HELP debt indexation media attention has highlighted arcane aspects of student loan administration. One of these is that HELP debtors in repayment mode are indexed on debt they have already repaid.

To simplify – the processes outlined in division 140 of the Higher Education Support Act 2003 are convoluted – I will give the example of a graduate with no new HELP debt.

How HELP debt is indexed

HELP indexation occurs on 1 June each year, so it will next happen on 1 June 2023 at the controversially high rate of 7.1 per cent (see this earlier post on possible alternative ways of setting the indexation rate).

To calculate the amount to be indexed on 1 June 2023 the ATO:

i) takes the person’s HELP debt for the ‘immediately preceding financial year’, ie 1 July 2021-30 June 2022;

ii) subtracts any voluntary repayments made between 1 June in the immediately preceding financial year, ie 1 June 2022 and ending immediately before the next 1 June, ie 31 May 2023;

iii) subtracts any compulsory repayment amounts ‘assessed during that period’, ie between 1 June 2022 and 31 May 2023.

The trap is that HELP compulsory repayments for 2022-2023 will not be ‘assessed’ between 1 June 2022 and 31 May 2023, because the 2022-23 tax year does not finish until 30 June 2023. Instead, compulsory repayments for the 2021-22 tax year will be deducted.

The issue here is that by 1 June 2023 HELP debtors in the PAYG system will, in cash terms, already have paid about 90 per cent of what they will eventually owe for the 2022-23 tax year. Effectively, HELP debtors will be indexed on debt they have already repaid.

How else could it be done?

From an ATO perspective the practical issue is that HELP repayments are not finally determined until tax returns are submitted. I have never seen statistics on the subject, but it would be very common for the final compulsory repayment to vary from employer provisional repayments.

Total taxable income could vary up with income from sources the employer is unaware of and down with deductions such as for charitable donations and work expenses. HELP repayment income also differs slightly from taxable income, for example adding back in net investment losses and reportable fringe benefit amounts.

One possible solution would be to deduct any compulsory repayments received by the ATO up to the indexation date, with a reconciliation later on that could adjust the indexation up or down.

Another option which may have greater simplicity would be to move the indexation date from late in the tax year to early in the tax year, perhaps just after the tax return due date (31 October, so perhaps indexation on 1 November).

ATO back office IT and administrative issues would be important to deciding on the best option. In the 1980s when the HELP repayment system was designed it was harder to keep track during the year of total HELP debt and repayments than it is now.

Slow systems reduce indexation in the borrowing phase

While the government gains financially from being slow in recording HELP repayments, it loses from being slow to record HELP debt in the first place.

This time to simplify I will assume the student started university for the first time in late February 2023.

For indexation on 1 June 2023 the ATO adds debts ‘incurred during the last six months of the immediately preceding financial year’ , ie added between January and June 2022, before the student enrolled. Debt on 1 June 2023 for indexation purposes is zero.

For indexation on 1 June 2024 the last six months of the preceding financial year will cover first semester 2023 and its HELP borrowing. More than a year after it was originally borrowed the debt will be indexed.

To this HELP debt ‘incurred during first six months of the financial year’ will be added, ie HELP debt taken out between July and December 2023, in second semester.

Delays in adding debt for indexation purposes keep happening through the period of HELP borrowing, so students accrue less indexation than they would under a more timely system.

In the old days it took a long time to transmit records of HELP debt to the ATO. Now it is much faster and pro rata indexation could be charged from the first year of borrowing.

Conclusion

Indexation offsets interest costs to the government of holding student debt and, at least in a minor way, discourages unnecessary borrowing and encourages voluntary repayments for those who can make them ($780 million in 2020-21). Calls to abandon indexation don’t take into account the potential compensating cuts elsewhere which may be worse overall, such as the excessively tight lending rules we see in VET Student Loans or a reduced number of higher education places.

However, the methods of recording debt and repayments don’t reflect any policy principle or public finance consideration. They are relics of late 1980s administrative issues. An update is worth considering.