The return of inflation has led to questions about what this means for students, graduates and higher education institutions. This post lists some of the implications.
Indexation of HELP debt
HELP debt is indexed each 1 June. It is based on a two year period of CPI data ending in the March quarter of 2022 (I am not sure why it is two years). Because inflation March 2020 to March 2021 was lower than inflation March 2021 to March 2022 indexation for 2022 was 3.9 per cent, rather than the 5.1 per cent it would have been on a one year CPI cycle. The downside of this reprieve is that after inflation comes down again indexation will still exceed the recent average.
I said at last week’s Universities Australia conference that increased indexation will affect the politics of HELP debt. The big increase in the number of HELP debtors and total HELP debt over the last 15 years occurred at a time of mostly low inflation. Annual indexation rarely attracted much comment. This year there was much more media and social media coverage.
CPI is well above bank interest rates, giving people who can afford to repay early an incentive to do so. Indeed, low bank interest rates may help explain why voluntary HELP repayments have grown in recent years.
Indexation of HELP repayment thresholds
HELP repayment thresholds are also indexed but on a year-to-year basis ending in the December quarter prior to the tax year in question. So for 2022-23 the indexation formula is (sum of quarterly CPI index numbers 2021)/(sum of quarterly index numbers 2020). This avoids the surge in inflation in the March 2022 quarter that helped bump up HELP debt indexation. Repayment threshold indexation is 2.9 per cent for 2022-23. However inflation during 2022 will mean higher threshold indexation for 2023-24 than for 2022-23.
For HELP debtors whose incomes increase by less than inflation threshold indexation could mean lower HELP repayments as a percentage of their income. This is because they could drop back a repayment level, for example paying 3.5 per cent rather 4 per cent of their income. However, this would leave more debt to be indexed each 1 June.
Indexation of student contributions
The indexation of student contributions has another strangely lagging CPI indexation formula. The 2022 student contributions were indexed on the formula of December quarter CPI index number 2020/December quarter index number 2019, or 0.9 per cent. Student contributions in 2023 on my calculations will go up by 3.5 per cent. Like indexation of the HELP debt it will be a case of high inflation still flowing through to higher education after it is gone.
Indexation of Commonwealth contributions
Commonwealth contributions are indexed in the same way as student contributions. Inflation is likely to cause universities problems. Wage demands to compensate for it are already here, but indexation income will not start flowing until 2023, with that increase likely to be well below actual inflation in 2022.
A further complication for universities is that although Commonwealth contributions, i.e. the per student Commonwealth funding rates, are indexed each university’s overall maximum Commonwealth Grant Scheme income is not.
The previous government said that Job-ready Graduates would index their funding to CPI but this was a promise without statutory backing. The legal maximum funding is set out in funding agreements. The maximum funding amounts may have expected CPI indexed built into the changing annual totals, but there is no automatic adjustment to actual CPI.
In practice what this means is that universities can deliver fewer Commonwealth supported places and still get their maximum CGS grant.
The only current way to put actual-inflation indexation into maximum grants is to renegotiate the funding agreements. For some universities this renegotiation will happen anyway to implement Labor’s promise of additional funding. But given overall budget pressures the government may decline to offer inflation top-up funding on ‘old’ money.
IRLSAF and NPILF
The Indigenous, Regional and Low SES Attainment Fund (IRLSAF) and the National Priorities and Industry Linkage Fund (NPILF) are indexed in the same way as student and Commonwealth contributions.
The Research Training Program and Research Support Program total funding pools are also indexed in the same way as student and Commonwealth contributions. However, as these are performance-driven schemes this does not guarantee that a university’s own grant will go up by the indexation amount.
Total funding for the Australian Research Council is not automatically indexed but there is a history of legislating to index its annual funding cap. When this was last done for the budget forward estimates years through to 2024-25 it was 1.35 per cent on previously announced levels. The ARC itself seems to index grants according to the block research grants formula, although on a quick check I have not identified a statutory requirement to do so.
A long period of mostly stable inflation has meant that sometimes odd indexation systems have not received much scrutiny. If inflation is always around 2 per cent it doesn’t matter that this 2 per cent was for a period some time ago. But when inflation flows quickly through to university expenses it matters that revenue increases are delayed.