Five things senators (and everyone else) should know about changes to HELP debts

Parliament will resume on October 16, when the Senate will consider the government’s proposed changes to higher education. There has been a lot of discussion about many of the changes, but little about the impact of the proposed change to HELP repayments. Here are five things Senators should know.

1. The HELP repayment threshold will vary according to family circumstances

Legislation to drop the minimum HELP repayment threshold for 2018-19 from $57,730 to around $52,000 was passed by the parliament last year. The government is now proposing to further reduce it to $42,000. This is around two-thirds of annualised average weekly earnings (AWE). This threshold will not apply to everyone with a HELP debt.

In 1997-98, the Howard government reduced the threshold to two-thirds of AWE. At the time, it decided that a person should not have to make a repayment if they did not pay the full Medicare Levy. Seven years later, it relented and increased the threshold, but it did not remove the link with the Medicare Levy. This provision is still in the Higher Education Support Act, but only families with three or more children benefit from it. The Turnbull government is not proposing to remove it.

The table below shows the income at which people in different family types will be paying the full Medicare Levy, and where they would start repaying their HELP debt if the government’s proposal had started in 2016-17. It also shows what these income levels will be if the Medicare levy is increased from 2% to 2.5%, as currently proposed.

2. HELP repayments substantially increase average effective tax rates

An effective marginal tax rate is the proportion of an additional dollar of earnings that is lost in additional tax and reduced government benefits.

It sounds reasonable to say that HELP repayments start at 1% and then gradually increase, only reaching 10% at an income of around $120,000.

This obscures the fact that these rates are applied to total income, rather than the extra “marginal” dollar of income. HELP repayments generally increase average effective tax rates on income above the threshold by more than 13 cents in the dollar.

The chart below graphs the government’s proposed HELP repayment arrangement. It compares this with two alternative approaches to working out a person’s HELP repayment - one applying a 13% marginal rate and the other a 15% marginal rate, both from the $42,000 threshold.

For people with income between $50,000 and $80,000, the proposed arrangement is about the same as making a HELP repayment of 13 cents of every dollar above the threshold. For people with income of around $120,000, it is about 15 cents of every dollar above the threshold. People with very high incomes may pay less than 13 cents in the dollar.

The logic for preferring this particular “step function” over a marginal rate approach is unclear. A marginal rate approach would be easier to integrate with other aspects of the tax transfer system and would remove the complexity associated with 19 separate HELP thresholds and repayment rates.

3. There are significant adverse interactions with the tax-transfer system

A person can experience a large loss of disposable income when their earnings increase. One reason this may occur is that they hit a HELP repayment threshold and their HELP repayment rises.

For example, if the Government’s proposal was in place in 2016-17, this would happen when the earnings of a person in a single income family with two children increased from $54,606 to $54,607. At this income, the person’s HELP repayments would commence at 3.5% of total income and they would be required to repay around $1,630. The one extra dollar would cause the person’s disposable income to go down.

This might not be much of a problem if the person’s disposable income only went down once, but that’s not what happens. For a single income family with two children, it would happen 15 times under the government’s proposed HELP repayment arrangement.

The disposable income of this family might also go down due to “sudden death” reductions in family tax benefit (FTB). FTB Part A is paid for each child and income tested, and FTB Part B gives extra help to single parents and families with one main income. At $80,000, the family loses more than $1,450 in FTB Part A supplements. At $100,000, it loses nearly $3,200 as it is no longer eligible for FTB Part B.

While this family is unlikely to make a decision about whether to earn one extra dollar, the parents will likely make decisions about whether it is worth working more while also trying to care for their children. They might not bother.

4. Incentives to earn will be worst for single parents and single income couples

The impact of the new HELP repayment arrangements on work incentives will vary according to family circumstances.

Currently, the government keeps around half of every extra dollar earned above the HELP threshold for a single person with no children. The government’s proposal will lift that to 50-60% of every extra dollar. The situation is much the same for a “professional” couple where both partners have high incomes.

For a single person with children and a single earner couple with children, the situation is much harsher. The chart below shows how the disposable income of a family with two children would increase as the earnings of a single working partner rise.

A single person with children and a single earner in a couple with children will often have average effective tax rates of over 80% for income from their new HELP threshold of around $50,000 up to $122,000.

In this income range, each extra dollar results in the government receiving 32.5 or 37 cents in tax, two cents in Medicare Levy and reducing family tax benefit by 20 cents. It receives additional HELP repayments averaging between 13 and 15 cents in the dollar. It also makes savings from “sudden death” family tax benefit reductions.

These reductions come from government cuts aimed at removing middle class welfare. HELP repayments are being tightened for a similar reason. When governments make multiple budget cuts from different social programs they interact, sometimes producing undesirable outcomes.

Average effective tax rates exceeding 80% over a large range of income for a family with children seems to be a punitive and undesirable outcome. There is considerable scope for a better integration of HELP repayment arrangements with other aspects of the tax-transfer system than exists with the government’s proposal.

5. It will still take students one to two decades to repay their debts

There are now seven student loan programs and most students borrow under more than one. Students study for longer than they used to and often pay full fees for “professional” postgraduate study. A two year masters course in an applied health science can add $35,000 to $50,000 in debt. A student can borrow $2,000 each year to help with study costs – a total of $10,000 over five years.

These schemes are administered in ways that do not draw student’s attention to how much they are borrowing or how it might affect them in future. Today’s students are unlikely to complete their higher education and enter the workforce with a HELP debt of less than $30,000. HELP debts of $45,000 to $55,000 will be more usual. Debts of $60,000 to nearly $100,000 will be common.

Students are likely to take a minimum of eight or nine years to repay their debts, with many taking 13-15 years, and a significant number taking close to two decades.

HELP repayment arrangements have long term consequences for students and their families. They will affect their living standards and ability to accumulate assets, like a home. The decisions these students take about working while they are in their 20s and 30s will affect their future income and standard of living in retirement.

The proposed arrangements deserve the close scrutiny of Senators.