You don’t pay the tuition fee upfront – the government pays the university on your behalf, and you repay the government. But, unlike any commercial loan you’ll ever get, when you to have start repaying, and the size of your repayment, depend on how much you’re earning. So, in principle, you should never be paying more than you can afford.
Loading
You don’t pay interest on the loan, but the outstanding balance is indexed to the rate of inflation – which, to an economist’s way of thinking, means you’re paying a “real” interest rate of zero.
If you never earn enough to be able to repay the loan – say because you become a monk – you never have to pay the loan back. That’s by design, not accident.
Trouble is, successive governments have not only made the scheme less generous, the post-COVID inflation surge has added greatly to people’s HECS debts. Debts have become so big they reduce the size of the home loans banks are willing to give graduates.
Worse, in the name of encouraging young people to take supposedly “job-ready” courses such as teaching, nursing and STEM (science, technology, engineering and maths), in 2021 the Morrison government reduced their annual tuition fees, whereas fees for courses such as business, law and the humanities were greatly increased.
Fortunately, this half-brained scheme did little to change students’ choices, but did mean abandoning the previous arrangement in which the fees for various courses were geared roughly to the size of the salaries those graduates were likely to earn.
The cost of an arts degree is now about $17,000 a year, or a massive $50,000 for the full three years. So it’s people who have studied the humanities who now have debts quite out of whack with their earning ability. Smart move, Scomo!
Albanese’s 20 per cent cut in debt levels will do little to fix this crazy misalignment of fees with future earning potential. The cut will have a cost to the budget of about a huge $16 billion in theory, but more like $11 billion when you allow for all the debts that were never going to be repaid anyway.
By making it a percentage cut rather than a flat dollar amount, too much of the benefit will go to highly paid doctors and lawyers. And, in any case, of all the young adults having trouble with the cost of living in recent years, those on graduate salaries are hardly the most deserving.
On the other hand, at a time when, justifiably, the young feel the system has been stacked against them, I can’t be too disapproving of Albo’s flashy measure to help keep the younger generation’s faith that, in the end, the democratic process will ensure most age groups get a reasonable shake.
Loading
The young are right to feel bitter about the way earlier generations have enjoyed the ever-rising value of their homes while allowing the cost of home ownership to become unreachable for an ever-growing proportion of our young. And that’s before you get to other features of our tax and benefits system that favour the old.
Thankfully, the government is making the rules for HECS repayments much less onerous, making them work the same way as the income tax scale. The minimum threshold for repayments will be raised from income of $56,000 a year to $67,000. Your income between $67,000 and $125,000 will require a repayment of 15 per cent, and 17 per cent on income above that.
This will yield significant savings to those with debts. But, of course, the lower your repayments, the longer it will take to clear your debt and the more your outstanding balance will be indexed for inflation.
The government’s changes offer justice of a kind, but the rough and ready kind.
Ross Gittins is the economics editor
Ross Gittins unpacks the economy in an exclusive subscriber-only newsletter. Sign up to receive it every Tuesday evening.
