Over the weekend, the Albanian government announced radical measures changes to student loanswhich would come into force after the next federal election.

Three million Australians with student debt could see their sales reduced by 20%. The remaining debt would be reimbursed according to a new systemwith no mandatory reimbursement for people earning less than AUD 67,000 per year. Both changes require parliamentary approval.

The changes will apply to anyone with student debt, including all HELP (formerly HECS), Vocational Education and Australian Learning Support Loans, as well as other student support loans.

People with student debt would undoubtedly benefit from the proposed changes. But they have a high price and some disadvantages.

What are the proposed student debt reductions?

As of June 30 this year, Australian tertiary student debt stood at around $75.1 billion – although that’s soon to be the case. expected to decrease by approximately $3 billion. Legislation for partially inverted the recent debt indexation will be submitted to the Senate later this month.

However, if we stick to the $75 billion, a 20% reduction would equate to approximately $15 billion.

Using the government figuressomeone with an average HELP debt of $27,600 would see about $5,520 reduction in their HELP loans next year.

Career students owed $8.4 billion as of June 30, 2024. Their balances would decrease by about $1.7 billion due to the changes.

Based on the previous student support loan According to the data, this debt amounts to more than $3 billion. The changes would result in a drop of about $600 million.

These reductions total $17.3 billion, compared to the government’s estimate of $16 billion. But upcoming indexing changes could explain this difference.

Reimbursements should change

These changes have two important elements: the income at which repayments begin and how repayments are calculated.

These changes take place in a context cost of living crisis and rising tuition fees for students.

There was a note outcry earlier this year when the cost of an arts degree reaches $50,000 by 2025.

No mandatory reimbursement if you earn less than $67,000

With the approval of Parliament, for 2025-26 mandatory student loan repayments would not begin until the debtor earns $67,000. That’s up from around $56,000.

This would help a significant number of Australians. In 2023-24 more than 400,000 debtors had incomes between $50,000 and $70,000.

Changes to how refunds are calculated

Another big change is how refunds are calculated. Currently, when a debtor’s income reaches one of 18 income levels they repay a higher percentage, based on all their income.

This can produce strange results. Take a graduate who earns $62,850 per year. They are within the 1% of income refund rate, so they owe the Australian Taxation Office $628.50 in HELP refunds. But if their income increases by $1 to $62,851, they fall into the 2% refund bracket and owe the tax office $1,257. Thus, a $1 salary increase would reduce the graduate’s take-home salary by more than $600.

Under the government’s proposal, refunds would be calculated on income above a threshold, ignoring all income below the first threshold.

The new system would start with a 15% reimbursement rate for incomes between $67,000 and $124,999. An income of $125,000 or more would have a reimbursement rate of 17%.

So let’s take a graduate who makes $70,000 a year. Under the current system, they will repay 2.5% of all their income, or $1,750. Under the proposed system, their reimbursements will be calculated only on the $3,000 difference between $67,000 and $70,000. This means they pay 15% of $3,000 or $450.

The government says on average, reimbursements will decrease by $680 per individual debtor.

But those earning more than $180,000 will pay off more student debt each year under the new system. It’s not a big group. From the 1.16 million people who made a HELP refund in 2021-22, all but 16,000 earned less than $180,000.

There are some disadvantages

The downside to reduced annual repayments is longer repayment periods and greater indexation of HELP balances.

People who want to repay more quickly can make voluntary repayments, which have increased significantly over the last few years. But most people default to mandatory repayment only.

While those currently in debt will see their repayment terms reduced after their balance is reduced by 20%, future borrowers will not benefit from this benefit.

Given the trend of recent announcements, it would not be surprising if the government also announced a reduction student contributions for future borrowers.

But it is also surprising that the government has been dithering for two years on the high cost of arts degrees, which is expected to reach almost 100%. $17,000 per year next year. These high fees should have been reduced long ago.

The cost to the government

Reducing student debt balances by 20% will also result in a very significant cost to the government and taxpayers.

It won’t be the full $16 billion announced, because that includes debt that is unlikely to be repaid anyway.

For higher education debt, the government actuary estimates that 24% of the outstanding debt as of June 30 this year will not be repaid. Even so, a 20% reduction in the “good” debt of $57.1 billion would still cost $11.4 billion.

Reducing vocational education debt by 20 percent would add about $1 billion more to the cost, after deducting the debt that will not be repaid. Student income support debts tend to have high bad debt rates, but the 20% reduction given to them would also increase government spending.

The government will also face additional costs due to the slowdown in future reimbursements.

Is this the best way?

Recent years have highlighted the extent to which stressful and damaging High levels of student debt may concern young Australians.

And as Labor looks ahead to the next federal election, reducing personal debts and repayments could be a useful election selling point.

However, the Albanian government’s plan comes at a high price and the priorities may not be quite right. Manage future debt, for example by canceling fee increases under the Job Ready Graduates programis as important as reducing old debts.