One criticism of the weekend’s big proposed changes to student debt – a new repayment system and a 20% cut to student debt balances – is that they are ‘off budget’, concealing their true cost.
The Budget includes several different takes on the government’s annual finances, including fiscal balance, headline cash and underlying cash. The Budget papers also report the value of government assets, including student debt.
The ‘underlying cash balance’ is the most commonly used Commonwealth’s Budget metric. When the Treasurer boasts about the government’s fiscal performance he uses an underlying cash measure. Unfortunately from a ‘Budget honesty’ perspective underlying cash is the weakest measure of student loan costs and of the financial impact of proposed changes to student loan policies.
Nominal cost of the 20% cut
The chart below shows the nominal value of student debt as at 30 June 2024 and the nominal value of the write-off. The actual initial nominal value will differ from this. The government plans to cut debt balances prior to indexation on 1 June 2025. To the 30 June 2024 figures shown below the ATO will add new lending during 2024, deduct compulsory repayments in respect of 2023-24, and deduct voluntary repayments made between 1 June 2024 and 31 May 2025 (which will presumably fall to near zero between last Sunday and 1 June 2025).
But using 30 June 2024 figures, the nominal value of student debt would decline by about $17.4 billion. As will be discussed below, the true loss of value is less than this.
A Parliamentary Budget Office analysis of a Greens plan to abolish HELP debt over five years helps us understand the implications of the government’s more limited plans to reduce HELP debt.
Headline cash
Headline cash measures actual cash movements in a year – student loan lending and student loan repayments. Public reporting of student loans on a headline cash balance is limited. Net figures are reported in the Budget papers but not the details of inflows and outflows of cash. The numbers for higher education and vocational education loans can be pieced together from multiple different sources. I have done so for higher education loans in my Mapping Australian higher education report. Only partial numbers are routinely published for the DSS administered schemes, the SFSS and Student Start-up Loan (although DSS is generally good on special data requests).
For debt write-offs the PBO counts lost future repayments. In the table below, they are separated into principal repayments and interest receipts, which I think means indexation money received (as opposed to the indexation accrued, a fiscal balance measure).
For the change to the repayment system, loan principal repayments will fall in 2024-25, due to lower voluntary repayments. In all near future years annual compulsory repayments will be lower than under the current system. I haven’t yet tried to estimate how large this will be. But as debtors will repay over a larger number of years than previously, at some point in the future repayment revenues will increase again.
Fiscal balance
Fiscal balance is an accrual measure. For the new repayment system I don’t have a PBO explainer of the impact of reduced average annual repayments. The treatment of student loan lending in the fiscal balance is confusing. For each year the expense of new lending is recognised by the difference between the amount lent and the fair value of the lending, which takes into account doubtful debt and interest subsidies. But there is an ‘unwinding’ of this in future years as repayments are received.
The proposed repayment system change would increase interest subsidies. Indexation on the wiped debt will no longer be received. Lower annual repayments will increase the number of years in which indexation will be subsidised (as bond rates are usually higher than indexation).
The proposed repayment system will increase doubtful debt on the remaining balances, by reducing annual repayments and increasing the risk that full repayment will not occur.
The value of new lending to the government will fall. These figures, however, will always have a speculative element to them. Future indexation levels, future borrowing and future repayments can only be estimated.
For the fiscal balance, the main cost of the 20% cut, based on the PBO table, will be the debt remission. However, I am not clear on the relationship between the prior write-downs of outstanding debt and the amount that would appear as a remission cost. Presumably the remission will only be the debt previously deemed recoverable.
Underlying cash balance
For the underlying cash measure the only part of student loan policy changes to show in costings will be reduced realised indexation revenues. The key costs of writing off 20% of the outstanding debt (fiscal balance) or forgoing future repayment revenues (headline cash) won’t be reported.
When this bill comes before the Parliament the government should not be allowed to get away with just presenting underlying cash balance figures. That’s what they did with the indexation reduction bill, when a $3 billion write-down in indexation was put at a cost of $239.7 million over the forward estimates to 2027-28. Presumably this is the indexation revenue the government would otherwise have received in repayments.
The government’s balance sheet
Student loans appear in the government’s balance sheet at their ‘fair value’, that is after taking into account doubtful debt and concessional interest rates. I am not sure how to account for the combined effect of the two policy changes on the fair value of student debt. They are both negative, but in estimating the total cost of these policy decisions we need to recognise that some debt being wiped would never be repaid anyway.
For that reason, the nominal write-down of $17.4 billion exaggerates the true additional cost to the government’s balance sheet of these proposed policy changes. In the table below I cut 20% off the fair value of student debt, which would represent an asset write-down of about $11 billion. Obviously, however, that is still a very large sum of money.
Conclusion
The long-term nature of student debt inherently makes it difficult to accurately represent the ultimate costs of student loan schemes as they stand and as the government would change them.
But I believe underlying cash is, for student loan policy, a misleading indicator. Its use has potential consequences for public policy. Some Job-ready Graduate changes to student contributions may not have been made if other budget indicators were used.
Fiscal balance would reflect the fair value write-downs that will inevitably result from allocating debt to people who will not repay in a timely manner, such as arts graduates, and in many cases will not ever repay in full.
Headline cash would reflect the fact that cutting Commonwealth contributions and replacing them with higher student contributions makes almost no difference to short term government finances. The cash outflows are just labelled ‘HECS-HELP’ instead of ‘Commonwealth Grant Scheme’.
In a political culture where underlying cash balance deficits or surpluses are a performance metric there is too small a political price to pay for bad student loan policy.
