Fewer new graduates will start repaying their HELP debt

In the mid-year Budget update, the government predicts that repayments of HELP debt will slow down. Unsurprisingly given recent posts on graduate employment, I think that’s right. Fewer graduates have any significant source of income.

What I have not written about so far is what graduates are paid if they have a full-time job. What the latest graduate employment outcomes data shows is that median starting salaries were essentially the same in 2014 as in 2013, at $52,500 a year (for graduates aged less than 25 in their first full-time job). That means that graduate salaries are going backwards in real terms. The HELP thresholds, however, keep being indexed according to average weekly earnings, which are still going up.

Unless there is a surprising surge in salaries paid to new graduates, this means that the median graduate who completed at the end of 2014 will not make a HELP repayment even if he or she has a full-time job. The slide below has the trends in starting salaries and initial HELP repayment thresholds.

starting salary and threshol

An implication of this is that, at least for younger graduates (older graduates are more likely to already have jobs, or employment histories that get them better-paying jobs*), is that few of them will begin HELP repayments in the months after graduation. Overall, only 42 per cent of the graduating cohort from 2013 have a full-time job, down from 56 per cent in 2007 and 2008. If the median starting salary slips below the initial HELP repayment threshold, fewer than half of that group will make a repayment. This suggests that around one in five new graduates will earn enough to start repaying their HELP debt.

Presumably these trends informed the 2014 Budget decision to lower the initial HELP repayment threshold to $50,638, which would require many more new graduates to start repaying, at the rate of 2 per cent of their income. But it is not clear why the Budget went for a once-off cut to the initial threshold, rather than changing the indexation system from average weekly earnings to the consumer price index. The government proposed this change for much more politically sensitive welfare payments.

Originally, the HECS thresholds were indexed to CPI, but were changed to AWE in 1994. Which it is has major implications for repayment levels. In our doubtful debt report, we showed that if the initial threshold had been indexed to the CPI rather than AWE it would have been $44,836 in 2013-14, rather than its actual figure of $51,309. Although we did not model the other thresholds, using CPI rather than AWE could significantly speed up repayments by bringing people into higher repayment categories earlier in their careers.

* In 2013, graduates aged above 25 or above with previous full-time employment experience had a median salary of $58,000.

  1. This is an important topic and you probably have mentioned it elsewhere, but the implications of the indexation of the minimum threshold are more significant than one might assume when looking at your chart because the HELP repayment scheme applies to total income, not marginal income. Even though HELP thresholds are occasionally referred to as “marginal rates”, they differ from marginal taxation rates because they do not apply only to income earned above that threshold.

    The implication is that someone earning $1 over the minimum threshold repays $2100 off their HELP debt, while someone earning $1 less pays nothing. By indexing the minimum threshold to AWE rather than CPI, we would expect an increased % of graduates in FT employment falling just below the minimum threshold in future years and paying $0 rather than $2100. The impact of changing indexation to the upper thresholds would be much less than the impact on the minimum threshold (at least in terms of doubtful debt).

    Personally, I think the HELP repayment system ought to be based on a genuinely marginal system which kicks in at $50,000(ish) and indexed to CPI. Under the current system one can literally be better off giving money to charity just to get below the minimum threshold (or moving into the next threshold). However, I suspect it is politically more effective to have the current system which is levied on entire income because it looks more benign when it is described as a “marginal rate” of 4%. Kind of like the Medicare levy (and others) look benign when described as a 2% levy.

  2. Peter – Yes, this is an important aspect of HELP’s design. I think it is one reason why its finances are bad but not as bad as England’s loan scheme. There they repay based on a marginal rate above the threshold. For people earning just above the threshold annual repayments are small and they may never repay in full. In Australia, they would repay in 10-15 years.

    Neil Warren has an interesting, but so far as I can see so far unpublished paper, which extensively analyses the potential perverse income-reducing behaviour you mention.

  3. AWE and wage price indices more broadly have been barely keeping up with CPI since 2012. This may be why no change was made to HELP debt indexation in the 2014 budget. Though it would likely help to speed up HELP repayments over the longer term, under reasonable budget parameters out to 2017-8, this change may not have contributed much saving in the forward estimates period, and therefore missed the cut.

    • I agree that AWE would not make a big short-term difference to HELP. But that did not prevent the government trying to change indexation of uni grants to CPI (replacing a labour market movements component), and explaining it as a whole of government measure. Leaving HELP indexation at AWE is inconsistent with their general approach, as well as changing it making sense in itself.

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