Student Loans in Australia

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Richard Pallardy

By Richard Pallardy

December 30, 2019

As the United States grapples with the student loan crisis, pundits and politicians increasingly look abroad for some indication of how the problem might be alleviated.

Among the most lauded systems is Australia’s. Boasting no-interest government loans provided to all college students, price controls in place for universities, and an income-contingent repayment system in which monthly amounts are withdrawn as a payroll tax, Australia’s student loan system is widely considered to be among the most generous in the world.

While Australian students have fretted about recent reductions in the repayment cap, they have dodged most of the hardships facing American students when they graduate. Default and bankruptcy discharge simply aren’t an issue. Struggling graduates who fall beneath the repayment cap cease repayment until they are able to meet their obligations.

The system is not without its imperfections: a certain proportion of graduates will likely never repay the full amount of their debt or even reach the repayment threshold in the first place, creating a cost sink for the government. And there are concerns that even the relatively moderate cuts in the repayment cap may be slowing down the financial development of young people.

Still, Australia’s government has been more proactive than most in refining and updating its education finance system to meet competing and ever-shifting needs. And it seems that they’ve successfully zeroed in on and mitigated at least some of the problems that plague other countries, including the United States.

History up to 1989

The Labor Government of Prime Minister Gough Whitlam got rid of university fees in 1973. Prior to that point, fees were officially in place, though in practice many students avoided them through the receipt of scholarships.

Beginning in 1986, fees began creeping back with the institution of the relatively minor $250 Higher Education Administration Charge (HEAC). As the rates of secondary education completion rose, it became increasingly apparent that government subsidies would need to be augmented by personal contributions.

In May 1988, the Committee on Higher Education Funding, known as the Wran Committee after chairman Neville Wran, recommended that students be charged a flat fee and that repayment be contingent upon post-graduation income.

A version of an income-contingent system was first proposed by economist Milton Friedman in 1955, based partly on the notion that return on human capital was greater than return on physical capital. Thus, education loans functioned as a system wherein shares of human capital were sold.

This approach was almost entirely untested at the time. Income-contingent student loans had never been tried on a large scale, though Yale had tried income-share agreements for a brief period following their suggestion by another economist, James Tobin, in 1971.

Nonetheless, the committee’s recommendations were passed into law as the Higher Education Contribution Scheme (HECS) in 1989 and a grand experiment was embarked upon.

Developments Down Under

The HECS system initially required students to pay $1,800 a year, with a 15% discount if they were able to pay up front rather than later through payroll taxes. The repayment threshold was set at $22,000 a year, based on average earnings at the time. Once that threshold was reached, borrowers repaid anywhere from 1-3% percent according to a tiered scheme that topped out at $35,000.

At its inception the program only covered financing for those pursuing bachelor’s or advanced degrees.

Adjustments were made in the early 1990s to contribution, upfront discount and repayment rates, though the system remained essentially the same. In 1994, postgraduate tuition rates were deregulated.

Income thresholds for repayment continued to fluctuate throughout the decade and in 1996 additional income tiers were introduced. Differential contribution rates aligned to certain fields of study were introduced the next year.

The system continued to undergo refinement in the next century. In 2001, bankruptcy discharge was officially prevented. And in 2002, specific loans for postgraduate work were introduced in what was known as the Postgraduate Education Loans Scheme (PELS).

A series of further revisions came into force in 2005. The HECS loan scheme was revised and became HECS-HELP (with ‘HELP’ standing for Higher Education Loan Program).

Universities were allowed to set their own fee schedules, within stipulated ranges. Repayment thresholds were increased, as were income percentages, which were upped to 8% for those making $65,000 or more.

HECS-HELP was available under this scheme to those who had secured slots at public universities — known as Commonwealth Supported Places. FEE-HELP was available to those attending private universities, and replaced PELS as a source of funding to graduate students, with a limit of $50,000 in borrowing. And OS-HELP provided assistance to overseas students.

Notably, FEE-HELP amounts were increased substantially in 2007, particularly for medical and veterinary students. These efforts to support STEM mirrored those made to HECS in 2005 with the introduction of the National Priorities Band. Contributions and repayments were reduced for those pursuing careers in nursing and education and in 2009 for those pursuing careers in mathematics and science.

This was discontinued in 2013, resulting in significantly higher contributions from students entering those fields.

