From ABC News, By Jessica Haynes Updated 21 Nov 2017, 7:08pm
It is often called the “best loan you’ll ever get”.
So, should graduate students try and put their money to work elsewhere?
Or, should they pay down their student loans as quickly as possible?
We asked one expert what you should prioritise.
Is your student loan (HELP debt) really the best one you’ll ever have?
Griffith University Business School lecturer Tracey West said that was probably true.
Because of its low interest 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,” Dr West said.”
“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’.”
So, if you have other debts what should you do?
Pay them off 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,” Dr West said.
And considering Australia’s household debt is among the world’s highest, it is probably not a bad idea to start paying those down anyway.
Will the way student loans work ever change?
It could, if the Federal Government has 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,” Dr West said.
“This means debt holders will start repayments earlier and the debt will compound faster.”
A spokesman for the Federal Education Department told the ABC the reduction in the repayment rate would be 1 per cent and the Government, “has not proposed applying the bond rate in the legislation currently before the Parliament”.
Is it ever worth paying off your student loans earlier?
Dr West said consensus on student debt seems 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,” she 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.”
Does paying off your HECS early help at tax time?
“There are now no tax benefits associated with early repayment of HELP debt,” Dr West said.
“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 Dr West said 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 can find this info out 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 said.
But there are not actually any calculators available to help you figure that out.
“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.”
Dr West says even she had some 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,” she 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. ”