Studenlloans and bankruptcy Introduction Changes to tertiary education funding in Australia since January 1989 have seen a significant shift in funding for tertiary educa- tion from direct funding by the federal government to the use of student loan funding schemes. 2 Where a student elects to accept a Commonwealth-funded loan the government funds the stu- dent's share of the cost of their course fees as a loan and the stu- dent repays that loan through the taxation system when their income exceeds specified thresholds. An issue that has received significant attention in the United States and Canada is how student loans are dealt with in bankruptcy. The issue is signifi- cant because in the United States student loan debt represents the fourth-largest category of consumer debe and in Australia the current level of student loan debt due to the Federal Gov- ernment is some $11.5 billion. 4 However in Australia this issue has not been closely exam- ined. The approach in Australia has been to ensure that student loan debts are not discharged in bankruptcy without an exami- nation of the advantages and disadvantages of such an approach. The purpose of this paper is to oudine the statutory scheme applicable to student loans and how they are dealt with in bank- ruptcy and propose reforms to the current system. The paper includes a brief examination of student loan schemes in the United States, Canada, England, Wales and in New Zealand that prOvide a useful inSight into issues that have arisen in other jurisdictions as well as different approaches to dealing with stu- dent loans in bankruptcy. There are a number of ways that student loans could be dealt with in bankruptcy in Australia. First, the current regime of a total restriction on dischargeability could be maintained. Secondly, all restrictions to dischargeability could be removed so that student loan debts are fully discharged through bankruptcy like most other debts which is the approach currendy adopted in New Zealand. Alternatively, a system could be adopted that includes some time restrictions on dischargeability as is done in Canada. The current system of a total restriction on discharge of stu- dent loan debts in bankruptcy is inconsistent with the fresh start John Tarrant' principle of bankruptcy. Under the fresh start principle debtors are freed from their debts so that they can again become pro- ductive members of society without the burden of debts that they are unable to repay. However a bankruptcy system with no restrictions on discharge of student loan debts is open to abuse because student loans do have unique characteristics. Unlike many other loans they are provided without security and in cir- cumstances where it is unclear whether the debtor will produce sufficient income to repay the loan. What is required is a careful examination of the issues so that a system can be adopted that meets the requirements of the fresh start principle while pre- venting abuse of the system. Student loan legislation in Australia Government funded student loans were introduced in Australia in January 1989 in the Higher Education Funding Act 1988 (Cth) which made provision for the Higher Education Contri- bution Scheme (HECS). Pursuant to HECS a student could request the Commonwealth to lend the student an amount equal to the amount that the student was reqUired to contribute to the cost of their higher education. 5 A student making such a request was required to acknowledge that they were liable to make pay- ments if the Commonwealth complied with their request to pro- vide a loan 6 and the Commonwealth would then assist the stu- dent by making a payment direct to the relevant institution? The loan would be repaid to the Commonwealth either through vol- untary repayment by the studentS or through compulsory repay- ment through the taxation system when the student's income exceeded certain prescribed thresholds. 9 The legislative regime provided for limited remission of student loans in special cir- cumstances. lO There was also the ability to have the making of an assessment deferred, or an assessment amended, if special cir- cumstances existed or where it would cause serious hardship to the person if an assessment was made or a payment was not deferred. 11 Importandy a student loan debt is not reduced when the making of an assessment is deferred or an assessment is amended because a student loan debt is only reduced when an Martf>.Moy 2010 Commerdal Low Quarterly 3 Copyright of Full Text rests with the original owner and, except as permitted under the Copyright Act 1968, copying this copyright materlalls prohibited without the permissi on of the owner or agent or by way of a licence from Copyright Agency Umlted. For information about such licences, contact the Copyright Agency Umited on (02) 93947600 (ph) or (02) 93947601 (fax )