The Government had a rare higher education Senate victory this week, passing various amendments to the HELP loan scheme.
These include a series of changes to HELP repayment thresholds. Most of the political attention went to the initial repayment threshold, below which no repayment is required. It will drop from the current $52,000 to just under $46,000 in 2019-20. At that point, debtors will have to repay 1 per cent of their entire income.
In principle, I support this step in the direction of better aligning HELP with other government income support thresholds. This 2016 Grattan report supported a lower initial threshold.
Unfortunately, another key recommendation of that report, of consistent percentage increases between each threshold at which the repayment rate increases, was not strictly followed.
For most of the higher thresholds, each is 6 per cent higher than the one before it. But there is a 15 per cent gap between the first and second thresholds.
Combined with starting the repayment percentage at just 1 per cent, this radically changes the nature of the threshold reform. It is not now something that we can assume will significantly alter HELP doubtful debt.
One intention of the original Grattan proposal was to move debtors more quickly through the repayment rates. This was partly to recover more HELP debt before female full-time labour force participation drops from their late 20s, as shown in chart 1 below.
Chart 1: Female bachelor degree graduate labour force status, 2016
From 2019-20, the repayment system will be less effective at recovering HELP debt during the early career rapid income increases. For most debtors earning between $60,000 and $95,000 a year annual repayments will go down, as chart 2 below show. This is the range into which most full-time early career graduate incomes will fall. As a result, many HELP debtors will make less progress towards repaying their debt before leaving full-time work than they would under current settings.
Chart 2: Increase/decrease in HELP repayment rate by income in 2019-20
There will be some offset from the lower initial threshold — some debtors will start repaying earlier than now, and more part-time jobs will pay enough to trigger repayment. But most of these repayments will be less than $500 a year, which won’t even cover the indexation for many debtors. Without returning to full-time work, they will either never fully repay or take a very long time to do so.
The much higher repayments at the upper levels won’t have a major effect on doubtful debt. People earning that much will typically repay anyway, even if the new higher rates speed it up by a year or two.
High income earners aside, the Government has changed HELP into a scheme that requires typically smaller annual repayments over longer time periods. There could be a case for that in managing the cash flows of young adults as they establish careers and families. But that was not the argument made in support of these changes.