Weekly Business News Analysis: 28/10/2024 (Australia Government Plans to Forgive 20% of Student Debt)

Weekly Business News Analysis: 28/10/2024 (Australia Government Plans to Forgive 20% of Student Debt)

Writer: Klinsmann Lee

The Australian government plans to cut student debt by 20% to alleviate the cost of living pressure. [1] [2]

Background:

• Taking effect from 1st June, the government plans to cut student loans for about 3 million students by 20%, totalling around 16 Australian dollars.

• The purpose of this plan is to help alleviate the cost of living in Australia.

• Additional measures in the future include:

  • Reducing the amount of student debts each borrower needs to repay per year.

  • Raising the threshold to start payments.

• The average student loan in Australia is $18,200.

Klinsmann’s Analysis:

• In the long run, this plan will help reduce the financial burden for many people with student loans. 

• However, I don’t think it will be impactful in the short run due to:

  • People with student loans only need to repay when they meet a certain income threshold.

  • Although the amount they need to repay will in theory be reduced by 20%, the dollar amount is not material for people with smaller student loans.

    • We can look at this using “Jerry” as our example.

    • Assumptions:

      • Jerry’s repayment income in 2025-2026 is AU$75k.

      • The repayment rate is 3% of the student loan at the repayment income.

      • Before the 20% student loan forgiveness, Jerry’s Student loan is $30k.

      • After the 20% student loan forgiveness, Jerry’s Student Loan is $24k.

    • Result: Jerry will save $180 on repayment after the 20% student loan forgiveness in that year. 

    • Below is a table I also created to illustrate the dollar amount saved on repayment at each student loan amount in a given year – the higher the student loan, the more saving it will be. 

Student Loan (before forgiveness)	Repayment before forgiveness	Repayment after forgiveness	Reduced repayment for borrower
$20,000	$600	$480	$120
$30,000	$900	$720	$180
$40,000	$1,200	$960	$240

• As the Federal Election is happening next year, I believe the purpose of this plan is also to attract voter support for the current government.

References:

[1] https://www.cnbc.com/2024/11/03/australia-to-slash-10-billion-off-student-debt-amid-cost-of-living-pressures.html

[2] https://www.businessinsider.nl/australia-announced-a-sweeping-plan-to-forgive-20-of-student-debt/