Death and Bad Debts

Monday, 26 May, 2014

Words by Christine Li
Illustration by Cameron Baker

It sounds macabre, but it actually makes a lot of economic sense for the government to chase up the unpaid loans of dead students. A new report from policy think-tank the Grattan Institute has advised exactly that, suggesting that the government considers recovering unpaid HECS-HELP loans from students’ estates after their deaths.

The Higher Education Loan Program (HELP), or Higher Education Contribution Scheme (HECS) as it was known before 1989, is an interest-free loan from the government that allows students with limited wealth to go to university without having to worry about funding it during the degree. Its “capacity to pay” principle means that repayment responsibilities only kick in once a graduate’s earnings income reaches $51,309 (in 2014).

For Medicine and Law students this is breezy, but earning power and job opportunities are considerably more taxing for graduates in the humanities and arts fields. As a cohort, students from these faculties have higher proportions of non-repayment.

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While HELP means poorer students have equal opportunity to pursue a degree—any degree—it doesn’t come cheap. With each tertiary course costing between $6,000 and $10,000 a year, the government spends about $6.3 billion (2013-14) in contributions on top of direct subsidies—a price it is theoretically prepared to pay for the sake of a skilled workforce, personal development, mobility, and all the social benefits of an educated population. The issue for them is that today’s budget position today is not as lenient as it once was.

There are a few of statistics that need to be considered in this economic debate. Seventeen per cent of HECS-HELP debts go unpaid because their recipients never reach the income threshold of $51,309, and the said debt is estimated to reach $13 billion by 2017. Furthermore, students pay more than twice as much in tuition fees as they did twenty years ago, and today there is bipartisan agreement to cut expenditure on higher education. The idea of the government collecting bad debts from ex-students’ deceased estates starts to look forgivable out of desperation.

There is no doubt this policy proposal will lend itself to accusations of grave-robbery or forcing debtors to sell out their offspring (inheritance is a sacred right, isn’t it?). Grattan suggests the posthumous liability could be activated only when the assets of the deceased total or exceed $100,000. This way, lower-income families of the deceased won’t have to suffer undue financial difficulty on top of it all.

Another suggestion is to charge graduates who move overseas permanently a flat amount equal to the minimum HELP repayment, as well as changing the way the income repayment threshold is determined. At present it is indexed to Average Weekly Earnings, which rises faster than normal price inflation. Tying the threshold to the consumer price index (CPI) would mean more graduates repaying. The changes could improve the bottom line by $177 million and $64 million respectively in two years’ time if implemented today.

The Commission of Audit released in early May went even further on the debt collection front, recommending that the earnings repayment threshold be reduced to the minimum wage of $32,354. It also proposes applying an interest rate to HELP loans to reflect the full carrying cost for the government. This would unquestionably affect students coming straight out of university.

Program Director at the LH Martin Institute and higher education policy guru Geoff Sharrock endorses this interest rate, but thinks the Commission’s razor gang proposal is “a big step down from the original idea of HECS, which was that only graduates earning above average income should have to repay”. He says that this would be inconsistent with other government programs that provide other forms of financial assistance at higher thresholds, such as the Family Tax Benefit Part A ($48,837 in 2013-14).

Meanwhile, UMSU Education Academic officer Adam Galvin is adamant that “any increase in the HECS debt constitutes an attack on students…. who struggle the hardest with costs of living after graduation.” Fellow officer Hana Dalton also says the changes to the way debt is collected, à la Grattan, would “increase students’ uncertainty and trepidation, factoring into their decision-making [to get a degree]”.

Sharrock stands in direct opposition to the fear mongering. “Collecting HELP debts from deceased estates is the best of the report’s three proposals. It has the biggest and most immediate savings impact on the government’s carrying cost of HELP debt… but no impact when it comes to deterring students from study, or imposing higher loan repayments on working graduates,” he argues.

But there’s also the spiky question of whether policy change should be retroactive, in which case certain legal clauses would have to ‘interpreted’ and re-worked.

The report’s author Andrew Norton insists that all this would be doing is “removing an anomaly rather than creating a new impost on the deceased, making student debt like any other debt that you owe, like credit card debts that need to be repaid from estates after death.”

The anomaly took hold when the HECS legislation was drafted in 1989, when the controversy of ‘death duties’ was still fresh in the minds of the public. Originally, HECS was more tax-like, a charge that was set by and paid to the government instead of universities as it has been since 2005. Sharrock says that back in the day, “the politics of moving from Whitlam-style free university study to making students pay part of the cost under Hawke in the late 1980s was already fraught. It appears they didn’t want to risk the symbolism of a young graduate dying and the government then chasing their unpaid debt”. Hence, he predicts that the politics around this would be very different today.

Currently, the lax debt collection standards that are in place are benefiting the wrong people. Why? Because people who do not repay their student loans are more likely to be females married to higher income-earners and the beneficiaries of this leniency are usually their adult children who inherit the deceased’s estate.

The answer is not making it harder for students of certain disciplines to access HELP, either. Norton assures me that “our intention was to preserve the basic characteristics of the HELP loan scheme, where the ‘right to borrow’ is linked to enrolment, not to particular disciplines. Even with high non-completion rates in degrees such as performing arts, there’s a sizeable group that can and does repay.” Policies that encourage more women to work full-time would help, too.

Regardless of whether the government takes on these recommendations, there is one question students must keep at the forefront of their minds. Amid all the bluffing and noise surrounding higher education loans, it’s vital to ponder whether HELP, in its current form, meets its original objectives of social equity.

HELP was never designed to recover all debts due to the inherent benefits of a higher educated population. Rather, it considers that students are almost always cash-poor at the start of their university lives, but will go on to earn incomes and clear any debts over their lifetimes. This is a good outcome for government spending. Those who don’t will sigh at this report, mourning that they can no longer use death as an escape from bad debt.