Author: Andrew Norton

Graduate income fluctuations and HELP repayment

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Last week I raised concerns about the new HELP repayment system increasing the number of HELP debtors who face very long repayment times or lifetimes of student debt.

The calculations in that post assumed that people maintained their relative income position through their careers – for example that someone who earned the median income at age 25 would still do so at age 35, 45 etc. We know, however, that relative income fluctuates. Family commitments drive movements in and out of full-time work. Careers go better or worse than expected.

Without solving the problems involved in estimating how these changes affect HELP repayments, this post outlines findings on graduate income mobility and labour force status changes.

Movements between income quintiles

The chart below uses data from a Productivity Commission report on economic mobility. It shows changes in relative income, between five economic quintiles, over a decade since degree completion. The data source is HILDA.

Quintile 5, the highest, shows strong stability. More than 80% of graduates in quintile 5 were still there or in quintile 4 a decade later. The high starting point and following stability may be due to people already doing well in their careers acquiring postgraduate qualifications.

The other quintiles all show significant movement in relative income. Upward movement is expected as we know graduate incomes increase in the years after course completion. Almost half of graduates in the lowest quintile in year one are in the top two quintiles a decade later.

Bu there is also some stability at the lower end. In the two lowest quintiles, 1 and 2, over a quarter remain in those quintiles a decade later. In quintile 3 we see a similar share falling back to quintiles 1 and 2. While some of this is career stagnation, ten years out takes into the ages when women start leaving full-time work to meet family responsibilities.

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Will the new HELP repayment system make high EMTR problems better or worse?

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The new HELP repayment system being legislated this week will move from repaying a % of total income to a % of income above the repayment threshold, a marginal system. In introducing the bill to Parliament, education minister Jason Clare quoted Bruce Chapman on a marginal system: ‘it’s much gentler and much fairer than previously—we should have done it years ago.’

While the new marginal repayment system may be gentler and fairer, it could create more widespread disincentives to working additional hours than the current total income system.

The problem with total income systems

The Universities Accord Final Report, which guides the government’s higher education agenda, criticised the total income repayment as unfair and a deterrent to work.

The underlying problem is that a multi-rate total income repayment system creates multiple threshold ‘cliffs’, income points at which earning $1 more triggers a big increase in student debt repayment. The most extreme cliffs are the lower income levels. Under the current system a debtor whose income reaches the $56,156 first threshold faces an increase in repayments from $0 to $561.56, plus 30 cents of income tax.  By earning more the student debtor reduces their take-home pay. Repayment cliffs exist, at less extreme levels, at all 18 income thresholds in the current student debt repayment system.

A total income repayment system produces some very high effective marginal tax rates (EMTR). An EMTR is jargon for how much of an extra dollar earned is lost to income tax, withdrawal of benefits, and in this case HELP repayments. EMTRs are a big issue in Australia’s welfare state, which makes widespread use of means tests – of which the HELP repayment thresholds are a version.

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The new HELP repayment system and lifetimes of student debt

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The prime minister says that a degree should not come with a lifetime of debt. For that goal, the government’s HELP legislation introduced last week is contradictory. It will cut all debt owed as of 1 June 2025 by 20%, which will shorten repayment times for current debtors. But it will also cut annual debt repayments for 99% of debtors, which will lengthen compulsory repayment times for many and push others into the PM’s lifetime of debt.

In the analysis below, female debtors owing $25,000 or more with incomes in the lowest 40% of graduate earnings face an increased risk of a lifetime of student debt. However, what percentage of female debtors actually face a lifetime of debt will depend on initial debt levels and how much their incomes vary through their careers. Voluntary repayments can also affect repayment times.

How the repayment system will change

My previous post on the initial threshold summarised how the repayment system will change. The key elements are that 1) repayment exempt incomes will include everyone on $67,000 or less compared to less than $56,156 now and 2) a marginal rather than total income repayment system will reduce what most debtors repay, particularly at lower income levels.

