Is the Government's plan to charge interest on existing student loans a broken contract?

Updated

There has been plenty of debate about the impact of the May 13 federal budget on the higher education sector.

The talk has focused on potential increases in university fees, even though students can defer paying fees through the Government's Higher Education Loan Program (HELP) scheme.

Virtually ignored in the debate has been one of the Government's other proposals - for the first time, it plans to charge interest of up to 6 per cent a year on new and existing HELP debts.

Unlike the other higher education changes, which will not apply to existing students until 2020, interest charges will apply to everyone who has an outstanding HELP debt, regardless of when they started, or finished, studying.

In Senate Question Time on May 15, Greens Higher Education spokeswoman Lee Rhiannon posed a question to Minister for Human Services Marise Payne: "Doesn't your Government's plan to charge interest at the higher rate of up to 6 per cent on all existing debts constitute a broken contract with the 1.8 million Australians who are still repaying their student debt and many of whom have graduated and are in the workforce?".

Senator Payne did not address Senator Rhiannon's point about a broken contract, but instead spoke about the Government's measures to deregulate university fees.

ABC Fact Check takes a closer look at the indexation changes.

The claim: Greens Higher Education spokeswoman Lee Rhiannon says the Government's plan to charge interest of up to 6 per cent on student debts constitutes a broken contract.

Greens Higher Education spokeswoman Lee Rhiannon says the Government's plan to charge interest of up to 6 per cent on student debts constitutes a broken contract. The verdict: There appears to be no legal contract between students and the Government over HELP debts. If Senator Rhiannon was referring to a broader "breach of faith", it is worth noting that charging interest on existing HELP-style loans would be unlikely to fly in the private sector. Senator Rhiannon's claim is debatable.

Broken contract or breach of faith?

Senator Rhiannon sees the term "broken contract" in broad terms that extend beyond a legal contractual relationship. Her spokeswoman told Fact Check the Senator believes the HELP changes are "fundamentally a breach of faith and will lead many students and graduates to question if the Government can arbitrarily change interest rates at their whim, what's to stop them increasing in the future?"

Fact Check examines Ms Rhiannon's statement in two ways. Firstly - is there a legal contract and has it been breached? And secondly - even if there are no legal barriers, could it be argued that there has been a breach of faith?

The HELP loans scheme

Upfront university student fees were reintroduced by the Hawke Labor government in 1987, with students made to pay the upfront Higher Education Administrative Charge. This evolved into the Higher Education Contribution Scheme (HECS) in 1989, which allowed students to defer payment of fees. A similar Postgraduate Education Loans Scheme (PELS) was introduced in 2002. These schemes became HECS-HELP (for Commonwealth-funded courses) and FEE-HELP (for full fee undergraduate and postgraduate courses) in 2005, with existing debts carried over to the newly named schemes.

The key feature of the system since 1989 has been the ability of students to defer payment of their fees until they start earning a certain income. Repayments are then made through the tax system on a sliding scale based on a percentage of income. For the 2014-15 financial year, compulsory payments begin once people have an annual income of $53,345, with that year's payment calculated at 4 per cent of income for people earning up to $59,421 and extending up to 8 per cent of income for those earning over $99,070 a year.

The loans have always been interest free, but are adjusted annually on June 1 "in line with changes in the cost of living" as measured by the consumer price index (CPI). This ensures that the debts keep their real value in the face of inflation. This is set out in the Higher Education Support Act, which refers to an "index factor", being the "All Groups Consumer Price Index number, being the weighted average of the eight capital cities, published by the Australian Statistician in respect of that quarter". The indexation rate in 2013 was 2 per cent. It has been higher in other years - for example, 3.4 per cent in 2007. Linking to the CPI also leads to unusual results such as a negative 0.1 per cent rate in 1998.

The proposed changes

A spokesman for Senator Payne told Fact Check that "the interest rate applied to HELP loans will be changed from an interest rate equivalent to the inflation rate to an interest rate that broadly reflects the cost of Government borrowings, with a maximum rate of 6 per cent".

An overview of higher education released with the budget papers says the change is "to help to ensure the HELP loan scheme will be sustainably and fairly funded into the future".

According to the budget papers, the new rate will be "a rate equivalent to the yields on 10 year bonds issued by the Australian Government", subject to a cap of 6 per cent a year. The bonds rate is currently around 4 per cent, however it has been higher in the past. For example in mid 2007 the rate reached 6.2 per cent a year, compared to 3.4 per cent for the CPI at the same time.

To make the change, the Government will need to pass legislation amending the law that governs HELP loans, the Higher Education Support Act 2003. The Government intends the new rate to start being applied with the indexation on June 1, 2016.

What students have been told about interest on HELP loans

The Government publishes information about HELP loans both online and in paper form, all of which makes clear that HELP loans are interest free. The information does not refer to indexation as "interest", nor does it raise the possibility of interest being charged in the future.

