More than a million people are now repaying HELP debt, but the average repayment is down

The ATO’s annual taxation statistics release shows that in 2019-20 the number of repaying HELP debtors continued its strong growth, up 23 per cent on 2018-19 and exceeding 1 million for the first time. However, compulsory repayments are not growing as strongly, up 8 per cent on 2018-19 to $3.6 billion.

This post offers a few explanations for overall growth and why repayers are increasing more rapidly than repayments.

Increases in students and HELP debtors

The increase in the number of repaying HELP debtors is partly a flow-on effect of the demand driven system. Under the DDS commencing domestic bachelor student numbers increased rapidly between 2009 and 2014 before stabilising. Most students from the initial growth years of the DDS have finished their studies and entered their HELP repayment phase.

The government never reports final debts on completion of studies. But these have probably increased over the last decade. More students have FEE-HELP debt, either from study in private providers or postgraduate courses, along with OS-HELP and SA-HELP debt. More debt equals longer repayment times.

Poor graduate outcomes in the mid-2010s along with strong real growth in the initial threshold meant delayed starts to repayment. Generally subdued real wage growth in the 2010s would have also slowed down repayment. Slower repayment means that more individuals are counted each year as still repaying their HELP debt.

The number of people annually finalising their debt has volatility that suggests reporting issues, but a sustained increase only began in 2017-18. 2019-20 was however the highest number yet recorded of 167,580.

Changes to the initial repayment thresholds

Two changes to the initial HELP repayment thresholds brought more people into HELP repayment. For the 2018-19 tax year a new lower initial threshold was introduced, $51,957 compared to $55,873 the previous year. And then for 2019-20 a still lower initial threshold of $45,881 was introduced.

Bringing in debtors earning between $50,000 and $55,000 was most effective in increasing repaying debtors, up 108,000 after the two threshold changes. There were also 97,000 additional debtors with incomes between $45,000 and $50,000 making repayments.

Some people with taxable incomes in that range were already repaying prior to 2019-20. I think that is due to HELP rules that count back in investment losses and voluntary superannuation contributions for the purpose of assessing HELP repayment liability.

Although changes to the initial thresholds are the most significant factor in increasing the number of people repaying HELP, people earning more than $60,000 made up 38 per cent of the increase between 2017-18 and 2018-19. They would have repaid under the pre-2018-19 system as well. This is consistent with the explanation above, that more people have been to university and are now on the upwards income trajectory of early career graduates.

Overseas compulsory repayment

Since 2016-17 HELP debtors overseas have been required to repay their HELP debt. According to Taxation Statistics 2019-20 13,125 individuals made a HELP overseas levy compulsory repayment in 2019-20, up from 7,968 in the scheme’s first year.

The average overseas debtor repayment of $5,221 is higher than that of domestic debtors at $3,462, but total overseas numbers are too low to make a big difference to the aggregate trends.

Changes to the repayment rates

The main reason the total dollar repayments are growing much more slowly than persons repaying is that the average annual HELP repayment is down. For domestic students the average was $4,345 in 2017-18, so it has fallen 20 per cent to 2019-20.

Obviously one major reason for a declining average is the increase in lower-income debtors repaying, combined with low percentage repayments, starting at 1 per cent.

But as my then Grattan Institute colleague Will Mackey explained in 2019 the new repayment system lowered many of the upper thresholds as well as the first threshold, with large numbers of debtors on higher incomes moving to lower repayment levels than previously.

The effects of this can be seen in average HELP repayments in each of the ATO income categories. Although Will’s chart has some exceptions on average all the income categories between $50,000 and $90,000 had lower average repayments in 2019-20 than they did in 2017-18.* As they are 59 per cent of all repaying debtors this is a big drag on total repayments. I haven’t done the modelling Will did, but it seems quite possible that the 2019-20 changes were a net negative for total repayments, with increased repayments from low and high income earners not enough to offset reduced payments from middle income earners. The increased number of repaying debtors prevented total repayments falling.

Conclusion

Reduced middle income repayments are due to a policy error that occurred when the previous government had a second go at threshold reform after an earlier Senate rejection. However, what the new thresholds accidentally do for most HELP debtors is introduce smaller average annual repayments over a larger number of years. This accentuates the smoothing aspect of HELP – keeping living standards more constant over time despite loan repayments. But there is also much to be said for clearing HELP debt more quickly to increase household capacity to take on the other major expenses of early adulthood. Faster HELP repayment would also minimise the new problem of high indexation of HELP debt.

I’m not at all clear what is going to be covered by Labor’s accord process, but with HELP now reaching far beyond students, including more than a million people in the repayment phase, it has broad social policy consequences.


*Though the $50-55,000 average is affected by the investment losses/voluntary superannuation contribution issue and the mid-point of the 2018-19 initial threshold.

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