Reclaiming HECS debt from dead Aussies won't work
A proposal to recover unpaid HECS/HELP debt from deceased estates has been slammed by one of the founders of the education loan system.
ANU Professor Bruce Chapman, who helped design the system, said the Grattan Institute's proposal goes against the basic concept of the student loan scheme - to only be repaid by Australians who had seen financial returns for their education.
"HECS says we want to give you some money for your education and only when you have the returns for your education you can pay it," he told Money.
"If you don't have the returns, it hasn't worked out for you and that's why it's forgiven."
Around 85% of HECS student loans are repaid, and it's understood that graduates who haven't repaid their loans simply can't afford to, Chapman says.
When HECS was introduced in 1989, graduates had to start repaying their debt when they earnt more than $74,000 a year in today's dollars. Today that threshold is $47,000.
The loans initially accumulated no interest, but they are now indexed to match inflation.
"It was always considered that you would not get 100% back because the system is income-contingent, and it's to protect people from things out of their control, for example, if they graduate in a recession like now," Chapman says.
Reclaiming money from deceased estates will not work, he says.
In one example, Chapman asked if a 32-year-old nurse with kids and an unpaid HECS debt of $25,000 was killed in a car accident, would her assets be withheld from her children to repay her student loans?
Graduates could also structure their estates to avoid dying with assets in their name.
Financial coach Karen Eley says a proposal to recoup HELP /HECS debts from estates worth more than $100,000 would hit young families hard.
"There really needs to be consideration to the beneficiary's financial circumstances - while the estate's assets might be worth $100,000-plus, there could be three children, a non-working spouse, and a $400,000 joint mortgage and car loan left behind," she says.
"Having to pay out a lump sum could be detrimental to their financial position as any outstanding mortgage would most likely revert to the surviving spouse.
"The loss of a young spouse is already detrimental, both emotionally and financially, adding a HELP/HECS debt to this could potentially cause a lot more stress.
"It seems inequitable to take from an estate when the individual may have never had an obligation to repay the debt (based on income being under the threshold)."
Pivot Wealth financial adviser Ben Nash says women would be more negatively impacted by this policy.
"They may take more time out of the workforce to raise children, meaning it would take them longer to pay down their HELP debt and mean again for those that were to pass away at a young age that there would be a higher debt for their dependents to pay."
According to the ATO, the average HECS/HELP debt is around $22,000 but some can be as high as $100,000.
The HECS repayment threshold is significantly lower than the average salary, indicating that if someone has not paid off or commenced paying off their HECS/HELP debt, they are not earning enough to live comfortably and service the debt, says Silway Private Wealth financial adviser Diana Saad.
"It also indicates that most of these HECS/HELP debtors who pass away are unlikely to have amassed significant wealth, given their below average income."