HECS and inflation? Graduates have no good reason to complain

HELP debtors repay only 1 per cent of their income each year.

No-one can blame students and graduates who have a hefty HELP loan for their growing alarm about the impact of inflation on their debt.

HELP is the Higher Education Loan Program, more commonly known to most as HECS, and the loans – which can be for university or vocational diploma study, paying student amenity fees, or doing overseas study as part of a course – have a concessional interest rate equal to the consumer price index.

Effectively it's a zero real interest rate which means the value of the loan principal (in terms of buying a basket of goods) does not rise. And in the low inflation environment of the past three decades the impact of interest on HELP loans has been little noticed.

Not so now. The current level of annual inflation – 7 per cent according to the consumer price index – is above home mortgage rates and causing understandable alarm for those looking at their HECS debt balance going up.

The Greens have introduced a bill to scrap the indexation of HELP debt to the CPI – meaning that the nominal value of the debt would never rise.

The National Union of Students has joined in the call to freeze HELP indexation.

Is there really a case for this? The answer is no, and to justify this position the first thing to consider is the difference between a HELP loan and a normal loan.

The major difference is in the rate of repayment. In a normal home mortgage the repayment rate is directly related to the interest rate. If interest rates rise then so will repayments, which puts the squeeze on people in times, like now, when rates are rising.

This is not the case with a HELP loan, for which the repayment rate is linked to the loan holder’s taxable income. The current repayment threshold is an annual taxable income of $47,014 and, at this level, HELP debtors repay only 1 per cent of their income each year. Repayments rise on a sliding scale up to 10 per cent when taxable income reaches $137,898. The key point is that rising interest rates put no extra repayment pressure on those with HELP loans.

But what about that 7 per cent rate of indexation which will boost the amount owed on HELP loan by 7 per cent this year? Don’t forget that wages will also broadly adjust to the inflation rate. When the amount you owe rises because of inflation, so will wage levels in the economy, meaning that the real value of the debt is pretty much unchanged.

True, most wage earners won’t see a 7 per cent rise this year. But over the longer term – and the longer term is what matters when thinking about HELP debt – the adjustment will be there.

What if you lose your job? That’s a disaster if you hold a normal mortgage but not so with a HELP loan. If your earnings fall below the income threshold you won’t repay anything on your HELP loan in that year.

If you accept that students should pay a contribution towards the cost of their tertiary education then paying through a HELP loan is a very fair way to do it. It has a very strong safety net for those who are not able to make their way in the job market. In fact if you never earn above the threshold income during your life, you will never repay anything on your HELP debt. This is actually a public policy problem given that some well-off graduates never work but live off income earned by their partners.

That is not to say that students and graduates don’t have cause for complaint about how the university fee system works. Some students end up with debt for a course that doesn’t help their ultimate career which they wish they’d never done.

This is a particular problem for school leavers, who don’t have HECS debt at the front of their minds when they enrol for a university course. Ideally, they would think about whether it’s really the course they want to do, and if they are unsure, take a gap year to consider their study and career path rather then incur needless debt.

Another valid gripe would be that the Morrison government reduced the average government contribution to the cost of subsidised university degrees from 58 per cent to 52 per cent, meaning that students pay more. The burden particularly fell on those doing arts, law and business degrees which now have fees of over $15,000 a year – way more than these courses cost a university to deliver. These students are being forced to give a large subsidy to others.

These are well-founded complaints which the federal government’s Universities Accord review should consider. But, in the meantime, stop blaming HELP.