 4.7% to an even 4%.

The change is great news if you're a current or former student with a HECS debt and currently, or intend, to earn enough to make compulsory payments. Even if you did the smart thing and paid some of it off prior to the 31 May indexation cut-off last year, the government is going to 'make you whole'.

But just because something is good for a group of people – in this case, over three million – doesn't necessarily make it good policy. The government might claim that the debt has been "wiped", but the money had to come from somewhere; there's always a trade-off, and any good policymaker should want the returns on their decision to be higher than the next best use of those resources.

So, let's take a look – is this decision a winner, a stinker, or a bit of both (politics and economics are often at odds)?

The economics of higher education

Governments all over the world subsidise higher education, whether directly (e.g. reduced tuition) or indirectly through some kind of student loan system. That's in part because, to some extent, having an educated population is considered a public good: