Student loans injected a dose of financial reality into Australian universities. Geoff Maslen

Australia's university students enjoy a system of financial support through government allowances and interest-free loans, although they also face charges under the country's unique graduate tax scheme. Now the government is considering radical changes.

Between 1989 and March 1996 -when the conservative parties swept the Australian Labor government from office - university student numbers jumped by 200,000 or 45 per cent. In that time, Commonwealth receipts from the ÖйúAƬ Contribution Scheme went from zero to Aus$430 million (Pounds 215 million) while student debt rocketed to Aus$3.55 billion.

Under HECS, students have to pay almost Aus$2,500 (about a quarter of the average cost of tuition) for each year of full-time study - either through a tax levy after they graduate or as an upfront fee when they enrol each semester. Part-time students pay less and those taking extra subjects owe more. The fee is indexed for inflation and has increased from Aus$1,800 when it was introduced.

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Despite widespread and violent protests by students before the scheme began in 1989, despite warnings that it would drive enrolments down and disadvantaged Australians away, HECS appears to have been an overall success.

To encourage pre-payments, the government offered an initial 15 per cent discount but was forced to raise this to 25 per cent in 1993. Today, 29 per cent of students take advantage of the discount and pay their fees on enrolment.

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To counter claims that the money generated by the scheme would be used for other purposes, the government set up a ÖйúAƬ trust fund. All HECS income is paid into the fund and the money then flows back to institutions as recurrent and capital grants.

About 80 per cent of all university students are now liable under the scheme, most of the others also face fees either through postgraduate course charges or as overseas students. Those who defer their HECS payment face a tax levy when they start work, although they must have an annual income at least equal to Australian average earnings.

Nearly half of all full-time university students receive some financial aid through the means-tested assistance scheme Austudy, which costs Aus$1.5 billion a year.

In another attempt to generate more income from students, the Labor government announced in 1992 that Austudy recipients could swap part of their free grant for twice the amount as an interest-free loan.

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That is, a student who foregoes Aus$3,500 of the Austudy grant can get a Aus$7,000 loan (the maximum allowable) in return. Students not eligible for Austudy, but whose parents' combined income is below Aus$53,000 a year, can take out a loan of up to Aus$2,000. Students must repay the loan after five years through a special tax surcharge when their income exceeds average earnings. To encourage repayment, a 15 per cent discount applies if the loan is repaid in five years.

More and more students have taken advantage of the scheme. Last year, more than 55,000 students traded in part of their Austudy grant for an average loan of Aus$4450. Since its introduction, students have built up debts totalling Aus$550 million. Coupled with the Aus$3 billion owed by students and graduates under HECS, the federal government is now owed more than half its annual ÖйúAƬ spending.

Now Amanda Vanstone, the education minister, is looking at ways of recovering the money more quickly. A number of radical options are believed to be under consideration, such as lowering the salary threshold at which graduate tax applies, increasing the HECS charge to 30 per cent of course costs (and making students on expensive courses pay more) plus abolition of Austudy grants altogether and replacing them with an expanded loans scheme.

The government discovered that reaction from universities was severe when it mooted cuts in operating grants. It should not be surprised by the outrage from students if it takes up the latest suggestions.

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