The federal government’s election pledge to reduce student debt for about three million Australians will be a legislative priority for the first week of the new parliament.
University graduates will have their debt reduced by 20%, but e61 Institute economists Jack Buckley and Matthew Maltman have concluded that people in the top third of income-earners will benefit the most from the proposed student debt relief, as will those who graduated some years ago.
Specifically, e61 cites the following concerns with the debt forgiveness policy.
First, the size of debt relief depends almost as much on graduation year as degree choice. This means that those who leave university in the year the policy is implemented will receive a debt cut that is more than twice as large as those who left only four years earlier or four years later. This raises concerns about the horizontal equity of the policy, since individuals studying the same degrees will receive different treatment depending on when they finish their courses.
Second, e61 claims the policy will do little to accelerate debt repayment. It estimates that only 20% of affected individuals with student debt pay off their loans even a year earlier due to a 20% debt cut. Most either still repaid their debt in the same year (35%) or hadn’t yet repaid it within the 10-year period we observe (45%) (this is largely driven by individuals who were still studying in 2012).
Third, and most importantly, most of the benefits of the student debt relief policy will flow to future high-income earners. e61 estimates that more half of the benefits will flow to individuals who ended up in the top third of all income earners 10 years later. Less than 20% went to those in the bottom third of income earners.
This raises vertical equity concerns because a student debt cut disproportionately benefits individuals with very high lifetime incomes and not those with low lifetime incomes.
e61 recommends reducing all student debt by a flat $5,500 would be more equitable:
Consider a simple world where total outstanding student debt is $100 and there are only two students with outstanding balances: Student A, who holds $80 of debt and Student B who holds $20. Under the current policy, Student A would receive
$16 in debt relief, while Student B would receive only $4. Under the alternate policy – where each student receives a flat dollar amount – both students would receive an equal share of the 20% debt cut, or $10 each.
This alternate debt cut would have three main advantages. First, it would help improve the horizontal equity of the policy – the extent to which similar individuals receive similar levels of debt relief. This would reduce the large role that graduation timing plays in determining the extent of debt relief. Rather than a student who has just graduated receiving twice the benefit as a similar student who graduated a few years earlier or will graduate a few years later, they will all receive the same amount of relief.
Second, it would improve vertical equity. Since high-income graduates often hold larger debts (e.g. those who studied medicine, law and commerce), a proportional cut skews benefits upward (Figure 6). In comparison, a flat dollar debt cut provides the same debt relief to students regardless of whether they studied law or teaching, medicine or nursing.
While a flat cut shifts more of the benefit toward low and middle earners, it still remains inequitable overall. This is a largely unavoidable characteristic of any student debt cut, because those who attend university and take on debt tend to earn more over their lifetimes and because any student debt cut disproportionately benefits higher earners, who are more likely to repay their debts in full.
The final benefit of our alternate policy is that it would help more individuals pay off their HELP debts earlier. Using our 2012 example, we estimate that about 35% of debt holders would make their final repayment in an earlier year with a flat debt cut, compared to only 20% under the current approach. This could help increase incentives to work for lower income individuals around the current repayment thresholds.
This final benefit reflects a key structural difference in the two policies. While a proportional cut reduces the size of a debt, a flat cut will eliminate it entirely for many debt holders. For low-balance borrowers, this delivers immediate relief and lowers participation tax rates—especially valuable for those marginally attached to the labour force.
The e61 Institution’s recommendations are an improvement on the policy. However, my view is that the student debt waiver is a gross misallocation of taxpayer money that will prevent the government from doing other, more important things.
After all, why should lower-skilled workers subsidise the debts of university graduates? There are far better ways to spend billions of taxpayer dollars.
