<em>Illustration: Rocco Fazzari</em>

Illustration: Rocco Fazzari

If you thought it was no longer possible to get a free university education in Australia, think again. Although most of Australia's roughly 600,000 domestic undergraduate students finance their studies through the HECS-HELP student loan system, whereby they are required to repay the loan in annual instalments once they reach a certain income threshold after graduation, an anomaly in the system enables thousands of students to sidestep repaying the debt.

All you have to do is go overseas.

Because the HECS repayments are administered through the taxation system, it has been deemed too difficult to recoup these payments from graduates who are working overseas and hence not paying tax in Australia. It might sound like a small thing but the equity and budgetary implications are considerable.

Think about it. Say you graduated from the University of Sydney's law school in 2010. You would be one of Australia's elite, with a degree from a prestigious school, equipped to make your way in the world, confident of earning good money. You would owe the federal government around $35,000 for its HECS loan to cover your fees. As a graduate, you could expect to earn an average starting salary of $48,000 in your first year in a large law firm, just above the $47,195 minimum repayment threshold income for 2011. But, if instead of signing up at Minter Ellison or Gilbert & Tobin or any of the other big firms you decided to head for London or New York or Beijing, you need not worry about repaying the debt.

If you stayed away for the rest of your life, becoming one of the million Australians who live overseas (most of whom are highly-educated young professionals), you would never have to repay the cost of your education. The federal government would carry the debt forward until your death, at which point it would be wiped off the national register.

Taxpayers would have given you the gift of a degree. Absolutely free of charge. And you are no doubt able to earn far more money in London or New York or Beijing than you would have had you stayed in Sydney.

I have always thought this situation was unfair. It seemed to me to advantage already-privileged graduates, those who could afford to travel abroad, at the expense of those who had no such option. And even if the graduate returned to Australia after, say, five years away, and began repaying the HECS debt, that person is still better off than those who stayed in Australia. HECS debt is indexed to the consumer price index but, unlike other loans like, for instance, your mortgage, it is otherwise interest-free, so five years free of repayments carries no penalty.

The HECS scheme has been in existence since 1989, so it seemed to me that potentially there was a large cost to government in this anomaly. To try to get a handle on what that cost might actually be, I contacted Bruce Chapman of the Crawford School of Economics and Government at the Australian National University, who is known as ''the father of HECS'' for his role as economic adviser to the Wran committee, which devised the loan scheme back in 1988.

Chapman told me that he, too, considers this anomaly to be inequitable and has long suggested to government officials that it be addressed. He concedes that it was a ''design fault'' of the original scheme but back in 1989, when the annual HECS debt was $1800 per year regardless of the course undertaken, it did not seem such a big deal. Today, when the annual debt can be as high as $9000, meaning a four-year course accrues a debt of $36,000, the figures are starting to stack up. But how high?

Chapman undertook to investigate. He enlisted the help of Tim Higgins, a researcher in actuarial studies at the ANU (and, incidentally, the son of Chris Higgins, who was secretary of the federal Treasury from 1989 until his tragic death, at age 47, in 1990). Chapman and Higgins have done some modelling based on various assumptions about the numbers of graduates who have worked overseas, the duration of their stay abroad and their imputed debts (according to when and what they studied).

Using data from the 2010 Beyond Graduation Survey, which is a longitudinal study tracking gradates from 2006, they found that around 10 per cent of 2006 graduates with deferred HECS debts had worked overseas within three years of graduation. Around 5 per cent had worked overseas for more than one year. Chapman and Higgins then modelled various scenarios assuming graduates remaining overseas for periods from one year to permanently and linked these to various assumed levels of debt.

Their conclusion? That the federal coffers are short anywhere from $400-$500 million as a result of HECS debtors being absolved from repaying because they live overseas. And, they caution, these estimates are ''conservative''.

They do not include postgraduate students, or students who have incurred HECS debts but failed to complete their courses and, of potentially great significance, they do not include the large and growing numbers of FEE-HELP and VET FEE-HELP recipients. (The latter are loan schemes for students undertaking tertiary training at government-approved institutions such as technical colleges or private universities.)

Higgins believes the shortfall from graduates with FEE-HELP loans to date may be in the order of $50 million but he notes the number of FEE-HELP students has grown markedly in recent years and future graduate numbers will also rise. And their debt is often considerably higher than HECS loans. In 2012, students can borrow up to $112,134 for certain courses, while private university courses cost substantially more than public ones. A law degree at Bond University costs $122,240 in 2012, while a combined degree can cost as much as $183,360, according to the university's website.

When these caveats are taken into account, the amount of revenue lost to the federal government from overseas graduates not repaying their student loans could be considerably higher. Using certain assumptions, it could be as high as $1 billion. Chapman was reluctant to use this higher figure but did say that under some assumptions concerning the likely length of time graduates remain overseas, ''such a figure is not implausible''.

''There is little doubt that as HECS-HELP and FEE-HELP charges have risen, the foregone revenue figures will inexorably increase in years to come,'' Chapman told me. ''Another 10 years of neglect in this area would likely double the current estimate.''

In other words, while it can be safely assumed the government is down by as much as $500 million so far on the HECS and related schemes, a failure to correct the anomaly will lead to an exponentially increasing shortfall. It seems hard to justify this oversight in an increasingly difficult budget environment.

Surely the government should be motivated by the extent of the opportunity costs involved of their foregone revenue. You can do a lot with $500 million.

For instance, pay for the Gerringong to Bomaderry Princes Highway upgrade, fund the National Rewards for Great Teachers payment supplements, preserve a means-tested-free childcare rebate, thus encouraging women's workforce participation, or - and why not - a huge increase in the number of tertiary education places. Reinvest the recouped funds in the nation's education. There's an idea.

In this post-global financial crisis environment, the lure of foreign capitals may not be as attractive as it once was - fewer graduates will want to leave and many away will return.

Advance is a global network for the Australian diaspora in New York, which keeps close tabs on trends of what our expats are up to. ''We've seen a significant number of members returning home in the past couple of years,'' says the chief executive of Advance, Serafina Maiorano. ''Especially those in the financial services sectors of New York and London.'' Advance does not collect information specifically on graduates but it is likely that the trends they have observed will include HECS debtors who, upon their return, will have to start repaying.

This would seem as good a time as any to fix the system. Nor does it appear to be difficult to collect the money.

Chapman has suggested different ways this could be done. The simplest would be to legally require all HECS debtors who intend to leave Australia to repay a minimum annual amount for each year they are overseas, say $1800, which is about the minimum that debtors now pay. Chapman says a declaration about HECS debt could be added to the outgoing passenger form. The form currently requires us to state if we are carrying more than $10,000 cash. A question about HECS debt could easily be added.

Bruce Chapman and Tim Higgins will be publishing their research shortly in an ANU working paper series. I suggest they send a copy to Senator Penny Wong.

Peter Hartcher is on leave.