Critics of soaring indexation on student debts have welcomed the education minister’s commitment to look into an accounting quirk in the way loans are indexed which could save graduates hundreds of dollars in repayments.
Hecs debts rise annually with inflation on 1 June, but loan repayments aren’t processed until tax returns are lodged, which can be months later. This means indexation is applied to portions of debts already paid – often by thousands of dollars.
On Friday, the education minister, Jason Clare, stood firm on going ahead with the 7.1% rate of indexation, which increased the average loan by about $1,700, but acknowledged the need for modest reforms amid growing backlash from graduates, unions and independents.
Independent MP Kylea Tink said Clare had “finally seen sense” on at least one aspect of Hecs. The member for North Sydney has been lobbying Clare alongside a growing crossbench coalition to urgently intervene to reform the system ahead of a three-decade high indexation rate that came into effect on Thursday.
“It’s great news that the minister has finally seen sense and committed to examining a quirk that has been the cause of so much angst for people with student debts,” Tink said.
“Now we just need to stay on the case and make sure the promise is followed through.”
Clare told reporters eradicating indexation on debts would come at too high a cost to the taxpayer but Tink’s suggestion to apply indexation after compulsory repayments were made was a “good argument”.
Forecasts showed that abolishing indexation would hit the budget bottom line by up to $1.3bn.
“If you’ve got a debt of about $20,000, you pay off about $2,000 over the course of the next 11 months … then the ATO index is based on the original $20,000 rather than the $18,000,” Clare said.
“That strikes me as not right.”
Clare said he had tasked the universities accord team, due to hand down an interim report at the end of the month, with looking at the issue.
On Monday, a coalition of eight MPs including Tink signed an open letter to Clare urging him to freeze the indexation rate before it came into effect on Thursday.
Independents also met with Clare privately on Wednesday suggesting immediate policy changes, including reforming when and how debts were indexed.
The changes to when indexation was applied were first raised by the independent member for Goldstein, Zoe Daniel, last month, based on modelling provided by the parliamentary library.
It found graduates could save hundreds of dollars a year in final payments if the system applied their repayments before applying indexation, with greater savings made for students with larger debts.
For Sam O’Leary, who spoke to Guardian Australia about the burden of his student debt this week, if his repayments for the financial year were applied to his loan balance, his debt would have increased by around $1,000 with 7.1% indexation.
Instead, it increased by $1,858.
“It’s ridiculous,” he said. “We wouldn’t accept banks compounding interest on peoples’ mortgages before applying payments they’d already made, so why do we accept the government doing it to citizens?”
The shadow education minister, Sarah Henderson, took Labor to task on account loan repayments in Senate estimates on Friday and said she was glad Clare had been “forced into reconsidering his position”.
“It is unjust that so many Australians are being gouged on Hecs loans which have been paid off,” she said.
“In one case raised with me, a young paramedic who paid off a $12,000 debt this year will still face an indexation penalty of $850 which is manifestly unfair.”
The Greens education spokesperson, Mehreen Faruqi, accused the Coalition of “wild hypocrisy” after cutting university funding while in government and implementing the controversial job ready graduates scheme.
“Young people deserve better than a government who sits idly by and watches their pain and suffering as their debt burden balloons,” she said. “Education should not be a debt sentence.”