The chart below shows how this will affect HELP debtors at different annual income levels. Based on 2022-23 ATO data I estimate that 99% of debtors repaying under current thresholds will repay less per year than under the current system. The other 1%, all high income earners, will repay the same amount per year as now.

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International students and the rental market

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The housing section of the RBA’s report last week on international students and the economy had higher education media dismissing the contribution of students to rent increases as a ‘furphy’. I agree that international students are at most one factor amongst many in post-COVID accommodation market problems. That said, the RBA may understate the scale of international education’s contribution to rental demand.

Student Experience Survey results

The RBA used the Student Experience Survey to try to work out the proportion of students in the private rental market where they compete with others for accommodation. The question the SES asks is below.

The RBA’s conclusion that about half of international students are in the private rental market is based on the result below, which is for undergraduates. Taking a broad definition of undergraduate that was about 40% of international students in 2023. But assuming it is broadly representative, there is still one number that I have persistently struggled to understand in this survey, which is the high percentage of international students who say they live with their parents – 19% in 2023. Can that be right?

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The history and politics of the first student debt repayment threshold

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The government’s HELP legislation, cutting student debts by 20% and introducing a new repayment system, was introduced into Parliament yesterday. While I have criticisms of the 20% cut, it will be implemented and once done cannot be reversed. The changes to the repayment system will pass now but can, and probably should, be changed at a later date.

In this post I briefly explain how the repayment system will change and then discuss the choice of the first threshold.

The current and proposed student debt repayment systems

Under the current system, repayments start at an annual income of $56,156, at which point student debtors repay 1% of their total income. From there the percentage of income repaid increases incrementally to reach 10% of income at $164,712.

Under the new system repayments start at when income exceeds $67,000. At this point a marginal rate of 15% of income above $67,000 applies up to $124,999, where a marginal rate of 17% applies for income of $125,000 or more. Unexpectedly the bill restores part of the old system with an annual repayment cap of 10% of total income. This avoids some high income earners paying more than now.

The new thresholds will be indexed to growth in average weekly earnings. The current thresholds are indexed to CPI.

The logic of the first threshold

As the chart below shows, in the black dotted line, the first repayment threshold has changed over time. The long-term policy/political tension is between the idea that graduates should enjoy some financial advantage before repaying their student debt and the idea that student debt should be repaid except in cases of financial hardship. The policy pendulum is currently shifting from the latter to the former.

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Despite an increase in applications for the 2024 academic year, school leaver interest in higher education remained below mid-2010s levels

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University applications statistics for 2022 to 2024 were finally released late last week, giving us another data source on demand for higher education.

This post focuses on recent school leavers. The chart below shows that applications for this group were up in 2024 on 2023, but that the slump in applications since the late 2010s remained evident – other than the spike for academic year 2021, which is only apparent for teenagers who finished school prior to 2020. This is consistent with people deciding to sit out the COVID recession at university.

That COVID spike meant that in 2021 an unusually large share – 35% – of the 19 and under applicant group were not people who had finished school the year before. This share was 32.5% in each of 2023 and 2024, higher than any year 2012 to 2020, when it averaged 28.4%. This could mean that we are seeing more young people delaying higher education. This data source does not, however, distinguish between people who delayed applying until one or two years after finishing school, and people who enrolled but reapplied to change university and/or course.

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The Prac Payment that will go to Services Australia and the ATO, as well as students

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Last year I was critical of how I thought the Commonwealth Prac Payments were going to work. These were to provide Austudy level payments, currently equivalent to $331.65 a week, for nursing, midwifery, social work and teacher education students while undertaking compulsory work placements. The payment starts on 1 July 2025 for students on income support and some working students.

Rather late in the day, the legal paperwork for its higher education version was completed last week. The vocational education diploma of nursing version paperwork was already available. The higher education version is administered by universities and funded through the ‘other grants’ provisions of the Higher Education Support Act 2003. The VET Prac Payment is administered by the Department of Employment and Workplace Relations, although the funding is authorised under the Social Security Act 1991.

