On 1 June each year, Australian student loans are indexed for inflation. In 2023, inflation will rise and the indexation rate will rise to 7.1%, the highest since 1990.
Without policy changes this year, student loan balances would increase by 4.7%.
The Federal Government has announced plans to support students, apprentices and trainees following continued pressure from communities to change the way debt indexing is done.
How will student debt change?
The announcement is part of the 2024 federal budget, which was released on May 14. A budget has two components.
First, the price index for student loans is determined based on the lower of the Consumer Price Index (CPI), which measures inflation, or the Wage Price Index (WPI), which measures hourly wages for the same job.
Secondly, in a surprising move, the government plans to backdate the new system until 2023. The government estimates that around A$3 billion of inflation-linked debt will be canceled and around three million Australians will be saved.
Since the WPI in 2023 was lower than the CPI, the indexation rate for 2023 will be retroactively reduced from 7.1% to 3.2%. Based on data from the Australian Taxation Office, people with average debt levels will have their debts reduced by about $800 in 2023.
The changes apply to higher education HELP loans, vocational education VET student loans and Australian Apprenticeship Support loans. Student startup loans and predecessor income support loans will also be eligible.
Any changes would need to pass Congress.
Mick Tsikas/AAP
is this a good idea?
Although several “lower of two indicators” indexing systems have been proposed, the idea of choosing the lower of the CPI or WPI originates from the University Agreement Final Report. This is a wide-ranging review of the government's higher education policy, announced in February.
The agreement report advocated a cap on WPI
Ensure that the indexation of HELP debt does not outpace wage growth and that debtors' repayment ability does not decline overall.
However, while the government's proposals would reduce the fiscal pain of price indexation in 2023, the WPI is not the best long-term alternative to the CPI.
Uncertainty remains as to how much the price index will rise in the future, including on June 1, 2024.
fine print
Student loan indexing uses a strange formula that includes two years of CPI data prior to each March quarter. The government's 3.2% figure for his WPI indexation in 2023 uses his same two-year indexation calculation that is currently used for the CPI.
The March quarter WPI data needed to calculate the June 1, 2024 indexation will not be released until May 15. Until then, the exact WPI indexation rate for 2024 will not be known. However, if WPI rises at a similar rate to his March 2024 quarter, in the second half of 2023, the WPI rate would be around 4.3%.
As 4.3% is lower than the CPI rate of 4.7%, the WPI rate will take priority under the government's new policy.
A WPI indexation of 4.3% would be more beneficial for those with student debt than the current system. However, the 4.3% figure remains the highest indexation level since 5.3% due to GST in 2001 (after last year's 7.1% was reduced to 3.2%).
When will WPI de-index?
Adding to these complexities, the WPI has been lower than the CPI only four times since 2000.
All four of these cases reflect unusual circumstances. At the beginning of this century, inflation rose due to his then newly imposed GST of 10%. Overseas conflicts and post-lockdown demand-supply imbalances have led to the current spike in inflation.
WPI is likely to be lower than CPI at the beginning of an inflationary period. Workers respond to inflation by demanding higher wages, but the effects are delayed. Salaries and wages are typically reviewed based on set schedules, such as annual minimum wage incidents, annual employer pay reviews, and multi-year enterprise agreements. These wage-setting practices create a time lag between the CPI and WPI.
However, during long periods of inflation, compensation for wage increases and real wage growth will cause the WPI to catch up and overtake the CPI.
This occurred (by a small margin) in the December 2023 quarter of this financial year. Compared to the previous year, WPI increased by 4.2% and CPI increased by 4.1%.
Diego Fedele/AAP
For maximum rate
The amendments could give more certainty to borrowers as the government's indexation policy moves through parliament. This includes the possibility of introducing a fixed maximum indexation rate to reduce the risk of student debt ballooning.
I previously suggested that the price index should be the lower of the CPI or 4%.
An indexation system that uses the lower of two variable indexation rates runs the risk that both interest rates will be higher for an extended period of time. The maximum index rate is not.
Anyone considering taking out student loans or estimating how long it will take to pay off their current loans should know that the index never exceeds 4% and is usually less. Please rest assured.
Welcome news, but bigger questions remain
For the three million Australians with student debt, a retrospective index reduction will be welcome news.
From the government's perspective, indexed revenues in 2023 will still be higher than the 2000-2021 indexed average of 2.5%. So, in this way, this is a good compromise between competing considerations.
However, the government's 2023 amendments will leave students vulnerable at a time when both the CPI and WPI are high.
Replacing WPI with a fixed maximum indexation rate means that the government's student loan indexation policy solves not only past problems, but also future problems.
