The impact of HECS: Does the overhaul go far enough?

Unlike traditional loans, HECS-HELP debts do not accrue interest. Instead, they are adjusted annually on 1 June each year through a process called indexation. This adjustment is intended to ensure that the value of the debt keeps pace with inflation, using the Consumer Price Index (CPI) as a reference point. However, with the CPI reaching 7.1 per cent  last year, many borrowers faced a substantial increase in their debt burden.

To tackle this, the government proposed changes to cap the indexation rate, ensuring it matches either the CPI or the Wage Price Index (WPI), whichever is lower. Once the legislation is passed, the adjustment will be backdated to 1 June 2023, effectively wiping out the 7.1 per cent increase that many borrowers experienced last year.

For someone with an average HECS-HELP debt of around $26,000, this change could mean a reduction of approximately $1,200.

Impact on borrowers

The overhaul is expected to provide much-needed relief to borrowers, particularly those who have been struggling with the rising cost of living. However, speaking to those affected tells a different story.

Oliver John Williams, research assistant at the Public Interest Advocacy Centre and in his final year of studying a Bachelor of Criminology and Criminal Justice/Law at the University of NSW, has a HECS debt of around $60,000.

He tells LSJ that his HECS debt increased by approximately $3,500 last year, and while he understands the changes will return half of this amount in the form of a tax credit and reduce future indexation rates, he does not think the changes will make it easier to pay off the debt.

“The current government acts as though these HECS reforms are such a huge change. However, my debt (with the changes) still grew 3.2 per cent in the 2022-23 financial year, and depending how much I earn post-graduation, I may have to make voluntary contributions to reduce the debt,” Williams says.

Charlotte Morson, Principal Solicitor at The Legal Costs Consultants, says that when she graduated in 2009, she worked a relatively low-income job for a couple of years as a graduate lawyer before having children at 25 years old. As a mother working part-time, she didn’t earn much over the threshold to pay much of her HECS back until recently at 35 years old.

“The indexing negatively affected me as a woman who had primary responsibility of young children – compared to my husband who, traditionally I guess, continued working full-time at a much higher wage, therefore meeting the repayment thresholds and repaying HECS quicker without indexing having much affect,” she says.

Her debt last year was $30,000 which she chose to pay off before the indexation, but this required her to dig into her savings.

“The indexing would have cost me approximately $3,000 and was the reason I used some savings to pay it off a little earlier than tax time.  Without the index, I would have been able to keep the savings in the bank a little longer,” Morson says.

There is no question that HECS is a long-term debt. With the average HECS-HELP debt balance of $26,000 taking an average of seven to 10 years to pay off, it can impact important milestones such as buying property, getting married and starting a family.

Williams says his borrowing power for a home would be significantly decreased due to his HECS debt. “It discourages me from having children and starting a family. I do not feel more optimistic about the changes, as I will still have a near $80,000 debt at the conclusion of my degree.”

Rising cost of education

According to Australian Government data, the cost of a law degree has increased by a staggering 74 per cent between 2009 and 2023.

But this wasn’t always the case. From 1974 to 1989, higher education in Australia was fully funded by the government. This changed with the introduction of HECS by the Hawke government in 1989, marking the beginning of student contributions towards their education.

Initially, under HECS, all degrees had a standard annual cost of $1,800. However, in 1996, the Howard government introduced a three-tiered fee structure, differentiating costs based on the type of degree. This saw fees increase to $3,300 for band one degrees like education and humanities, while band three degrees such as law and accounting were set at $5,500.

The government’s rationale was that the higher a student’s earning potential, the more they should pay for their degree. These fees have continued to increase ever since and while the overhaul has been welcomed by many, some critics argue that it does not go far enough, reigniting the debate around the necessity of free tertiary education.

Many countries around the world have recognised the benefits of free education. Germany, for example, abolished tuition fees in 2014 for all public universities, leading to a surge in enrolment and a more skilled workforce. In the US, several states are experimenting with free college programs to create an education system that is inclusive and accessible.

While Morson agrees that the changes are a fair way to address the issue of student debt, she is also “pro-free university”, and thinks the government should consider offering free university courses or lower repayment schemes.

“Some income levels must pay approximately 10 per cent of the income in HECS repayment. In my view it should be capped at 5 per cent,” Morson says.

However, Williams believes a fair way to address the issue is for the government to wipe all previous indexations of HECS and increase student financial support services like Youth Allowance, Job Seeker and Abstudy. “Until 1989 education was free and those currently in power and benefiting from HECS revenue had the privilege of a free or significantly cheaper degree.”

An unintentional effect

Williams thinks HECS encourages lawyers, law graduates and corporations to charge more money to clients and the community. But it appears HECS is having another unintentional effect: driving solicitors away from the legal assistance sector to the higher paying private sector.

Dr Warren Mundy wrote in his Independent Review of the National Legal Assistance Partnership, which was released this week, that the substantial financial burden and time commitment required to obtain a law degree are steering new graduates towards high-paying positions within the legal field. This allows them to expedite the repayment of their HECS-HELP debts, but it inadvertently contributes to a shortage of mid-career lawyers, particularly in community legal services.

He notes this problem is even more pronounced when labour demand outstrips supply as wages typically rise as higher salaries are required to attract talent. “Due to limited funding increases, the legal assistance sector’s capacity to match and compete with rising wages is curtailed, further hindering the sector’s competitiveness in the labour market.”

To address the impact on regional and remote areas, Mundy has called for incentives for those practising in regional areas, with particular focus on a HECS forgiveness scheme. Under this scheme, if a person works for non-government legal assistance providers in rural, regional or remote locations for a period of five years, their outstanding HECS debt will be forgiven by the Commonwealth. This would also be available to lawyers working in private practice in regional and remote areas who could demonstrate that over a five-year period 45 per cent of their work was on grants of legal aid.

While HECS has long been touted as a fair way for graduates to contribute to their education costs, the current economic climate is a reminder of the growing financial burden placed on students. For the legal profession, these students are essential to ensuring the community continues to have equal access to justice.

“A law degree should be about passion, not earning capacity. That is why I sought to pursue university education and I think that many would explore their passions more if there were less of these future barriers,” Williams says.