Things I was concerned about that have not happened

Some of my Prac Payment concerns from last year were not realised in the policy as enacted. The Prac Payment has a means test but it is based solely on the student’s income, not family income. However family income has an indirect effect through eligibility for income support.

A policy goal is reduce the number of students who defer or withdraw from their course due to placement obligations, but students won’t need to prove that they are considering either of those things.

But in the Australian way of public policy, the Prac Payment is an underwhelming half-measure. The payment is low and will be further reduced by tax and by social security income tests. Many students won’t be eligible at all.

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What explains delays in attrition?

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I was quoted at the weekend in a Herald-Sun article about attrition from Victorian universities. The journalist wanted to know how much HELP debt students typically have on drop-out, but unfortunately this data is not regularly published (it should be of course).

But based on some old Grattan analysis, which had actual data to the mid-2010s, the fact that first year is the most common year for attrition, and the strong link between part-time study and attrition, I thought that the typical $$$ figure may not be too high.

That said, average or median HELP debt on dropping out may have increased at a faster rate than indexation in the early 2020s. This is due to students spending more time enrolled before dropping out.

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What is behind increased rates of upfront payment of fees and student contributions?

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It’s been a while – seven years – since I took a look at higher education student decisions to take out a HELP loan or pay upfront. Since then we’ve had instability in upfront student contribution payment incentives and increased student debt salience, triggered by high-CPI indexation. Anecdotally some students paid upfront to avoid high indexation of the subsequent debt.

Student contributions & HECS-HELP

The direct incentive to pay student contributions upfront has been framed as a discount. If the upfront discount was 10% and the fee was $1,000 a person who paid upfront would incur a debt of $900. The Commonwealth compensated the university for the lost $100, but avoided holding debt that might go bad and paying interest on its own borrowings to finance lending the student $1,000. In recent years, according to estimates in the Budget papers, about 15% of each year’s lending is not expected to be repaid.

The size of the incentive to pay student contributions upfront has varied over the last 20 years. Any incentive was abolished in 2017, restored for 2021 and 2022 to get Pauline Hanson to vote for Job-ready Graduates, and then abolished again from 2023.

I am in the no upfront discount camp, as I believe most people who pay upfront will do so anyway, whether there is a discount or not.

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What’s in the 2025 funding agreements? – ‘Higher education courses’ block grants

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In February I reported on preliminary university-level 2025 allocations under the Commonwealth Grant Scheme and estimates of student contributions.* These have since been updated to add money for FEE-FREE Uni Ready places and regional university study hubs. The revised funding summary is here.

This post looks at the underlying funding agreements for more detail on the ‘higher education courses’ part of CGS funding. As usual in funding agreements since 2021, the detail reveals a range of legal and policy problems.

A spreadsheet summary of higher education courses funding for 2025 is here.

The role of higher education courses funding

Higher education courses funding is intended, by the Higher Education Support Act 2003, to be a flexible block grant. Within their total funding envelope, expressed as the ‘maximum basic grant amount’ (MBGA), universities can move resources across coursework AQF levels and between fields of education, other than medicine.

Although higher education courses funding is supposed to be flexible, both Coalition and Labor governments have used ad hoc funding agreement conditions to restrict use of higher education courses money to purposes chosen by the government.

This has in turn led to the unlegislated concepts of ‘base MBGA’ and ‘total MBGA’. Total MBGA is actual MBGA under HESA 2003. Base MBGA excludes most ad hoc programs. Its purpose is to reduce expenditure on the higher education continuity guarantee and the current equity plan funding. If universities don’t meet the ad hoc criteria they get $0 for those non-delivered places.

Overall trend in higher education courses funding

To the surprise of universities the first-term Albanese government often treated them harshly. But Labor kept the former government’s promise to index higher education courses funding to CPI. That was 4.1% for 2025. They also kept the Coalition’s region-based funding increases. While there are complex financial flows in and out of higher education courses funding – discussed further in this post – it is up 6.1% between 2024 and 2025 to a total of $7,687,211,975.

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