In 2008, VET-FEE HELP was introduced to aid vocational students, who had to that point been excluded from the loan program. It became VET Student Loans in 2016. And in 2009, enrollment caps were eliminated at public universities in the hopes of increasing Australia’s competitiveness in producing young professionals.

During the early twenty-tens, the government continued to tweak fees and fine tune other aspects of the system. An additional program rolled out in 2012, SA-HELP, was designed to assist with fee for student services. Discounts for early and up-front payment were eliminated in 2015.

Recent and Proposed Changes

A series of substantial adjustments to the repayment threshold were enacted in the late twenty-tens. For 2018-19, the threshold was set at $51,597, with repayment set at 1-8% of total income, depending on the income tier. For the next school year it dropped to $45,881, with repayment set at 1-10% of total income. The highest bracket tops out at $131,989.

Still, this is quite high in comparison to other OECD countries.

These adjustments applied to both outstanding and future debt. Further, lifetime borrowing caps were set for all HECS loans. These caps had previously been restricted to graduate loans. They are now set at $104,440 for all students except those who study dentistry, medicine, or veterinary science, who top out at $150,000.

In 2016, a loophole that allowed Australians living abroad to avoid repayment was closed. This had been a significant liability: appreciable numbers of graduates were simply leaving for parts unknown and abandoning their debt. Currently, these overseas students must repay according to the same system as residents, a fact heavily reinforced in the press surrounding the most recent changes.

These changes have been cause for alarm in Australia. The new repayment threshold is considered quite low. Concerns about financial security, from the challenges posed to home ownership to the more-distant concerns of retirement, have increased. Even those still enrolled in school who earn above the income cap now must begin repayment.

Liberal attempts to deregulate fees for domestic students were thwarted in 2015. However, fees were gradually deregulated for international students between 1980 and 1990. And now, students from overseas provide over 20% of university revenues.

The Australian government has moved to compensate for the proliferation of bogus vocational programs that occurred in the wake of the institution of VET-FEE HELP. Many of these institutions provided worthless degrees, subsidized by government lending. Some $493 million in debt to such programs was absolved in December 2019.

Current State and Implications

An analysis by the Parliamentary Budget Office in 2016 found that the yearly cost of the HELP program of around $2 billion would rise to $11.1 billion by 2026 and that the overall value would more than triple, from around $60 billion to $185 billion.

The upward creep of the cost was apparent in 2018-19, with about $4.7 billion lent. Around 90% of students use HECS-HELP, as opposed to paying up front. Some 20% of this is “doubtful debt” — debt that will never be repaid. One analysis found that debtors would have to earn well over the current repayment threshold if they were to pay off their debt before they retired.

Some of the current level of debt has been attributed to the VET-FEE program and it has caused further rumblings about deregulation.

VET students are far more likely to fall under the income threshold and never rise above it, either due to failure to complete the program or to lower wages, raising questions about the program’s sustainability.

National subsidy of the higher education system has declined by nearly 50% since the mid-1970s.

The average Australian student graduates with over $21,000 in debt, with a substantial portion holding more than twice that amount. And the amount of time it takes to pay that off is approaching a decade for most. Nearly 800,000 students are currently repaying their loans. According to one estimate, the cost may increase by nearly 30% in the next decade.

Concerns about the so-called “$100,000 degree,” a major Labor talking point, increasingly seem as though they may be justified.

Still, while Australia doesn’t match the free education provided in Germany and Scandinavia, its repayment scheme has been imitated in various forms by other progressive countries and remains among the world’s most generous. Israel, New Zealand, South Africa, Thailand, and the United Kingdom have all experimented with different versions of an income-contingent repayment system.

Whether such a system would be scalable to the larger population and economy of the United States remains a topic of debate. Currently, even the initial infusion of money that would be required to get such a system in place seems improbable. Even so, elements of the Australian system feature in recent legislation.

An October 2019 bill introduced to the House by Democratic Congressman David Cicilline calls for interest-free loans with a 30 year repayment period and no payments for those making under $40,000 a year, with three tiers of income-contingent payments for those making above that amount.

Whether such a system will gain any political traction remains to be seen, but with revisions of the student loan system on the platforms of many Democratic presidential candidates, it seems likely that the discussion will at least give it some consideration in the coming years.

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