There is a better way to cut student debt

When the re-elected Albanese Government returns to parliament, its first stated legislative priority is to cut 20% of outstanding student HELP debt. The proposal echoes U.S. policy under the Biden Administration and comes after a decade during which both the number of young people with a HELP debt and the real value of that debt have grown.

Supporters argue that the policy will help make Australia’s education system fairer and more affordable. But critics have raised concerns about whether most of the cut will go to future high-income earners. There are also questions about whether a percentage cut is the right approach to help students struggling to pay off their HELP debts later in life.

To shed light on these questions, we went back in time to consider what would have happened if such a cut had been implemented in 2012 instead of 2025. Using administrative tax data linked to university completions records, we identified who would have benefited from the cut and tracked their earnings overtime.

We identified three lessons for the 2025 student debt cut.

First, most of the benefits of a student debt cut go to future high-income earners.

We estimate that over 50% of the benefits of the debt cut go to people who are in the top third of all income earners only 10 years later. Less than 20% went to the bottom third of income earners.

Looking across fields of education, recent medicine, law, and dentistry graduates would have been some of the largest beneficiaries, receiving over $10,000 in debt relief each on average. In comparison, recent teaching and nursing graduates would have received only $3,000 to $4,000.

Second, the size of debt relief depends almost as much on graduation year as degree choice.

We found that individuals who left university in the year the policy was implemented received a debt cut that was more than twice as large as individuals who left only four years earlier, and two and a half times larger than those who left four years later.

This highlights a key issue with a percentage debt cut that has so far been missing from the debate. It treats other otherwise similar individuals – who studied the same degree and graduated into a similar labour market – very differently.

Consider a stylised example of two teaching graduates who graduated just before our simulated debt cut in 2012. James, who graduated in 2011, and Emma, who graduated in 2007. Despite studying the same degree and starting on similar salaries just years apart, a percentage debt cut would have provided James with over $3,230 in debt relief, nearly twice as much as Emma, who would have received just $1,790.

The third and final lesson from our analysis is that a 20% debt cut will do little to accelerate debt repayment.

We found that the 20% reduction in HELP debts had surprisingly little effect on when students paid off their debt. For around 80% it was unchanged. Most individuals either still paid off their debt in the same year (35%) or hadn’t yet paid it off during the 10-year period we observe (45%).

Of course, many things have changed since 2012. The introduction of Job Ready Graduates in 2021, for one, has significantly increased the cost of some humanities degrees with lower earnings potential. But many of the highest cost degrees remain high earning fields such as law, medicine, and commerce.

Is there a better way to cut 20% of student debt?

It may be unrealistic to expect the Government, just returned with a strong majority, to renege on an election promise. But there is one small tweak that could improve both the equity and effectiveness of the policy while remaining true to the core promise – and without increasing its cost.

That tweak would be to cut 20% of all debt but cut each debt holders balance by an equal flat-dollar amount of about $5,500, rather than cut 20% of each individual’s balance. This would be closer to the flat-dollar debt relief policy proposed by the Biden Administration in the US.

Moving to a flat-dollar debt relief policy would have the same overall effect on the debt burden of young Australians. But it would help each former student with an outstanding HELP debt the same amount, regardless of whether they studied law or teaching. Or whether they graduated in 2023, in 2025 or will graduate in 2027.

And it would help more individuals pay off their HELP debts earlier. Using our 2012 example, we estimate that about 35% of debt holders would make their final repayment in an earlier year, compared to 20% under the current approach. This could help increase incentives to work for individuals around the current repayment thresholds.

Still, it’s important to note that even a flat cut would remain poorly targeted. A substantial share of benefits would accrue to individuals who go on to become high earners, while future students would miss out entirely. As previous e61 research has noted, this continues a shift away from Australia’s legacy of heavily targeting our limited welfare expenditure through direct transfers.

This raises a broader question about who should pay for university education. Under our current system the taxpayer subsidises part of the cost up front, with the rest picked up by students through a zero real interest loan.

Student debt reform may be politically popular. But how policymakers redesign it – and who it ultimately benefits – still matters.