Category: Student loans

Bruce Chapman’s multi-rate marginal HELP repayment system – the PM’s ‘simpler’ option?

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Last week the prime minister was asked about changes to the HELP loan system.  In response he referred to Accord recommendations that ‘the system can be made simpler and be made fairer’ (emphasis added), and that ‘we’ll be making announcements pretty soon on that’.

‘Fairer’ probably means a lower-of HELP debt indexation formula, moving the indexation date so that more recent compulsory repayments can be taken into account, and a marginal rate repayment system to remove high effective marginal tax rates.

But what did the PM mean by ‘simpler’? I’m guessing that this refers to moving away from the current 18-threshold and rate repayment system to a system with fewer thresholds.

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Lower-of CPI and Wage Price Index (WPI) HELP debt indexation – inherent weaknesses and design issues

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This morning The Conversation published my argument, made last month on this blog, that HELP debt should be indexed at the lower of CPI or 4%. I argue that this is better than the other suggested ‘lower-of’ options, such as the government bond rate, the RBA cash rate, or a wage increase indicator. The Universities Accord final report chose the last option, specifically the Wage Price Index (WPI). WPI measures changes in hourly rates in the same job.

All the CPI alternatives have a relationship with CPI

A problem with all the lower-of proposals, except a fixed maximum, is that they have a relationship to CPI. If inflation starts going up the RBA increases its cash rate and government bond holders want higher interest rates to protect their real value. Workers and unions, often supported by policymakers, seek inflation compensating wage increases.

For wages set nationally, the federal government wants the minimum wage increase linked to inflation this year. If the Fair Work Commission grants this increase, minimum wage and other CPI-driven wage rises will flow through to future WPI figures.

Real wage increases, over-and-above CPI, also push up WPI. Aged care workers have recently been awarded a large real wage increase. Statistics on enterprise agreements show wage increases returning to their normal pattern of exceeding both WPI and CPI.

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The politics of multi-rate marginal HELP repayments

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In a couple of previous posts, I examined reasons for moving to a marginal rate system for repaying HELP debt, as proposed by the Universities Accord final report, and what the rates might be.

Under a marginal rate system HELP debtors would repay a % of all income above a threshold amount, instead of a % of all income once a threshold is reached, as now. An advantage of marginal rate repayment systems is that they can reduce effective marginal tax rates. High EMTRs discourage people from taking on more paid work. In some cases under the current system EMTRs exceed 100%, so disposable income goes down despite nominal income going up.

The Accord final report and the minister, Jason Clare, also suggest reducing annual repayments, at least for lower income HELP debtors. Except for HELP debtors just above an income threshold in the current system (especially the first one, where there are very high EMTRs) this is not an inherent feature of marginal rate systems compared to current arrangements. But it could be a political selling point for a marginal rate system designed to reduce repayments.

To cut annual repayments for lower income HELP debtors without causing a major reduction in HELP repayment revenue the government would need to introduce a multi-rate marginal system. This is implied in the Accord final report discussion. Multi-rate systems progressively increase the marginal rate as income goes up. There are many possible sets of rates, but my previous post looks at 7%-17%-22% and 10%-15%-20% models.

This post goes through some of the political implications of moving to a marginal rate system.

How will the percentage numbers be interpreted?

One initial challenge will be convincing people that a 7% or 10% first marginal rate will usually reduce their repayments compared to the current seemingly lower rates. How can charging 7% increase disposable income compared to 1%?!

Of course the answer is what the percentages are of, but for people half paying attention, who have never thought about marginal versus whole of income rates before, a higher percentage rate reducing their repayments is going to seem counter-intuitive.

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Possible marginal HELP repayment rates under Universities Accord reforms

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The Universities Accord final report proposes changing how HELP repayments are calculated. It recommends abolishing our current system, which levies a % of all income once an income threshold is reached. It would be replaced with a system that charges a % of income above the threshold – a marginal rate system.

A major reason given for this change was to end the ‘unfair situation’ of some HELP debtors having very high effective marginal tax rates. These can exceed 100% in some cases, so that an increase in taxable income results in lower disposable income. In addition to the fairness issues, high EMTRs can lead to people working fewer hours and the loss of income tax revenue.

Other Accord final report comments, however, suggest HELP repayment redesign with purposes beyond the EMTR issue. While not specifying thresholds or marginal rates, the report suggests a system in which the ‘majority of HELP debtors who make a repayment … would repay less in a given year’. They warn, however, that a ‘small number of higher income debtors (likely less than 10% of HELP debtors) [would] make higher repayments in a given year’.

Subsequent Jason Clare media interviews suggest that policy thinking on repayment systems has moved beyond a general preference for a marginal rate system. Referencing unpublished research by Bruce Chapman, Clare said on the day the final report was released that ‘someone on an income of $75,000 a year would pay every year about $1,000 less.’ He gave the same example again this week.

Speaking to the SMH, Chapman expanded on how the new system might work. He envisaged a multi-rate marginal HELP repayment system: ‘a person earning $86,000 would only be taxed the 5 per cent repayment rate on the income above the threshold at which the rate kicks in, being $84,430. All income below that threshold would be levied at the lower rates.’ A multi-rate marginal system is also consistent with the Accord final report reference to some HELP debtors repaying more each year than they do now.

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Why does the Universities Accord final report suggest repaying HELP debt on a marginal rate – a % of income above the threshold, rather than all income?

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One quirk of the HELP repayment system is that, on reaching each repayment threshold, the debtor pays a % of their entire income. England and New Zealand followed Australia in creating income contingent student loans. But their repayment systems are based on a % of their income above the threshold – they have marginal rate systems. The Australian income tax system also uses marginal rates.

