One of the Albanese government’s headline-grabbing commitments in the recent election campaign was a promised 20 per cent reduction of the Higher Education Loan Program (HELP) or student loan debt. The Prime Minister has said this measure will be the first piece of legislation the government introduces in the next Parliament when it returns from 22 July.
But there’s also another commitment to transform the student loan repayment system. Subject to the passage of legislation, the federal government plans to raise the minimum repayment threshold for HELP loans from $54,435 this financial year to $67,000 next financial year, as well as alter the way repayments are calculated (based on income).
Under the current system, HELP repayments are calculated as a fixed percentage of an individual’s total income. But in the new model, repayments will be calculated on a marginal basis, similar to the income tax system. It means applying a fixed percentage only to the portion of income that exceeds the relevant income bracket threshold.
The changes were recommended in the February 2024 report of the Australian Universities Accord, which highlighted longstanding issues in the existing HELP repayment system.
One of the core problems the Accord identified was the sharp effective marginal tax rates (EMTRs) faced by graduates who earn just above a repayment threshold. Effective marginal tax rates measure the amount of additional earnings that someone loses to taxes and other payments, like student loan repayments or reduced government benefits.
But first, an important consideration should be whether HELP repayments towards a personal student debt should even be considered taxation from the individual’s perspective.
This depends on three key factors:
- The individual’s expectation that they repay the debt: If someone believes they’ll never pay off their entire HELP loan – because their income will stay below the repayment threshold for much of their life – they might see each repayment as money they’ll never get back.
- The individual’s valuation of money in the future vs now: When the effective interest rate on HELP debt (typically indexed to inflation) is lower than an individual’s own discount rate (i.e., how much they value money now versus later), repayments feel more like an enforced repayment on an obligation they would typically take longer to repay.
- The individual’s liquidity constraint: Even if borrowers value future money a lot, i.e. they are not impatient, liquidity constraints such as mortgages or other personal debt may force borrowers to prefer cash in hand now rather than making contributions to a HELP debt.
With this in mind, assuming that an individual considers their HECS repayment as a tax, ongoing research at e61 is examining the EMTRs of the current tax and transfer settings, specifically looking at the share of an additional $1,000 in earnings that is captured by the government.
In the below figure, under the old system, a graduate on $62,000 receiving a pay rise of $1,000 loses almost all of this pay rise to income tax and increased HELP repayments. For some in high-income brackets, earning an additional $1,000 results in paying back around $1,100 in income tax and HELP repayments. Under the new system, these discontinuities in HECS repayments would be smoothed, such that around half of an additional $1,000 is lost to taxes and HELP repayments for all income levels above the new minimum threshold.
How do graduates react to these incentives in practice?
New academic research using administrative data is offering a clearer picture of how repayment design affects borrower behaviour. At the Micro for Macro conference, co-hosted by e61 and Macquarie University in December last year, Tim de Silva presented a paper that used detailed Australian tax data to investigate how graduates respond to repayment thresholds.
His findings indicate that borrowers do adjust their work patterns in response to repayment thresholds. When examining tax return data, a number of people submit an income tax return just below the minimum repayment threshold, more than what is expected based on tax returns just below and above this amount. This echoes similar earlier findings from Bruce Chapman and Andrew Leigh.
Furthermore, when the minimum repayment threshold is adjusted periodically over the sample period, many borrowers who were closer to the new threshold appear to work fewer hours or reduce their income slightly to avoid crossing into the new repayment territory.
This behaviour is found to be especially common among those with flexible working arrangements (such as hospitality or gig work), those who are less likely to repay their full loan, and those facing tighter financial constraints.
Importantly, the research doesn’t suggest scrapping income-contingent repayment – in fact, quite the opposite. De Silva finds that while some borrowers do change their work behaviour, the overall benefits of tying repayments to income far outweigh these effects.
Compared to a fixed repayment model, income-contingent repayment still offers better protection against financial hardship and leads to higher overall welfare for borrowers. But the design details – like where the threshold sits, and how repayments are calculated – really matter.
This proposed adjustment is likely to reduce the sharp financial disincentives that exist just above the repayment line, while maintaining the progressivity of the repayment schedule.
e61 will continue to explore how micro-level decisions – like when and how people work – shape broader economic outcomes at our upcoming Micro for Macro conference in December, where new research will again help inform policy.
Elyse Dwyer
Elyse is a Research Economist at the e61 Institute, her research areas cover structural reform, labour markets, education and housing. Elyse holds a University Medal and First Class Honours in Economics from the University of Queensland.
Matthew Maltman
Matthew Maltman is a Research Economist at the e61 institute. He previously worked at the Australian Productivity Commission, where he focused on various policy issues including education, public transport, and housing policy. He is passionate about housing affordability and writes on the impact of housing supply reforms globally. Matt holds a degree in Economics from the University of Western Australia, where he graduated with First Class Honours.
