Most call it the “best loan you’ll ever get.”
That said, should graduates put their resources to find a job somewhere else? Or should they settle their student loans at every possible chance? We turned to an expert and asked what should be prioritised first.
So, is your student loan or the so-called HELP debt really the best one you’ll get? A Business School lecturer from Griffith University concurs because of its low interest rate and high payback income threshold.
“HELP is known as an income-contingent loan, meaning repayments are only collected once your income meets a threshold — currently $55,874 per annum in 2017-18,” remarked Tracey West.
“The current repayment rate is 4 per cent of taxable income on this lower threshold, and rises by income bands to 8 per cent above $103,766 per annum, and the employer withholds this repayment alongside withholding tax.
“The value of the student debt is indexed to the CPI [Consumer Price Index] each year, which was 2.1 per cent in March 2017. Thus, based on these factors, HELP is the ‘best loan you’ll ever get,” West added.
But what if you have other debts? What should you settle first? West suggests allocating more of your funds to paying those other debts first.
“Absolutely, a person should repay a car loan, credit card, home loan, or other debt that has higher interest rates because it compounds more quickly over time, and because their behaviour in loan repayment [or lack thereof] will impact their credit rating,” explained West.
And taking into consideration the fact that Australia’s household debt is already the world’s highest, it is not a terrible idea to start paying those down right away.
Will the way student loans work ever change?
It quite possibly could, if the Federal Government gets its way.
“Two major changes [include] reducing the repayment threshold to $42,000, with a reduction in the repayment rate to 3 per cent, and to change the indexation to be linked to the bond rate [of government borrowing] rather than CPI,” West stated.
“This means debt holders will start repayments earlier and the debt will compound faster.”
A spokesman for the Federal Education Department was quoted as saying that the reduction in the repayment rate would be 1% and the Government, “has not proposed applying the bond rate in the legislation currently before the Parliament.”
West said consensus on student debt appears to be set and forget as it takes care of itself.
“In the early career phase of an individual this approach makes a lot of sense, as acquiring other assets and lifestyle demands take priority, like a car, travelling [and] saving for a home deposit,” West said.
“However, as with other debts, the HELP debt is still compounding over time, albeit at a low rate. Thus, making voluntary contributions will help pay down the loan faster, and when paid off, wages are no longer deducted … effectively a pay rise,” she went on to say.
Does paying off your HECS early help at tax time? Not anymore.
“There are now no tax benefits associated with early repayment of HELP debt,” West conveyed.
“From January 2017, discounts on up-front contributions to the education provider and voluntary payments of $500 or more to HELP debt were discontinued.”
And West added that you also might have less idea of what you actually owe.
“The ATO ceased mailing out account statements in 2013, so many students may be unaware of their HELP debt balance.”
You may gain access to this information through the ATO’s website or through your tax accountant.
How much can you expect a HECS debt to increase if you just leave it?
“If you assume an average inflation rate of 3 per cent per annum, a HELP debt of $20,000 will accumulate to $26,900 in 10 years’ time, with no repayments,” Dr West stated.
“It is actually a project proposal that I am working on along with a financial literacy education program that is linked to students with HELP debt.”
West went as far as saying that she holds regret about not paying more of her HELP debt down earlier.
“I have first-hand experience with an accumulated HELP debt after participating in quite a few study programs, and not meeting the income repayment threshold until later in life,” West said.
“Now that I have a young family and mortgage commitments, my mind has turned to ways that I can increase my disposable income, and paying off HELP debt is one way.
“Unfortunately, it has accumulated to quite a hefty amount so it will require a concerted effort to pay it down, and I’m better off investing that extra money in the stock market.
“I have some regrets about not being conscious of the impact of student debt on my future cash flow earlier in life, and quite honestly didn’t give it much thought. ”
Missing out on payments is one of the factors that can lead to a bad credit rating. And that is something you don’t want hanging over your head as a bad credit rating can be especially damaging.