On 1 June 2022 outstanding HELP debts were indexed, using a CPI-based formula, at 3.9 per cent. Someone whose HELP balance was $50,000 on 31 May owed $51,950 the next day.

There had been no change to indexation policy; CPI indexation has been in place since HECS was introduced more than 30 years ago. But the politics did change. A topic on which I previously received few media inquiries, and then only during the periodic doomed government attempts to impose a ‘real’ interest rate, suddenly became the subject journalists asked me about most often.

In a low inflation environment – indexation was 0.6 per cent in 2021 – public reaction to this annual increase in HELP debt was minimal. But higher indexation in 2022 revealed latent issues. With increasing average debt the same percentage indexation leads to larger absolute dollar increases. Huge growth in debtor numbers means that indexation affects more people than previously.

Calls to talkback radio programs suggest that the lower initial payment thresholds introduced since 2018-19 create a particular annoyance. At the current lowest threshold 1 per cent of income repayment rate debtors repay $500 or so, but high CPI indexation means that their total HELP debt still increases.

Policy responses

The Greens have a bill in the Parliament to remove indexation entirely. This is unlikely to happen, but even an organisation at the opposite end of the ideological spectrum as the Greens, the Productivity Commission, sees high CPI indexation as a problem. In their big 5-year productivity report last week they suggested that indexation could be a lesser of CPI and real wage growth (this concession made in the context of proposing higher student contributions to fund more student places).

In a forum on HELP last year Gareth Bryant suggested another lesser-of formula, CPI or the government 10-year bond rate,

In its submission to a Senate inquiry on the Greens legislation the National Union of Students called for a two-year pause in indexation followed by permanently lowering [sic] it to the RBA cash rate. I think they probably meant the bond rate, the government’s cost of borrowing, but I will leave this idea in the mix.

What is HELP debt indexation for?

Indexation offsets the cost to government of lending to students via income contingent loans. While the government does not specifically borrow to re-lend to students, the 10-year government bond rate gives some approximation of the effective cost to government of the HELP debt sitting on its books.

As the chart below shows, generally the bond rate is higher than CPI-based indexation, which is why previous governments have sometimes proposed charging a ‘real’ rate of interest. But in a few recent years CPI has been higher, and this is especially likely to be true in 2023 (I need March quarter CPI to calculate the 1 June 2023 indexation level; as a guide to where things are heading I used the December quarter in the unusual lagged indexation formula required in the higher education legislation).

HELP is classified as a ‘concessional loan’. While the government will still lose money on HELP this year due to debt that is unlikely to be repaid, CPI indexation will lead to a significant profit on interest rates. The government has never intended to make money out of indexation, only to offset costs. For this reason I can see merit in indexation occurring at the lesser of CPI or the bond rate, to deal with the occasional times when the bond rate is lower than CPI.

RBA cash rate

The RBA cash rate is an instrument of monetary policy. Its logic here would be linking HELP debt to other types of personal debt, such as mortgages. Because lifting interest rates is part of reducing inflationary pressures the two will often trend together (somewhat muted in the chart by the HELP indexation formula). In recent years, HELP debtors would have been neutral or better off with the RBA cash rate over CPI. However, history suggests that there is no guarantee of this. A ‘lesser of’ formula would be needed to protect against periods of sustained high cash rates.

While interest rates are inter-related the 10-year government bond rate goes more directly to the cost the policy is trying to offset, so I prefer it over the RBA cash rate.

Real wages

The Productivity Commission mentions their real wages idea only in passing, in the context of debts growing more than wages. It perhaps links to household financial pressures, but indexation of HELP debt will usually only affect debtors financially many years later, when they spend longer repaying their debts than would otherwise be the case. The current CPI indexation of repayment thresholds already protects household finances, since if wages grower at a lower rate many debtors will fall back a repayment rate, reducing their repayment for that year.

Compared to the other indicators there is no official time series on real wages, and varying ways in which it could be calculated. The purest way is probably the wage price index, which measures hourly wage changes for the same job. Other potential measures such as changes in average weekly earnings, historically used to index the repayment thresholds, also include ‘compositional’ change; for example changes in the relative numbers of workers in different occupations. Increasing numbers of people in high-paying occupations cause AWE to go up even if hourly wages in each occupation stay the same.

The chart below does not directly shows real wages as historical CPI is used to index HELP debt, but as a rough guide in periods when the orange WPI line is above the blue CPI line there is real wage growth. Generally indexation would be lower than CPI, and negative in some years to due to falling real wages. This is a potential issue with inflation as well. In 1998 HELP debts were reduced by 0.1 per cent. It would be possible to legislate zero indexation in the case of real wages (or CPI) falling, but I can’t see why a government with serious financial problems already would agree to larger HELP subsidies.

The unclear rationale for real wage indexation, the lack of a clear indicator, and distance from the underlying public policy objective of offsetting the government’s cost of HELP debt all count against this option.

Conclusion

An old legal maxim says that ‘hard cases make bad law’. Political and bureaucratic attempts to optimise too many outcomes and minimise too many problems are how we end up in a policy mess, cursing us with complexity and unintended consequences. The Greens proposal to abolish indexation could easily lead to offsetting savings that would make things worse overall for people seeking to further their education, such as tighter caps on tuition subsidies and stricter borrowing limits.

There is a case for just riding out the HELP indexation controversies of this current inflationary spike. That looks like the government’s position (update: the Treasurer is unmoved). Over the long run CPI indexation has not been an unreasonable burden on debtors; with an average of 2.6 per cent in the 2000-2022 period. A strong public policy commitment to keeping inflation contained aligns the interests of debtors and the priorities of government (indexation of benefits costs the government a lot).

That said, the lesser of CPI or the 10-year bond rate idea is worth considering. It would help manage the politics of indexation while still achieving the policy goal of offsetting HELP’s borrowing costs.