# Increased debt and repayments – HECS reform means students will have to pay a heavier tax

On 1 May 2017, the Education Minister announced a suite of reforms for the higher education sector, introducing a range of measures including an increase in student course fee contribution...

# Increased debt and repayments – HECS reform means students will have to pay a heavier tax (updated)

## Background

On 1 May 2017, the Education Minister announced a suite of reforms for the higher education sector, introducing a range of measures including an increase in student course fee contribution and changes to the minimum repayment threshold.

These changes will not impact all students in the same way, as they are dependent on course choice and study duration. Indeed, the field of study or "Band" a certain course is categorised under determines the HECS contribution that a student will need to make.

Band 1 courses include Behavioral Science, Clinical Psychology, Education, Foreign Languages, the Humanities, Social Studies, and Visual and Performing Arts. Band 2 courses include Agriculture, Allied Health, the Built Environment, Computing, Engineering, Mathematics, Science, Surveying, and Statistics. Band 3 courses include Accounting, Administration, Commerce, Dentistry, Economics, Law, Medicine, Nursing, Veterinary Science, and Visual and Performing Arts.

Current student contributions and, as a result, total graduation debt, depends on the Band category: $6349 for Band 1, $9050 for Band 2 and $10596 for Band 3. (see http://studyassist.gov.au/sites/studyassist/helppayingmyfees/csps/pages/student-contribution-amounts).

# Budget 2017 Changes

The government proposes an increase to the student contribution to the tuition fee by up to 7.5% and will lower the first income threshold for repayment to $42,000 (Note this has not been formally announced at the time of writing, the current model assumes changes to the first threshold only). The repayment threshold will also be indexed by inflation, rather than the faster growing average weekly earnings.

Table: The repayment rate in financial year 2017-18 (current system)

2017-2018 Repayment threshold |
Repayment % rate |

Below $55,874 |
Nil |

$55,874 - $62,238 |
4.0% |

$62,239 - $68,602 |
4.5% |

$68,603 - $72,207 |
5.0% |

$72,208 - $77,618 |
5.5% |

$77,619 - $84,062 |
6.0% |

$84,063 - $88,486 |
6.5% |

$88,487 - $97,377 |
7.0% |

$97,378 - $103,765 |
7.5% |

$103,766 and above |
8.0% |

source: http://studyassist.gov.au/sites/studyassist/payingbackmyloan/loan-repayment/pages/loan-repayment

Table: The repayment rate in financial year 2018-19 (new system)

2018-2019 Repayment threshold |
Repayment % rate |

Below $42000 |
Nil |

$42000 - $44520 |
1.00% |

$44520 - $47191 |
1.50% |

$47191 - $50022 |
2.00% |

$50022 - $53024 |
2.50% |

$53024 - $56205 |
3.00% |

$56205 - $59577 |
3.50% |

$59577 - $63152 |
4.00% |

$63152 - $66941 |
4.50% |

$66941 - $70958 |
5.00% |

$70958 - $75215 |
5.50% |

$75215 - $79728 |
6.00% |

$79728 - $84512 |
6.50% |

$84512 - $89582 |
7.00% |

$89582 - $94957 |
7.50% |

$94957 - $100655 |
8.00% |

$100655 - $106694 |
8.50% |

$106694 - $113096 |
9.00% |

$113096 - $119882 |
9.50% |

$119882 and above |
10.00% |

Source: Budget 2017

This article models the impact of such changes on student debt, assuming the changes will take place in the upcoming financial year (2017). To account for the price adjustment, we reduced the 2018 government threshold by 2%. This particular assumption makes only minimum differences for the calculation. While there are no other direct student-centered measures, accompanying cuts to overall University funding could add additional administrative fees from universities to student bills. For the purpose of simplicity, we do not consider the second round effects in this analysis.

# Impacts on Students

Students will be affected in different ways, depending on whether they obtain scholarships or other grants and whether they defer their entire tuition fee in the HECS scheme. In addition, their repayment will depend on whether they are able to obtain a Commonwealth-supported (CSP) place.

The model assumes that the student accumulates the debt without early repayment during the study period, and would immediately find a job with a starting salary of 50%, 75% or 100% of the average wage. It is clearly conceivable that Science and Medical degree students will receive a higher starting wage. The model also assumes the annual wage will increase by 5% a year until the increase reaches 25% of the average wage. This means that for a student with a starting salary of 75% of the average wage, his or her wage profile will plateau at 100%. All calculations are in 2017 value. The average earning in 2017 is assumed to be 2% higher than the one in 2016, which was at $79,049 per annum.

Students studying Band 1 degrees (e.g. Education or Social Work) will accrue $1905 additional student debt with a four-year degree and will pay off their debt either earlier than the original scheme or around the same time as before. In this case, the student could repay faster due to the early start of repayment at the relatively low wage level depending on their starting salary. The proposed scheme will increase the total debt of a 4-year Band 1 degree by $1905, and the student will pay back the debts 18 months earlier, assuming the graduate earns a starting salary of 50% of the average wage ($39524 p.a., increasing at 5% p.a. until reaching 75 % of the average wage). The average annual repayment would be $1816 (a $586 decrease).

Figure 1: Outstanding Debt for students taking a 4-year degree in Band 1 courses, assuming 50% AWE as the starting salary (left) and 75% AWE as the starting salary (right)

For Students in Band 2 courses, the total amount debt will increase by $2715 for a four-year degree and their average annual repayment amount will go up by 7 to 10 percent, although the repayment duration will not be affected much. The proposed scheme will increase the total debt of a 4-year Band 2 degree by $2715, and the student will pay back the debts 1 months later, assuming the graduate earns a starting salary of 75% of the average wage ($59286 p.a., increasing at 5% p.a. until reaching 100 % of the average wage). The average annual repayment would be $4143 (a $265 increase).

Figure 2: Outstanding Debt for students taking a 4-year degree in Band 2 courses, e.g. Computing, assuming 75% AWE as the starting salary (left) and 100% AWE as the starting salary (right)

Students in the most expensive courses, e.g. Law and Medical Science will experience the highest HECS debt increase (circa $3974 for a five-year degree) and their average repayment amount will go up by 6 to 11 percent, depending on their starting salary. The proposed scheme will increase the total debt of a 5-year Band 3 degree by $3974, and the student will pay back the debts 2 months earlier, assuming the graduate earns a starting salary of 100% of the average wage ($79049 p.a., increasing at 5% p.a. until reaching 125 % of the average wage). The average annual repayment would be $7321 (a $683 increase). These students are most adversely affected by the absolute debt increase.

Figure 3: Outstanding Debt for students taking a 5-year degree in Band 3 courses, e.g. Law, assuming 75% AWE as the starting salary (left) and 100% AWE as the starting salary (right)

[Note: This piece was updated with revised assumptions. Previous figures were estimated using a slightly (5%) higher wage rate, this has now been updated. There is no change to the main conclusion.]