Student debt shock: Australians with HELP loans face biggest hike in decades
Millions of Australians are extremely concerned about their level of student debt with rates rising to 7.1%, according to new research by Finder.
A Finder survey of 305 Australians with student debt found 1 in 2 (54%) are slightly or extremely concerned about their ability to repay their interest-free loan.
A whopping 14% don't think they'll ever be able to pay off their debt.
That's more than 420,000 people who have no confidence that they will be able to pay off their student loan.
In 2021–2022, outstanding HELP debt rose to just over $74.3 billion up from $68.7 billion in 2020–2021.
Graham Cooke, head of consumer research at Finder, said Australian graduates could find themselves with more and more student debt each year.
"Inflation is causing headaches for almost all Australians, and former students are no exception.
"Our high inflation rate means more interest will be charged against student debt than we have seen in decades – no doubt the effects will be significant.
"Many Australians with plans to get on the property ladder or take out any sort of loan in the future will find it extremely difficult as lingering student debt is a massive liability," Cooke said.
Two thirds of Australians (74%) have never had student debt, while 11% have already paid it off.
Indexation rates set to rise to 7.1% on 1 June, 2023
According to the Australian Tax Office (ATO) 15% of Australians – equivalent to more than 3 million people – are riddled with student debt. This is up from 2.9 million in 2020–2021.
Of those in debt, 11% have between $5,000 and $40,000, 3% have between $40,000 and $100,000, and just 2% have under $5,000.
On 1 June each year, student loans are indexed to the rate of inflation on the loan that has remained unpaid for more than 11 months.
The rate for the 2021–2022 financial year was 3.9%, meaning on an average debt of $24,771, last year's indexing would have added $966 on top of what was already owed.
With rates set to rise to 7.1% on 1 June for the 2022–2023 financial year – the highest we've seen since it was 8% in 1990 – those same people will see an extra $793 added to their loan this year, in addition to their yearly repayments.
Those with higher HELP debt of $40,000 will be looking at an extra $1,280 added to their loan.
Cooke said the student debt crisis has left many Australians feeling hopeless, but it shouldn't send you into a panic.
"Whilst it may seem all doom and gloom, student debt is the least crucial loan you'll ever have.
"If you have some spare cash, putting it towards repayments could minimise that debt in the long-run," Cooke said.
Economists split on whether the government should intervene
In April's Finder RBA Cash Rate Survey™, the panel was largely split on whether the government should intervene to pause the indexation for this year to help ease the cost of living for young Australians.
More than 1 in 2 who weighed in (55%, 16/29) believe the government should not pause the indexation, while 45% (13/29) believe they should.
Panellists who believe the government should not pause the indexation cited that the government should not favour certain sectors over others, and that those with student debts do not need support like other sectors of the community.
Others cited that it would hurt the government budget in the long term.
Stella Huangfu from the University of Sydney said there is a trade-off if the government were to pause indexation rates.
"The short-term gain is that this would ease young Australians' debt burden, but the long-term cost is it would worsen the government budget. In my opinion, the long-term cost dominates the short-term benefit," Huangfhu said.
Panellists who believe the government should pause indexation cited that those starting out in their careers required the most support, or that the indexation should be matched to the cash rate and not the CPI.
Leanne Pilkington from Laing+Simmons said the outset of most peoples' career is when they need the most support.
Mala Raghavan from the University of Tasmania agreed.
"Cost pressures are more acute for young Australians. Therefore, alleviating the cost of living pressures requires easing financial stressors on this group," Raghavan said.
Last year a bill was introduced to pause indexation and increase the repayment threshold. A Senate inquiry looking into the proposal rejected the bill in April.
*Further expert commentary below
Case study example
A 25-year-old graduate who made a compulsory repayment and voluntary contribution of $2,969 in the 2021–2022 financial year to their outstanding $28,287 loan, saw $1,103 added to their loan on 1 June 2022. Therefore, their loan only decreased by $1,866. This student will see $1,876 added to their outstanding $26,421 loan this financial year, despite making a predicted compulsory payment of $3,375 – their loan decreasing by only $1,499.
