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The prospect of Australian universities charging significantly higher fees combined with a real interest rate being levied on student loans is fueling concerns of a blowout in bad debt that will not only cost taxpayers but may also undermine the country's whole higher education loan system.

University leaders are gearing up to call for the Australian federal government to back down from, or moderate, its plan to charge students the 10-year bond rate on their loans up to a maximum of 6 percent.

The proposal is widely seen as unfair; it will mean substantially higher costs for low-income earners and those who take time out of the work force, such as mothers, because they take longer to repay. It is also considered unfair to students who have already contracted a debt under the Higher Education Loan Program, commonly called HECS, but will face a new set of rules come June 2016.

While the government intends to save money through various measures, the budget papers show that the cost of the Higher Education Loan Program is forecast to rise from $1.47 billion this year to $2.33 billion by 2017-18, reflecting the increased bad debts. The rate of bad debt is forecast to rise from 17 to 23 percent.

The University of Canberra's vice chancellor, Stephen Parker, has called fee deregulation “a heist on taxpayers.”

“I have serious concerns that this is a time bomb for HECS,” said Tim Pitman, senior research fellow at the National Centre for Student Equity in Higher Education, at Curtin University. He said the cost could become so great that a future government would have to further dismantle the income-contingent loan system to save money.

Writing in The Australian Tuesday, Tim Higgins, a senior lecturer in actuarial studies at the Australian National University, said the cost of a dramatic rise in bad debts “could turn out to be quite a shock to government finances.”

“Current doubtful debt is close to $7 billion and the Grattan Institute has projected this to rise to $13 billion by 2017 under the existing system. But if fees are deregulated, the reality will be a dramatically increased doubtful debt,” Higgins writes. “Under current arrangements, taxpayers bear this expense.”

Andrew Norton, the Grattan Institute's higher education expert, agrees the government’s reforms could prove expensive unless further measures to rein in the cost of the higher education loan system, such as chasing the debts of students who go overseas and taking outstanding debt out of deceased estates, are taken.

“Otherwise it will end up being very expensive and the spending to write off the bad debt will have little social value,” he said.

Norton himself has recommended such measures, which he estimates could save $860 million by 2016-17, effectively covering the projected increase in cost of the program in the budget.

Meanwhile, Gavin Moodie, RMIT’s Canadian-based adjunct education professor, said the government’s plan to charge interest on HECS could be made fairer by varying the rate interest paid relative to a graduate’s earnings.

He suggests graduates earning below the repayment threshold should continue to just pay inflation. Those earning up to $60,000 could pay half the 10-year bond rate, with the full rate being applied on earnings above that. Students earning more than $70,000 could be charged 150 percent of the bond rate, rising to 200 percent for those above $100,000.

“This would not only be progressive but it would further encourage early repayment by those students most likely to be able to do so,” Moodie said.

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