Three million Australians with outstanding student loans will receive a more than $2.5 billion debt increase when the annual indexation is applied on June 1.

The Albanese government had promised to reduce student loans by 20 per cent before indexation is applied this year, but the legislation required has not reached parliament as sitting does not recommence until July.

Until that happens, those with student loans will receive a 3.2 per cent indexation.

Here’s what that means for you.

How much indexation is being applied to student debt?

Student debt will rise by 3.2 per cent on June 1 as part of the Australian Tax Office’s annual adjustment to match unpaid loans with either inflation or wages.

This year’s indexation is a little lower than last year’s 4 per cent, as inflation remained steady at 2.4 per cent for the third month in a row in April.

The national student loan debt of more than $79.3 billion will rise by $2.5 billion after the indexation is applied. 

Those with an average debt of almost $26,500 will see an increase of $848.

Is the government taking 20 per cent off student debt?

Yes, it will just be reduced later than promised.

The federal government late last year committed to reducing student debt by 20 per cent before June 1.

But parliament does not resume until July 22, meaning that it will have to wait until then to introduce the legislation.

Education Minister Jason Clare has guaranteed that it will be the very first piece of legislation that is introduced when parliament sits.

“This is a game-changer for the more than three million Australians with a student loan,” he said.

“For someone with the average debt of $50,000, this will cut that debt by $10,000.”

It is expected to slash $16 billion in total from all student loans.

The legislation is looking to breeze through the House of Representatives, where Labor has a majority, and the Senate, where Labor and the Greens hold power.

Labor will likely receive the support it needs from the Greens to pass the legislation in the Senate, as the minor party has been vocal about wiping all student debt.

Once passed, the 20 per cent reduction will be automatically applied and backdated to June 1.

The indexation rate will also be recalculated after the measure is in place.

How does indexation work?

The Australian Tax Office applies the indexation to all student debt on June 1 each year based on its calculation of the Consumer Price Index, which is an indicator of inflation.

After a whopping 7.1 per cent indexation rate was applied in 2023 due to out-of-control inflation, the government moved to cap the indexation of all student loans to whichever is lower — the Wage Price Index or the Consumer Price Index. 

This essentially means that the indexation will never be higher than wages.

This year, the Consumer Price Index was lower at 3.2 per cent compared to the Wage Price Index at 3.7 per cent.