Poor graduates would pay about 30 per cent more than their richer counterparts for their degree under the federal government's plan to charge real interest on student debts for the first time, according to the architect of the HECS system.
Leading education economist Bruce Chapman, who has conducted the most detailed modelling of the government's proposal, says the ''unfair'' policy undermines a fundamental tenet of Australia's internationally-lauded HECS repayment system.
He is urging the government to consider alternatives outlined in a new research paper, which would reduce inequity and save low-income graduates tens of thousands of dollars.
The government announced in the May budget that it would peg student debts to the government bond rate, capped at six per cent, rather than inflation.
Professor Chapman's alternative proposals could be a game-changer for the government, which is expected to have to compromise on its higher education package to pass it through the Senate.
Education Minister Christopher Pyne has flagged the government is willing to give ground on the interest rate proposal.
Professor Chapman's paper, which he wrote with Australian National University colleague Timothy Higgins, has been presented to the government for consideration.
The modelling shows that a low-income graduate on a salary of $33,000 to $40,000 would pay $105,000 in total repayments over a lifetime on a starting debt of $60,000. By contrast, a high income earner (with a salary of $60,000 to $87,000) would pay only $75,000 in total repayments on the same starting debt – that is $30,000 less than low income earners.
Graduates on a median salary would pay about $82,000 in repayments on the same starting debt.
Low-income earners would be hardest hit by the interest rate changes because they spend more time out of the workforce and have lower salaries. This means a real interest rate, applied from the time they begin accumulating debt, would see their debts compound dramatically, Professor Chapman said.
Students who do not complete a degree, but accumulate a university debt, would be among the worst affected, he said.
"Using the long-term bond rate will be regressive – and it is very hard to argue this is fair," Professor Chapman told Fairfax Media. "It takes away an important part of the loan design.
"HECS was designed to protect people who go to university but, because of bad luck or bad circumstances, don't get to enjoy the benefits.
"HECS should act as an insurance mechanism and that aspect of the scheme is being undermined."
In their paper, Professor Chapman and Dr Higgins propose two alternatives:
- a hybrid scheme where graduates only pay the higher interest rate when they are above the earning threshold (about $50,000); or
- a one-off 25 per cent surcharge on each graduate's loan, with debts then pegged to inflation.
They find that either of these approaches would reduce inequity significantly from the government's current proposal but would have a relatively small impact on the budget.
Under a hybrid system, low-income earners would pay six per cent more in repayments than high income earners – down from 30 per cent. The surcharge approach would essentially wipe out the inequity altogether.
Group of Eight Universities chairman Ian Young told the National Press Club on Wednesday that he was "fairly confident" the government would modify its interest rate proposal.