Australian tertiary students may want to take a bit of a lie-down in a couple of weeks’ time to overcome the sinking sensation from having a $795 million interest bill turn up on your doorstep.
Unless you pay off your student loans this year, there’s more bad news coming: the annual indexation of student loans will blow that out to an estimated $1.001 billion on 1 June 2020, according to Budget documents.
So, whether you owe money under the Higher Education Contribution Scheme - Higher Education Loan Programme (HECS-HELP) or have taken out a Student Start-Up Loan (SSL), the full impact of the total $46.3 billion debt is about to hit home – especially for those in the high-debt states of New South Wales, Victoria and Queensland.
On the bright side
People’s Choice Spokesperson Stuart Symons said payments made before the 1 June indexation would reduce a student’s long-term debt.
“If you do have the capacity to make a repayment, it’s a really sensible option, although you need to look at your entire personal situation,” Mr Symons said.
“The less you owe when the indexation is calculated, the smaller that increase is going to be. Like all loans which go up over time every little bit you can repay helps and the sooner you start chipping away the better.
“However, it’s good to remember that your student loan is indexed at the general rate of inflation, which was set at 1.9% for last year’s indexation. If this is your most expensive debt, then it’s best to target it. Otherwise, pay down debts which are carrying higher rates of interest.”
Competing for cash
“Most students overlook student debts because they are out of sight and out of mind. They’re easy to ignore until you start to see payments come out of your wages when you start earning more than $51,956 per annum,” Mr Symons said.
“That’s a good thing because it means if you’re just starting in the workforce you don’t lose all your wages paying off your student loan, but it can be a bit of a trap,” he said.
“Most people, of course, put off student loan repayments for as long as possible but all that time the debt is increasing every year thanks to that indexation. Then when you have to start paying it back you’re often at that stage in life when you’re trying to save for other things – like a home or a family. It’s much better to get rid of it as soon as you can.”
The benefit of paying early
If you graduate with an average HECS-HELP debt of $21,000 then paying just $20 voluntarily a week as a HECS repayment will see you thousands of dollars better off.
Assuming it takes five years to reach the compulsory repayment threshold, if you have been paying $20 a week then you will have already paid off $4,000 in debt and saved around $350 in interest. If you have made no payments, then the annual indexation will have lifted your debt to some $23,000.
That is a saving of more than $6,000 – all for paying attention to your HELP debt repayment.
“Of course, the same rules apply when the compulsory payments kick in. If you can make voluntary contributions above and beyond then so much the better,” Mr Symons said.
“You’ll get rid of your old debt faster and be free to save more for your future.”