Is Charging Interest on Existing Student Loans a Broken Contract?

Friday 30 May 2014 @ 11.17 a.m. | Legal Research | Trade & Commerce

While debate about the impact of the May Federal Budget on higher education and the likely increases in university and other tertiary education fees has raged for days, even though the fees can be deferred through the Government's Higher Education Loan Program (HELP), another issue arising from the budget which is perhaps more immediate and possibly not yet realised by many, is the Government's proposal, for the first time since the introduction student loans, to charge interest of up to six percent per annum on new and existing HELP debts.

In relation to this measure the ABC's FactCheck has examined the claim made by the Greens Higher Education spokesperson, that "the Government's plan to charge interest of up to six percent on student debts constitutes a broken contract".

Nature of Broken Contract Claims

The ABC's FactCheck takes two possible views:

First, it considers whether there is a legal contract between the government and students and whether it has been breached?

A contract exists where there is: an intention by both parties to create a contractual relationship, an offer and acceptance of the offer, and finally some form of consideration or benefit going from each party to the other. The conclusion reached by ABC FactCheck based on the advice of Arlen Duke from the University of Melbourne law school is, that it would be unlikely that a court would find the Federal Government had showed an intention to enter into contractual relationships when it signed students up for HELP loans.

The legal view given is that, in fact, HELP loans are products of the Higher Education Support Act 2003 (Cth) (No 149 of 2003) (the HES Act), and are governed by the HES Act, and not the laws of contract.

Currently the Federal Government cannot charge standard interest rates on HELP loans under the HES Act, but they are able to amend the legislation to be able to do so, assuming they can get the changes required through Parliament, especially the Senate. Essentially, the HES Act and the HELP system it creates are "a statutory based grant scheme" (see, section 3-1 of the Act), and by amending the legislation the Federal Government can quite legitimately add interest as a condition to the repayment of loans. Another relevant consideration pointed out in the ABC FactCheck article is the view often taken by the courts that government policy, on the grounds of public interest (like addressing a budget emergency), can override ordinary commercial and legal principles making them unlikely to apply.

Second, on the assumption there is no legally enforceable contract is it possible to argue a "breach of faith" or something akin to misrepresentation?

The suggestion that the proposed HELP changes are a breach of faith can be considered by way of how the law would consider the situation if the HELP loan system was a private scheme, rather than a Government one.

The first point would then be that, students entered into HELP loans on a clear representations that the loans would be interest free and, unless specific contractual terms allowing for interest rates to be changed at the discretion of the lender existed, then the lender, namely; the Federal Government, could not make the changes now proposed.

ABC FactCheck quotes Arlen Duke on this as saying:

"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."

In this "hypothetical situation" ABC FactCheck found some support for the view that:

".  .  . the provisions in the Australian Consumer Law [see Competition and Consumer Act 2010 (Cth) (the ACL) (No 51 of 1974) Schedule 1 Chapter 2 General Protections] 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'".

However, again the fact that one is dealing with government might again make the normal legal position applying with respect to commerce interesting when applied to government.

Section 2A of the ACL provides:

2A  Application of Act to Commonwealth and Commonwealth authorities

(1) Subject to this section and sections 44AC, 44E and 95D, this Act binds the Crown in right of the Commonwealth in so far as the Crown in right of the Commonwealth carries on a business, either directly or by an authority of the Commonwealth.

(2) Subject to the succeeding provisions of this section, this Act applies as if:

(a) the Commonwealth, in so far as it carries on a business otherwise than by an authority of the Commonwealth; and

(b) each authority of the Commonwealth (whether or not acting as an agent of the Crown in right of the Commonwealth) in so far as it carries on a business; were a corporation.

(3) Nothing in this Act makes the Crown in right of the Commonwealth liable to a pecuniary penalty or to be prosecuted for an offence.

(3A) The protection in subsection (3) does not apply to an authority of the Commonwealth.

(4) Part IV does not apply in relation to the business carried on by the Commonwealth in developing, and disposing of interests in, land in the Australian Capital Territory.

It could be argued this section prevents an action against the Commonwealth because you would need to establish that the HELP loan system amounted to a business being carried on by the Commonwealth (see section 2A(1)), which in fact as discussed above, the Commonwealth would argue against on the basis that the loans were part of "a grant scheme" conducted under the HES Act and even if this could be overcome, an actual result could still be denied by section 2A(3) which limits the Crowns liabilities under the ACL.

The Outcome

No legally enforceable contract exists between students and the Federal Government with respect to the non-charging of interest on HELP debts. HELP Loans are correctly characterised as grants or parts of a grant scheme and outside normal commercial principles. Even if it could be established that a contract existed, the Federal Government could simply move to amend the laws and change the position if it could get the support to do so in Parliament.

In the broader sense of a "breach of faith" or misrepresentation, it is worth noting that charging interest on existing HELP style loans might make it through the broader principles of the ACL but again could fall down when it came to the Commonwealth's more limited liability under the legislation.

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