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The university is paid upfront by the federal government so it can still cover all of it's costs. The taxation office then collects the repayments, which are just taken out of your income.

There are risks for the government. For example, lots of Australians work overseas and unless they return to Australia to work, they won't pay back the debt. http://theconversation.edu.au/expat-workers-have-cost-austra... But that's probably not a huge percentage of outstanding debt.

The 10-20% discount is just another way of saying the loans have a direct cost of 10-20% and then get indexed to inflation. With that 10-20% upfront cost plus inflation adjustments work out close to the same net cost as my 3.2% student loans in the US assuming you pay them back in a 10-20 year time frame.

In other words, the government is subsidizing the loan just like in the US.

Capital gains.