In Australia, higher education financial support is provided by the Federal Government through Higher Education Contributions Scheme (HECS) and Higher Education Loan Program (HELP). As these are indexed to the rate of inflation and no interest is charged, there is no concern to be non-permissible in Islam.
The Federal Budget 2023-24
There have been issues raised in relation to higher education loan measures in the Federal Budget 2023-24. In this budget, the Government has made changes around how the higher education loans are indexed, where the indexation is capped at the lower of the consumer price index (CPI) and wage price index (WPI). The former refers to the general increase at the macroeconomic level prices and the latter measures the annual growth of salaries and wages. This indexation rule has been back-dated to 1 June 2023.
Once again, no interest is involved in this indexation of higher education loans in the Federal Budget measures for 2023-24.
The indexation rate is applied on 1 June each year to the balance of higher education debts that have been unpaid for more than 11 months.
On 1 June 2023 (last year), the indexation rate was 7.1 per cent and this year, the rate applied on 1 June 2024 was 4.7 per cent. The reduction in the indexation rate was due to the application of the new rule legislated as part of the Federal Budget measures for 2023-24.
As an outcome, over 3 million Australians had their HECS/HELP debts slashed by $1,200 on average in 2024 and, due to back-dating of this measure to 1 June 2023, over $3 billion debts were wiped out from the higher education loans.
Through this initiative, the Federal Government is just giving some money back to Australians as part of a cost-of-living relief measure. People with higher education debts don’t need to do anything to receive the credit or the reduction in their debts. It was and will be applied automatically by the Australian Taxation Office on 1 June each year.
Indexation vs interest
Indexation is applied using the lower of the rate of CPI and WPI in each year which are not interest. A brief description of these concepts are given in what follows.
CPI is a measure of the average change in prices at the macroeconomic level overtime which is paid by consumers for a basket of consumer goods and services.
WPI measures the rate of annual growth in salaries and wages in the economy.
An interest is the fixed charge on money lent or borrowed. An interest rate is the amount of interest due in relation to a period, charged as a proportion of the amount lent, deposited, or borrowed. The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited, or borrowed.
The concluding remarks
CPI, WPI and interest are different accounting and finance concepts. In essence, interest is fixed in nature and the other two (CPI and WPI) are variable measures of general prices, salaries and wages which are not in the nature of interest and not treated as so in the financial and commercial dealings. The Federal Government doesn’t call or treat this indexation of higher education support as interest.
There has never been an involvement of interest in the calculation of HECS or HELP since their inceptions in 1989 and 2003 respectively.
As the HECS/HELP financial support involves indexation and not charging of interest, the Australian higher education supports have no concerns around permissibility under Islamic principles.
The article falls short, in my opinion, as it describes interest in accounting terms and not according to the definition in Islamic jurisprudence.
When you look at interest/usury as per Islamic definition, there is not much difference between interest and indexation. In both cases, more or less amount is charged against the original loan amount and therefore riba comes into the picture.
I’d personally suggest to stay away from dubious loans like HECS if possible.