‘It’s obscene’: ATO still chasing $2bn in student debt from controversial 1990s loan scheme

The Australian government is still chasing $2bn of debt from more than 140,000 former low-income students who traded away their right to welfare under a loan scheme more than two decades ago.

The student financial supplement scheme (SFSS), which operated for a decade from 1993, enticed tertiary students to take out "low-cost" loans by giving up benefits including youth allowance, Austudy or the pensioner education supplement.

Every dollar of welfare a student gave up entitled them to $2 in a loan, which could be used to help cover expenses while studying. Minors were also able to take out loans.

The Coalition dumped the scheme at the end of 2003, acknowledging it was saddling students with high levels of debt, was "administratively cumbersome and poorly targeted" and effectively hit people with hidden interest rate costs through forgone welfare.

It also conceded that many of the students would struggle to ever pay the money back. When the scheme was axed, the government actuary estimated about 50% of the loans would be recovered.

In 2017, Guardian Australia revealed that, four years after it was dumped, more than 150,000 people still owed around $2.1bn in debt.

Six years later, the dial has barely shifted.

Figures supplied to Guardian Australia showed 143,487 people were still paying back $2bn in debts as of March this year. The highest single balance was $128,768.

A spokesperson for the Australian Taxation Office said it was collecting SFSS as part of the "overall regime" for other student loans.

"It's collected via the income tax return system when income is over the thresholds for compulsory repayment," a spokesperson said.

The threshold is currently $48,361 per year.

SFSS sits below Help and Vet student loans but above student start-up loans (SSL) and trade support loans (TSL) in the repayment hierarchy.

After two decades, former student Dennis last year managed to pay off his Help loan, which was about $15,000, but he still has more than $36,000 owing on his SFSS loan.

When he initially took out the SFSS loan it was sitting just under $10,000.

"It's basically just accrued interest for years," he said.

Dennis was from a low-socio economic background and took out the debt at the start of his university studies to help pay for a move to Perth.

"Being able to afford living costs before finding work seemed like a good offer without knowing the ramifications," he said.

Dennis paid off $6,000 of his SFSS loan during the last financial year. He estimates that because of inflation and indexation his debt will jump by $2,500 next year.

"It's criminal that this is being chased for people who took it out decades ago not understanding the rate indexation," he said.

"It's a silent stalker as far as government debts go."

The Antipoverty Centre's spokesperson Kristin O'Connell said it was "horrible" to think financial decisions of such huge economic consequence were being handed out to young people starting out on their career paths.

"We have, for the past 30 years, politicians willing to transfer the burden of budget savings and cost of welfare on to people who can least afford it and are most in need of support," she said.

"The government was stealing the financial future [of welfare recipients] and [their] capacity to establish themselves and live a decent life.

"Today 140,000 people now have debt getting in the way for their capacity to buy a home. It's obscene they were cheated out of welfare support they were entitled to."

O'Connell echoed calls made in a Greens bill, rejected by a Senate committee, to wipe SFSS debt and raise the minimum repayment threshold to the median wage - around $60,000.

"We need to make sure people can comfortably survive before having to repay education debts," she said.