More than three million Australians with student loans are being warned to brace themselves for a massive increase in debt in the coming months.
The debt, known as HECS-HELP, is not charged interest. Instead, the entire amount is indexed annually to inflation. It is often labeled as a “good debt” that is much cheaper than other types of debt.
Over the past ten years, the average indexation rate has been just under 2 percent. But as inflation skyrocketed, so did indexation. Last year it reached a decade high of 3.9 percent.
This year it is expected to be even higher and could reach 7 percent. The actual figure will not be known until April 26, when the Australian Bureau of Statistics releases its March inflation figures.
The rising loan rates come as students bear the brunt of the rising cost of living, which impacts the cost of gas, groceries and electricity.
Graduates hoping to get a home loan will also be affected, as banks consider outstanding HECS or HELP debt when deciding how much to borrow.
Australians who are still paying off their student loans will be hit by another rise in repayments (pictured, students at the Australian National University in Canberra)
For Jessica Currie, who borrowed more than $45,000 to complete her undergraduate and graduate studies, that means about a third of her mandatory repayment will be swallowed up by indexation.
“This year, my mandatory repayment will be about $3300, and the indexation will be $1120,” she told NCA NewsWire.
“It doesn’t pass the pub test for me. the ‘real value’ of my education to the Australian economy is not a dollar figure when compulsory repayment and indexation are so closely linked.’
Mrs. Currie is not alone. Two-thirds of submissions to a recent Senate inquiry came from people who were in trouble because of their debts.
“It makes me feel hopeless and stupid because I’m enrolling in courses I never use,” said an anonymized submission from an accountant at a law firm.
Their debt was reduced by just $30 last year, despite a voluntary repayment in addition to the mandatory amount, thanks to a decade-high indexation rate.
WHAT IS THE INDEXATION PERCENTAGE?
Indexation rate is a formula applied to student loans that remain unpaid for more than 11 months after graduation.
It maintains the value of the loan in line with increases in inflation and the cost of living.
The rate rose 3.9 percent from June 1 (up from 0.6 percent last year).
In another, a young woman estimated it would take her four decades to repay her debt: “If I could go back and talk to my seventeen-year-old self, I’d tell her to run.”
According to an analysis of ATO data by the Parliamentary Budget Office, outstanding HELP debt currently stands at $74 billion.
Treasury estimates, included in last year’s budget papers, say it now takes an average of 9.6 years for someone to pay back their student loan.
The Greens, backed by the National Union of Students, are calling on the government to abolish indexation and raise the minimum reimbursement income to the median wage, which is $62,400.
Deputy Green leader Mehreen Faruqi, who introduced the bill to parliament last year, called the current system “unfair and unsustainable.”
“Combined with low wages, higher tuition fees and a very low minimum repayment threshold, we are in a student debt crisis,” she said.
Graduates hoping to get a home loan will also be affected, as banks consider outstanding HECS or HELP debts when deciding how much to borrow (pictured, university students in Sydney)
“It makes it harder for people, many of whom already have multiple jobs to make ends meet, put food on the table, buy medicines and pay rent.
“Just because Treasurer Jim Chalmers tells us the system is fair and working doesn’t mean it is. The HECS-HELP system was never designed to work the way it does now.’
Universities Australia president Catriona Jackson told the inquiry it would not support abolishing indexation and expressed caution about raising minimum repayment thresholds.
“There’s tremendous cost of living pressure, but the one thing that doesn’t increase for students over the next two weeks or months is their HECS debt,” she said.
Of course, CPI indexing means that debt gets bigger over time. But that means they pay it back longer.
‘That doesn’t mean they immediately pay more, and it’s very important to make that distinction, because students already have enough on their mind without worrying about it.’
Experts have said it would be foolish to pay off HECS debt early because it’s the cheapest loan anyone will ever get amid rising indexation rates (pictured, University of Sydney)