Problems with cutting student debt

The problem with running a "small target" strategy and winning an election is that you may actually end up in government, but not in power, because "no target" often means "no agenda" for government.

So how does Prime Minister Anthony Albanese, who won with a very small target, solve that problem? Copy whatever Uncle Joe Biden is doing in the good ol' USA.

The latest instalment in that strategy is the government's decision to modify how the HECS-HELP (Higher Education Contribution Scheme) debt is calculated.

This is the $3 billion (US$2 billion) little brother to the Biden administration's decision to cancel more than US$1.4 trillion of student debt and commitments.

President Biden is counting on his plans to keep students and young people in his voting column. Yet it's not clear that Albo's beneficiaries will even notice the benefit.

I should say upfront, that I was a beneficiary of that brief moment in history when the Whitlam Labor madness made tertiary education completely free, as well as providing a payment to university students while they were studying.

That episode had to be shut down in 1989 by Labor federal education minister John Dawkins who introduced the HECS scheme.

The scheme was innovative and internationally famous as it credited the cost of a student's education to a loan account, which was then paid back via a marginally higher personal tax rate that hypothecated a specific percentage of income to the debt.

How the HECS scheme works

It is one of the sweetest deals you will ever get. Normal loans charge interest at a rate which the lender hopes will give them an income plus compensate for any inflation.

There is no interest charged on student debt. Instead, it is indexed to inflation, which means the real value of the loan is maintained, but the government doesn't get any real return on its investment.

Loan repayments don't cut in until the student reaches a certain income ($51,550 in 2023), and then it scales up as a percentage as income increases, starting at 1 percent of income and topping out at 10 percent for those earning over $151,201.

If the student never earns enough to repay the loan then the balance is just written-off.