| Year | Voluntary repayment | Compulsory repayment | Loans taken out | Indexation charged | Rate | Loan indexed (older than 11 months) | Running Balance |
|---|---|---|---|---|---|---|---|
| 2017 | $0 | $0 | $6,542 | $49 | 1.50% | $3,271 | $6,591 |
| 2018 | $0 | $0 | $5,537 | $167 | 1.90% | $8,780 | $12,295 |
| 2019 | $0 | $0 | $149 | $224 | 1.80% | $12,443 | $12,668 |
| 2020 | $0 | $0 | $10,984 | $303 | 1.80% | $16,833 | $23,955 |
| 2021 | $0 | $0 | $4,164 | $169 | 0.60% | $28,118 | $28,288 |
| 2022 | $1,500 | $1,469 | $0 | $1,103 | 3.90% | $28,288 | $29,391 |
| 2023 | $0 | $3,375 | $0 | $1,876 | 7.10% | $26,422 | $28,298 |
| 2024 | - | - | - | - | - | $24,923 | - |
| Total | $1,500 | $4,844 | $27,376 | $3,891 | N/A | N/A | $28,298 |
Source: Finder analysis of a 25-year-old Australian graduate. This student finished their studies in September 2020 and started full-time work in June 2021. On 1 June 2023 they will be indexed 7.10% on the accumulated part of their loan which has remained unpaid for more than 11 months, in this case – the whole amount, as they have not taken out any new loans since finishing their studies in 2020. As you can see in previous years, while studying, this student was only indexed on part of the loan that was older than 11 months.
It is important to note the indexation is applied prior to compulsory repayments and voluntary contributions being deducted. Therefore, it is not factored into the loan that has been indexed in 2022, and will not be reflected in the running balance, but is a reflection of the repayments and contributions made during that financial year, and will be applied to the 2023 loan that is indexed.
Similar to the point above, the compulsory repayments made in 2023 will be deducted once indexation has been applied to the remainder of the loan, and is therefore not factored into the running balance of the 2023 year.
| Are you concerned about your ability to repay your student debt? | |
|---|---|
| Yes, I'm slightly concerned | 32% |
| Yes, I'm extremely concerned | 22% |
| I don't think I'll ever be able to repay my student debt | 14% |
| No, I'm not concerned | 32% |
| Source: Finder survey of 305 respondents with a student loan, February 2023 |
| How much debt do you have in student loans (e.g. HECS-HELP or international student debt)? | |
|---|---|
| Under $5,000 | 2% |
| $5,000 – $10,000 | 3% |
| $10,000 – $20,000 | 3% |
| $20,000 – $40,000 | 5% |
| $40,000 – $60,000 | 2% |
| $60,000 – $100,000 | 1% |
| $100,000 – $150,000 | 0% |
| More than $150,000 | 0% |
| I have never had student debt | 74% |
| I have already paid off my student debt | 11% |
| Source: Australian Tax Office. Rounded to the nearest %. |
| Year | Indexation rate | Indexation applied to average HELP debt ($24,771) | Indexation applied to $30,000 HELP debt | Indexation applied to $40,000 HELP debt | Indexation applied to $50,000 HELP debt |
|---|---|---|---|---|---|
| 2022 | 3.9% | $966 | $1,170 | $1,560 | $1,950 |
| 2023 | 7.10% | $1,759 | $2,130 | $2,840 | $3,550 |
| Source: Finder analysis. Figures rounded to the nearest dollar. |
*Further commentary from panellists in Finder's RBA Cash Rate Survey
Panellists who believe the government should not pause the indexation
Stephen Miller, GSFM: "University graduates are highly paid and already heavily subsidised. To give them assistance would be highly regressive."
Nicholas Frappell, ABC Refinery: "Recipients of HECS have benefited from an extended period of very low indexation. It can't really be asymmetrical."
Jakob Madsen, University of Western Australia: "They have to get used to inflation - it is normal to have inflation."
Craig Emerson, Emerson Economics: "It favours higher-income families and is therefore inequitable."
Sean Langcake, BIS Oxford Economics: "These are income contingent loans, so the repayments are less punitive than other loans. The CPI goes through peaks and troughs - no concessions were made when the CPI plummeted through the pandemic."
Evgenia Dechter, UNSW: "The government should implement policies which are not sector specific."
Nicholas Gruen, Lateral Economics: "Because it's discriminatory. If people suffer from cost of living pressures the government wishes to relieve, it should relieve them on that basis, so as not to waste the resources on people who don't need it."
Panellists who believe the government should pause indexation
Noel Whittaker, QUT: "That's unfair to have the debt indexed at more than the normal lending rate. I think it should be linked to the cash rate."
Mark Crosby, Monash University: "7% is above the mortgage rate, and at a minimum the indexation should reflect other rates in the market, particularly the cash rate."
Angela Jackson, Impact Economics and Policy: "Would be fairer to link the interest rate to implied rates of return on government bonds."
James Morley, The University of Sydney: "It is unusual that indexing to inflation can end up being worse than having nominal interest payments. But here we are. And it seems this could happen more often with low real interest rates. So I think it makes sense to restructure HECS debts to have some nominal interest rather than being indexed to inflation. The nominal interest rate could be set to the long-term inflation rate of 2.5%, implying a zero real interest rate over long periods of time. I presume this was the intent of indexing the debts to CPI in the first place."
