Australia’s government will forgive an estimated A$3 billion (£1.6 billion) of graduate debt by implementing the Universities Accord recommendation to change the formula governing annual indexation of outstanding borrowings.

The government has announced its intention to use the lesser of the consumer price index (CPI) and the wage price index (WPI) to calculate annual indexation of accrued student debt.

The measure, to be included in the forthcoming federal budget, will require legislation. It is intended to ease the impact of inflationary spikes which can leave graduates owing more at the end of the year than at the start, despite making 12 months of repayments in between.

Surprisingly, the measure will be backdated to include last year’s indexation, which added a record A$5.3 billion to student loan obligations.

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Education minister Jason Clare said the “big hike” in Higher Education Loan Programme (Help) debt had “hit a lot of Australians hard”.

“The Universities Accord team said that we should make sure that indexation doesn’t go up faster than the average wage,” he told journalists. “We’re going to wipe out what happened last year and make sure that it never happens again. It’s one part of the first stage of our response to the Universities Accord report that we will set out on budget night.”

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Under the proposals, the 7.1 per cent increase to accrued debt in 2023 will be reduced to 3.2 per cent. Another round of indexation on 1 June, which was expected to be 4.7 per cent, will now be lowered to about 4 per cent.

The government said the measure would wipe around A$1,200 from an average Help debt of A$26,500, with savings of about A$4,485 for graduates with much steeper A$100,000 debts.

Universities Australia said the change would make repayment arrangements simpler and fairer. Chief executive Luke Sheehy said living costs influenced people’s decision to enter university and finish their courses. “This relief will give people more confidence in pursuing a degree while providing much-needed support for those already paying off a Help debt,” he said.

The Australian Technology Network said the change would be a “shot in the arm” for people paying off student debts. “It is extremely pleasing that calls to modernise the student loans system have been heard,” said interim executive director Frank Coletta.

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Troy Williams, chief executive of Independent Tertiary Education Council Australia (Iteca), said the government’s move would be “most welcome for the millions of people with student debt struggling to deal with cost-of-living pressures”.

Shadow education minister Sarah Henderson said this year’s indexation would still be the highest in 23 years. Shadow treasurer Angus Taylor noted that WPI was expected to exceed CPI in the near term.

john.ross@timeshighereducation.com