What do the new changes to HECS mean for investors?

Welcome to this two-part series where I explore the Albanese Government’s proposed new initiatives for HECS as they fight an uphill battle to wrangle Australia’s cost-of-living crisis.

This will be split into Part 1 which details the changes and Part 2 where I explore what this may mean for investors with outstanding HECS.

What is HECS?

Higher Education Contribution Scheme (“HECS”) is Australia’s answer to federal study assistance, first introduced in 1989 after free higher education policy was abolished.

Unlike a typical loan, HECS is not interest bearing. Therefore, the cost to the borrower is less than traditional higher education loans globally. Instead of interest the principal of the loan is indexed by the consumer price index on a yearly basis to reflect inflation. Individuals above a certain income threshold are required to make compulsory loan payments based on their income bracket.

Currently there are approximately 3 million Australians with an outstanding HECS debt which averages around $26,000 per individual.

Why the commotion?

HECS has been a highly contentious topic with over $78 billion of outstanding debt which continues to expand driven by the increasing cost of education. Controversy spurred amidst cost-of-living pressures triggered by the pandemic which led to higher indexation rates and a substantial change in course fees. In 2023 indexation peaked at 7.1% after an inflationary spike sent debt balances soaring. Whilst the government has since outlined plans to retrospectively reduce the indexation rates for 2023 and 2024 through a credit system, higher education reform remains a contentious topic going into the next federal election.

Proposed changes

In response to concerns raised by those with outstanding HECS debt, the Labor Government announced that it plans to make a one-off payment to wipe 20% of all existing student debt (as at June 2025) if re-elected.

Treasurer Jim Chalmers has stated the latest measures are geared towards young Australians, to help ease cost of living pressures and assist in achieving home ownership.

The proposed policy will see more than $16 billion erased from the loan accounts of over 3 million Australians. The reduction will take place before the annual indexation of outstanding balances.

Further proposed changes include an increase to the minimum repayment threshold from $54,435 to $67,000, aimed at easing the cost-of-living pressures for lower income earners. Compulsory repayments will now be calculated only on the portion of income above the $67,000 threshold, rather than based on a proportion of total annual income.

Here is what this looks like at different thresholds:

These measures build on earlier proposals that suggested indexing debt by the lower of the Consumer Price Index (“CPI”) or the Wage Price Index (“WPI”). This policy was proposed after last year’s eye-watering 7.1% indexation rate based on CPI and a more palatable WPI of 3.2%. The government proposal would retrospectively adjust indexation through credits reducing the 7.1% figure to 3.2%. The same approach has been proposed for the most recent round of indexation in June 2024, taking the rate down to 4% from 4.7%.

My concerns with the proposal

From my perspective, the primary issue with this proposal is that it fails to meet the objective of easing the burden on young, lower income Australians over the long term. Whilst raising the income threshold puts more disposable income into the pockets of those most effected by the cost-of-living crisis, it is a double-edged sword. Intuitively, lowering the rate of compulsory contribution simply further delays the paying down of a balance that continues to be indexed. While it provides extra disposable income for many Australians, the time value of money dictates that contributions made now hold more weight that future contributions.

Whilst the extra income might prove a welcome sign of relief for many, I believe it also fails to address the underlying issue of rising costs of higher education. A small band aid on a gaping wound. The announcement of a one-off reduction in debt comes rather close to the next federal election and reads as a re-election campaign, rather than an attempt to address the continued failures of the education sector.

The 2021 “job-ready graduates” reforms introduced by The Coalition almost doubled university fees for certain areas of study such as arts, law and commerce. This reduced the overall government contribution to degrees from 58% to 52%. A 20% reduction in HECS is only intended to benefit current debt holders and indicates that the government has failed to acknowledge rising costs for future generations.

For those with higher debt balances and lower incomes, wiping 20% off existing debt and delaying the rate of repayment will not have a significant impact on long term outcomes. Indexation in the coming years will largely negate any real impact the proposal brings on an outstanding balance. In 2024 the compulsory contribution of individuals earning under $84,108 barely covered the indexation, meaning that the outstanding debt still increased.

The 20% deduction applies to all income brackets however arguably benefits middle and high-income earners more than their lower income counterparts. These individuals have a larger disposable income and therefore the ability to pay off their debt faster. The 20% deduction has a larger impact as their contributions are generally larger therefore pay down debt quicker, meaning that the 20% benefit they receive may not be negated by indexation.

As the next generation of Australians head to the polls, the parties move their focus to appealing to these new voters and the issues that matter most to them. As a young person, I am constantly faced with news and content surrounding housing affordability and cost of living pressures. This effects my life just as much as it does my peers and therefore are crucial talking points heading into the next election.

The Government has stated that the proposal is an attempt to reach out to young voters and address their concerns over cost-of-living and the housing market for new entrants. I previously explored Australia’s housing crisis in What rate cuts could mean for your investment property. The inability for young Australians to enter the market is driven by a complex web of persistent supply issues, rising construction costs and a decline in planning approvals. Additional disposable income can certainly help when gathering a mortgage deposit but doesn’t necessarily make housing any more accessible for younger people amid a plethora of obstacles.

Lastly, I believe the suggestion to index HECS at the lower of CPI and WPI is unlikely to provide a significant difference in the long term. The CPI and WPI have historically had a strong positive correlation, rarely differing by more than 1%. The chart below shows the recent years of inflationary spike has led to a temporary widening of the gap between the two, as wages fail to keep up with inflation. However, the impact of indexing by the lower of the two, is likely to grant only a minor change once inflation cools.

What the opposition thinks

Shadow Treasurer Angus Taylor has already come out in opposition of the proposal citing that taxpayers will ultimately foot the bill. He went on to further state that “the average Australian household will pay $1,600 for this, and the average Australian household doesn’t have the HECS debt”.

Shadow Education Minister Sarah Henderson highlighted that individuals who chose to pursue higher education will be high income earners over their lifetimes, therefore bear the responsibility of those debts.Opposition Leader Peter Dutton has also suggested Anthony Albanese’s move was a vote-grabbing attempt to “make people like him again” and suggested that the move may lead to an inflationary spike through increased spending.

Stay tuned for Part 2 of this series where I examine what these policies look like in practice and whether investors should pay off their HECS or invest.