HECS – HELP Needed

Uncovering the HECS Debt Issue

P. P. Zhang

THE HIGHER EDUCATION CONTRIBUTION SCHEME (HECS) WAS INITIALLY INTRODUCED BY THE HAWKE GOVERNMENT IN 1989 AS A WAY FOR STUDENTS TO DEFER THEIR UNIVERSITY FEES UNTIL A LATER DATE. It exists as part of the broader government scheme, The Higher Education Loan Program (HELP), which encompasses other loans such as overseas fees and student service and amenities. HECS is often labelled as “good-debt”, comparable to an investment. On the surface, HECS-HELP seems like a great initiative – it allows many to access tertiary education who previously would not have been able to, with payments that are completely interest-free, all while keeping the economy in balance. The catch? Well, while HECS may not be affected by interest repayments, it operates under the existence of something called an indexation factor, which links the scheme to Australia’s CPI (Consumer Price Index, basically the inflation rate). 

If you’ve been following the news recently, you’ve probably noticed the RBA’s contractionary stance on the cash rate in an attempt to curb inflation. The inflation rate peaked at 7.8 percent in December 2022, before slightly easing to 7.0 percent this March. For some reference, the target band of inflation is 2-3 percent, far less than the status quo. As a result, HECS indexation has spiralled upwards, effectively meaning the debt current and former students owe will increase by 7.1 percent in June this year. Now at first, this may seem fair, because intuitively, debt should be revalued at the same rate as the economy is growing. However, there are a couple of problems associated with the indexation factor.

Firstly, although the cost of living is rising in the form of increased energy and grocery prices and mortgage repayments, wages have not increased as steeply as inflation has in recent years, leaving many struggling to meet living costs. HECS indexation only further adds to this stress. Despite one only having to repay this debt once their salaries pass $48,361 a year, the growth in the value of a loan means it will ultimately take longer for students to fully pay back their debt. Furthermore, the lingering HECS debt has knock-on economic implications, such as a future inability to take out home loans, as the repayments are deducted from one’s base salary. 

Another flaw is the untold profit the government makes from HECS loans. Although the Labor government may have achieved a budget surplus this year, one reason for this is the student debt which it has effectively been profiting off. Whilst HECS debt is indexed each year based on CPI as aforementioned, the government’s funding for these loans is sourced from the RBA’s 10-year bond yields, meaning that their interest rate sits at a comfortable 3.6%, compared to the 7.1% indexation students have to pay. This basically means that when this difference is taken into account, the government will profit around $2.5 billion from student debt.

Unfortunately, to make matters worse, HECS availability has only declined over recent years. In 1989, upon its establishment, the government covered 78% of student loans. Compared to 2022, this number has dropped to 51%. For the hardest hit degrees, including accounting, economics and law, government contribution has reduced to just 7%.

The reality is, HECS is undoubtedly still a cheaper and more accessible alternative to students paying university fees upfront. However, it has some blatant issues that make it a flawed student loan system. Education is a key driver of economic growth, but for those of us pursuing higher education, it is also an issue we’ll have to tackle soon as we progress out of high school and into the tertiary system.