Accord will make Australia the world leader in student loans

The changes to Australia’s student finance system announced in 2021 by the previous government under Scott Morrison were always contentious, and it now looks as though they will be mercifully short-lived.

In Australia, as in other countries where teaching is largely funded by income-contingent student loans, tuition fees are set by the government. This means that taxpayers subsidise the difference between the value of those fees and the costs to a university of running a particular degree.

Until 2021, fees were set to align with students’ expected future earnings. Hence, doctors and lawyers paid the highest fees, while teachers and social workers paid much less.

But Morrison’s Job-Ready Graduates legislation reduced tuition fees for “job-ready” courses such as nursing, maths and languages to encourage students to study in those areas. At the same time, the government raised fees to attempt to disincentivise students from studying degrees it deemed less valuable. The most notable change was a 113 per cent increase in fees for humanities and arts degrees.

That hike was highly controversial, with senior figures within the arts and humanities fearing the worst for their disciplines. However, my research showed that the intended policy response did not materialise, for several reasons. When deciding what to study at university, students are heavily influenced by their interests, not financial considerations. Moreover, the income-contingent loan system softens the financial blow of more expensive degrees because there is no up-front cost.

That bring us to the Universities Accord, whose final report was handed down last week by education minister Jason Clare. Prepared by an expert panel stacked with higher education experts, business leaders and ex-politicians, its 47 recommendations to improve and grow higher education include restoring the old fee structure, where tuition costs are aligned to expected lifetime earnings.

While this is clearly equitable, it also has pragmatic value. In Australia, the income threshold for loan repayment is currently A$51,550 (£26,465) per year, currently the 37th percentile of income, and the repayment rate rises from 1 per cent to 10 per cent as income increases. The loan grows at the rate of inflation.

Since arts graduates, on average, earn lower wages than other university graduates, piling them up with nearly A$50,000 of student debt is unlikely to result in a high repayment rate. Aligning fees to expected earnings, on the other hand, makes it more likely that the government (and therefore the taxpayer) will recoup their loans.

The Universities Accord also recommends tightening up some of the quirks in the current loan system. One is the fact that Higher Education Loan Program (Help) loans are indexed at the rate of inflation (the consumer price index). This faced little scrutiny until the recent post-Covid period of high inflation, which saw student loans grow at 7.1 per cent last year (around A$3,000 for a newly completed arts degree). For any arts graduate earning less than around A$75,000 per year, this means their loan grew by more than their compulsory repayment.

The accord has recommended, instead, that loans be indexed to the lesser wage price index (inflation and wage growth). This means that students will no longer face high loan growth levels unless there is a wage-price spiral (where prices and wages both inflate quickly), something the Reserve Bank of Australia should ensure never happens.

The accord also proposes a switch to a marginal repayment system. Currently, if you hit the A$51,550 repayment threshold, you pay 1 per cent of your income towards your loan. If you earn one dollar less, you pay nothing, meaning that earning one extra dollar when your income is A$51,449 actually loses you $515! The accord shares evidence that this changes debtor behaviour, with many more people reporting incomes just below the threshold rather than just above.

In a marginal repayment system, as adopted in New Zealand, you would only pay a percentage on the income earned above the income threshold. The rates would still increase with income, and they would be rejigged so the government still recouped a similar amount of its debt annually. However, it would mean you could never be worse off for earning more income.

Last, the review recommends that banks view student debt differently from other debt to make it easier for graduates to purchase properties. This makes sense because a Help loan generally grows at a low rate, is not indicative of poor financial management and is deducted from pay automatically (so there is no risk of missing repayments).

Luckily, Clare seems highly motivated to enact as many of the accord reforms as possible. The only barriers that could present themselves at this stage are budgetary pressure from the Treasurer or a difficult legislative environment due to prime minister Anthony Albanese’s record-low polling. However, I’m optimistic that these key reforms will get cemented soon.

Some might argue that Australia already had the world’s best student loan system, and they could be right. However, the accord’s proposed changes would give the country the world’s best evidence-based loan system, which effectively incentivises higher education study. And on the value of that there should be accord in abundance.

Maxwell Yong is an economist and policy researcher.