Students signing up to HELP loans fill out a "Commonwealth Assistance Form". That form is accompanied by a booklet that provides information about the scheme. In the most recent HECS-HELP booklet, students are told that they "must read [the] booklet before signing the Commonwealth Assistance Form", and by signing the form they "declare that [they] have read this booklet". Part 2.4 then says that "there is no interest charged on HECS-HELP loans. However, your debt will be indexed annually to maintain its real value".

Similarly, the FEE-HELP booklet says: "There is no interest charged on FEE-HELP loans. However, your HELP debt at the ATO will be indexed on 1 June each year to maintain its real value by adjusting it to reflect changes in the Consumer Price Index."

The handbook published by the Government says "there is no real interest charged on a person's HELP debt, although their debt is adjusted (indexed) on 1 June each year to reflect changes in the CPI".

In the Government's short "Thinking about uni?" and "Thinking about studying?" brochures, students are told that a HELP debt "is indexed each year to maintain its real value, but is otherwise interest free". Similarly, the Government's Study Assist website says "there is no interest charged on HELP debts". Fact Check also looked at paper booklets issued between 2005 and 2014. These consistently tell students that HELP loans are interest free.

Even though the term "interest rate" is not used anywhere in the existing Act and the documents handed out to students specifically say "interest" is not charged, the Government talks of its plans in terms of a change in the "interest rate" charged on loans, rather than a change from indexation to interest.

A legal contract?

Is the Government able to change the rules for existing students and graduates? Given information previously published to students, is the Government breaking a contract with current students and graduates?

Fact Check has consulted several legal experts and it appears that HELP loans do not involve a legal contract between students and the Government. For there to be a contract, there needs to be an intention by both parties to create a contractual relationship, as well as an offer, acceptance and consideration (some sort of benefit flowing from one to the other). Arlen Duke from the University of Melbourne law school says it is unlikely a court will find the Government showed an intention to enter into a contract when it signed up students to HELP loans.

Instead, legal experts say, HELP loans are products of, and governed by, the Higher Education Support Act. The Government cannot charge real interest on HELP loans under the current law, but they are free to change these arrangements as long as they get the required amendments through Parliament.

Professor Justin Malbon, who specialises in consumer law at Monash University, told Fact Check that while he can see some arguments being made on the margins, his overall view is that HELP "is a statutory based grant scheme, therefore Parliament has the power to amend legislation, and therefore they can validly do this". Mr Duke notes that "as we are in the realms of government policy, ordinary commercial principles are unlikely to apply".

A breach of faith?

Senator Rhiannon's suggestion that the changes are a breach of faith can be examined by looking at how the law would look at this situation if HELP was a private, rather than Government, scheme. Students went into the loans based on clear representations that the loans would be interest free. In that case, unless there were specific contractual terms allowing for interest rates to be changed at the discretion of the lender, the lender could not make the changes the Government is now proposing.

Mr Duke, who is co-author of two textbooks on contract law, told Fact Check: "It would not come as a surprise... that lending institutions would be held to contractual promises relating to interest rates and... that if students had undertaken commercial loans as a result of the representations [that loans would be interest free] the lender would be bound to honour the commitments or, at the very least, provide compensation under the Australian Consumer Law."

Similarly, Professor Malbon suggests that in this hypothetical situation, provisions in the Australian Consumer Law against misleading or deceptive conduct and unfair contractual terms may apply "depending on the precise wording of the claims made [before signing up to the loans] and the way in the government implements any imposition of interest".

The verdict

There appears to be no legal contract between students and the Government over HELP debts. As long as the Government can get the required amendments through Parliament, it can start charging interest on all outstanding debts.

If Senator Rhiannon was referring to a broader "breach of faith" by the Government, then her claim goes to the Government's actions in light of previous information given to students. This involves subjective judgment and so is for others to decide.

It is worth noting that charging interest on existing HELP-style loans would be unlikely to fly in the private sector.

Senator Rhiannon's claim is debatable.

Sources

Topics: university-and-further-education, access-to-education, education, budget, greens, laws, government-and-politics, federal-government, law-crime-and-justice, australia, australian-national-university-0200, canberra-2600, university-of-new-england-2351, university-of-new-south-wales-2052, university-of-newcastle-2308, university-of-technology-sydney-2007, university-of-western-sydney-2560, university-of-wollongong-2522, charles-darwin-university-0909, central-queensland-university-4701, griffith-university-4111, university-of-southern-queensland-4350, university-of-queensland-4072, adelaide-university-5005, flinders-university-5042, university-of-south-australia-5000, university-of-tasmania-7005, monash-university-3800, university-of-melbourne-3010, murdoch-university-6150, university-of-western-australia-6009, bond-university-4229

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