What happens to my HECS Debt when I Die or go bankrupt?

If you’re a student striving for higher education in Australia, the term “HECS loan” has likely crossed your path. This acronym stands for the Higher Education Contribution Scheme, a financial arrangement started in 1989. While those who studied at a university before 1989 might find themselves exempt from this system, the majority of us have or have had a HECS loan at some point in our educational journey.

Navigating HECS Debt After Dying

The question that often arises is: How do HECS loans operate, and what transpires after your educational pursuits are over?

Repayment of HECS loans is linked to income. The process starts when your earnings exceed a certain amount. When your income for that financial year exceeds this threshold, your employer makes the compulsory repayments on your behalf. These repayments are seamlessly deducted from your salary, ensuring a streamlined process.

What happens when you die with a HECS debt?

What happens when you die with a HECS debt? What happens when you are no longer present to manage your HECS loan?

At your death, the responsibility of managing your assets and liabilities, including your HECS loan, falls to your executors in your Will.

You, the persons holding your POAs and then, at death, executors ensure that your compulsory repayments remain up-to-date. Your accountant prepares the outstanding tax returns for each relevant tax year.

At death, HECS has many rules

HECS loans occupy a singular piece within a broader jigsaw puzzle. Similar mechanisms extend to various other Government HELP loans, encompassing FEE-HELP, VET FEE-HELP, OS-HELP, SA-HELP, and VET Student Loan Debts.

The HECS loan has entrenched itself as an integral element within the Australian higher education landscape. As you navigate the path towards realising your academic aspirations, remember that HECS loans function as a support system, fostering financial flexibility. Keep a vigilant eye on your income and remain well-versed in repayment thresholds. Ensure the seamless transition from the realm of student life to the arena of gainful employment.

For further help on HECS loans, speak to your accountant and financial planner and use the myGov portal.

The Executor’s Role when you die with a HEC Debt

Your executor carries on with your financial affairs. The executor manages your assets and liabilities. This is according to your wishes in your 3-Generation Testamentary Trust Will.

Compulsory Repayments of HECS when you are dead

If you have not done so, then the executor shoulders the responsibility of ensuring that repayments are current until the day of your death. These repayments hinge upon your income. This falls under the stewardship of your employer, who deducts HEC payments directly from your salary.

Outstanding repayments are coordinated between your executor, employer, and the Australian Taxation Office (ATO). This may include your accountant preparing outstanding tax returns.

Cancellation of Remaining HECS Debt at death

Once you are up to date, the rest of the HECS balance is extinguished. This is good news for your beneficiaries.

Your executor files any outstanding tax returns at the time of your death. If your earning threshold is reached, then the executor makes payments out of your estate. This is for that financial year. But after this payment is made, the remaining debt is written off. Neither your family nor your executor is liable for the remaining HEC debt; it is written off.

I am still confused about the HEC debt at death

Q: This article suggests that HEC is split into two parts, one of which involves compulsory payments.

I understood that HECS disappeared upon the death of the student or ex-student. However, you seem to be saying that the executors are still required to bring up to date any compulsory payments.

In what circumstances are there compulsory payments after death, and how is it calculated

A: HECS-HELP debts are indeed extinguished upon the death of the student. This means the remaining balance is not transferable to the estate or any dependents. Thus, the family or executors are not liable for the debt.

However, any compulsory repayments due on a person’s tax return for the income year before their death must still be finalised. This situation typically arises when the deceased had earned above the compulsory repayment threshold during the part of the income year they were alive.

The compulsory repayment amount is calculated based on the deceased’s income for that income year, in accordance with the usual HECS-HELP repayment thresholds.

What happens to my HECs or VET debt if I go bankrupt?

Bankruptcy Does Not Erase Higher Education Contribution Scheme Debts

Death wipes the HECS debt. But what happens to the HECS debt if you instead merely go bankrupt?

Many Australians mistakenly believe bankruptcy wipes the slate clean for all liabilities. This is incorrect. Commonwealth debts operate under entirely different rules. Your Higher Education Contribution Scheme (HECS) debt survives bankruptcy. Your Vocational Education and Training (VET) student loans also survive bankruptcy. See VET Student Loans Act 2016 (Cth).

Section 82 of the Bankruptcy Act 1966 and Your Student Loans

The Bankruptcy Act 1966 (Cth) distinguishes between provable debts and non-provable debts. Creditors prove provable debts in the bankrupt estate. Provable debts are released upon discharge from bankruptcy, subject to statutory exceptions.

However, under section 82 of the Bankruptcy Act 1966 (Cth), your student loans are non-provable debts. They are statutory, income-contingent loans governed by the Higher Education Support Act 2003 (Cth). You cannot claim these loans in your bankruptcy. The bankruptcy trustee has no power to compromise or release these debts. The government continues to index your loan balance every single year.

In other words, HELP and VET Student Loan debts are statutory, income-contingent liabilities under the Higher Education Support Act 2003 (Cth). They are not released on discharge from bankruptcy.

How Australian Courts Treat Education Debts such as HECS and VET

Australian courts strictly enforce the survival of statutory debts. You cannot use bankruptcy as a backdoor to avoid government education loans. The courts recognise these loans as taxpayer-funded assistance that you must repay when you have the financial capacity.

Courts scrutinise these debts closely across all jurisdictions. In family law proceedings, courts assess whether a HELP debt should be treated as a personal liability or taken into account in adjusting the overall property division. The classification depends on the facts of the relationship and who received the benefit of the education. See Lane & Owen [2010] FamCA 575.

Repaying Your Vocational Education and Training Debt During Bankruptcy

Your repayment obligations pause if your personal income drops. You make no compulsory repayments if your income falls below the statutory repayment threshold.

However, your income might rise above the threshold again. This income increase can happen during your bankruptcy. It can happen after your discharge from bankruptcy. The repayment system automatically restarts the moment your income exceeds the repayment threshold. The Australian Taxation Office collects these compulsory repayments directly through your annual tax return.

Protect Your Assets Before Bankruptcy Threatens

Do not wait for financial ruin to organise your legal affairs. Protect your family. Consider structured estate planning, including a Three-Generation Testamentary Trust Will. They include Bankruptcy Trusts.  Keep your compulsory tax returns up to date. Speak to your accountant and your financial planner.