The Universities Accord final report HELP repayment recommendations include ‘moving to arrangements based on marginal income’.

As explained below, this Accord change would reduce ‘effective marginal tax rates’ – the loss of disposable income on each dollar above the threshold. Under the current system, EMTRs can exceed 100% – so that earning an extra dollar reduces rather than increases a HELP debtor’s annual disposable income. The Accord final report calls this an ‘unfair situation’.

The Accord final report does not specify a marginal rate – an issue I discuss in another post. England and New Zealand have marginal loan repayment rates of 9% and 12% respectively above their repayment thresholds.

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Changing the HELP indexation date – 30 November?

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A common HELP indexation complaint over the last couple of years is that compulsory repayments during the financial year are not deducted prior to indexation. I explained the current system in this post last year.

In that post, I noted that one reason for not taking compulsory HELP repayments out prior to the current 1 June indexation date is that their exact amount is not yet known by the ATO. The repayment amount is calculated after the financial year ends, on 30 June, and during tax return processing. There are many reasons why HELP repayments sent via the PAYG system could be less or more than the final repayment amount.

The ATO has raised another administrative obstacle, which is that HELP repayments are not separately identified in the PAYG information it receives from employers. As the ATO collects salary information, and already knows who is a HELP debtor, it perhaps would not be that hard to infer why the amount withheld from an employee is higher than income tax rates require. But clarity on what is intended as a HELP repayment would require system re-designs for the ATO and employers. HELP PAYG information would still often vary from the final correct amount, so the system would need a reconciliation after 30 June, with corresponding adjustment of indexation up or down. This would add complexity and administrative costs. These practical issues rule out real-time reduction of HELP balances.

The Accord final report instead recommends another option, changing the date of HELP indexation. They do not, however, suggest a date.

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HELP debt indexation at the lower of CPI or a fixed maximum rate – giving HELP borrowers more certainty than the Universities Accord final report lower of CPI or WPI recommendation

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Over the last two years high CPI-driven HELP debt indexation – 3.9% in 2022, 7.1% in 2023, probably in the vicinity of 5% this year – has been a major issue. It has brought to public attention HELP debt issues that had been waiting for their trigger.

The last time HELP debt indexation exceeded 5% was in 2001, as the the new GST flowed through into prices and an indexation rate of 5.3%. At that time 1.1 million people had HECS (as it then was) debts of about $7.2 billion. A Factiva search shows that this unusually high indexation was newsworthy at the time. But with much lower HELP balances per person than now the average debt increase was only $350. The indexation issue then went quiet for two decades, except when the government wanted to charge more than CPI.

The reason for HELP indexation’s long low media profile was that between 2002 and 2021 it averaged 2.4%. It was below 2% between 2016 and 2021. This extended period of low inflation left HELP indexation as a latent issue, as increases in HELP debtor numbers and average debts gave it far more potential to cause significant personal cost and political trouble than it had in 2001.

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Creating a better integrated education system – some notes on Rethinking Tertiary Education, a book building on the work of Peter Noonan

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Peter Noonan was a rare person with expertise across vocational and higher education, and an even rarer person who made significant policy contributions to both. Sadly he passed away in 2022 at the age of 67.

Rethinking Tertiary Education, co-edited by Peter Dawkins, Megan Lilly and Robert Pascoe, with sixteen others as co-authors, is billed as ‘building on the work of Peter Noonan’, and does so by exploring ways of making the component parts of Australia’s formal education sector – especially higher education and vocational education, but also schools – work together more smoothly than now. Pascoe also contributes an interesting biographical chapter on Noonan.

For historical and political reasons the vocational and higher education systems in Australia have quite sharp dividing lines in the nature of the qualifications they deliver, how they are funded, how they are taught, and with some exceptions the occupations they support. The book also looks at school credentials, especially the idea that they don’t measure all they should.

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The 2003 Cabinet papers and Brendan Nelson’s higher education reforms

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In the history of Australian higher education policy Brendan Nelson, the Liberal minister for education from 2001 to 2006, is perhaps under-rated. Several student funding structural changes he legislated 20 years ago are still in place. These include:

  • Student contributions set by universities up to a legislated maximum and going to universities (previously HECS was a fixed government charge);
  • A per full-time equivalent student Commonwealth contribution based on subject field of education (previously universities received an overall operating grant, which although informed by an early 1990s costing exercise did not directly tie money paid to discipline-level enrolments);
  • Commonwealth-university funding agreements as a method of allocating student funding to institutions, which made funding arrangements more transparent (but also turned into a backdoor instrument of policy and regulation that bypasses Parliament);
  • Through FEE-HELP, extension of student loans to full-fee undergraduates and students in private higher education institutions (the more limited Postgraduate Education Loan Scheme, PELS, was already supporting university full-fee postgraduates).

The 2003 Cabinet papers

The annual National Archives release of 20-year-old Cabinet papers, with the 2003 papers released earlier this week, gives us a look behind the scenes as Nelson’s reform package was developed and debated. Three digitised Cabinet documents record proposals and decisions, but not the Cabinet discussion. Sometimes, however, Cabinet thinking can be inferred from requests for further work and contextual material in the submissions.

This post focuses on changes to income contingent student loans.

The loan scheme that did not make it through Cabinet

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Mapping Australian higher education 2023 – official release

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Mapping Australian higher education 2023 is now available from the ANU Centre for Social Research and Methods website.

Update 26/10/23: A reader has pointed out that list of FEE-HELP NUHEPs is incomplete. A column of names from the original Excel file was omitted during production. The full list is available here. This list also includes three non-FEE-HELP providers registered by TEQSA since the pdf version was finalised. A corrected version of Mapping with the full list of NUHEPs, as of mid-2023, is here.

If anyone has noticed other errors please let me know.