Young people earning money above and beyond their living expenses face a choice: pay down their tertiary education debt or invest?
While everybody has their own unique circumstances, there are a few key things to keep in mind.
If you undertook your tertiary education on a Commonwealth-supported place (CSP), you’ll likely have received a helping hand from the government in the form of a HELP loan. Your HELP debt is the money borrowed from the government to undertake tertiary education. That covers loans labeled as HECS-HELP, FEE-HELP, VET FEE-HELP, OS-HELP, SA-HELP and VET student loans.
This money is paid back depending on your level of taxable income. If you earn less than $47,014, you don’t pay anything. Between $47,014 and $54,282, you’ll pay back 1% of your taxable income annually, which increases incrementally through to 10% for those earning over $137,898.
According to the Australian Taxation Office (ATO), almost 3 million people had an outstanding HELP debt at the end of the 2019-20 financial year. The average amount was $23,280, up from $22,425 in 2018-19.
The time taken to repay HELP debts has also been increasing, reaching 9.3 years in 2019-20, up from 9.2 years in 2018-19. See table, page 72.
HELP debt is cheap, maybe the cheapest debt you can get. Unlike other types of loans, HELP debt does not incur an interest charge.
But the amount owed does increase. HELP debt is indexed to inflation, as measured by the consumer price index (CPI). CPI is currently 1.1%, next to nothing, so in a way, this figure could be treated as the annual interest charge on the loan.
“Paying down a HELP debt has very little merit at all, because the amount that comes out of your pay is very low, and the amount by which that debt grows is negligible,” says Nicole Pedersen-McKinnon, author of How To Get Mortgage-Free Like Me. Nor will HELP debt affect your credit score.
“But it will form part of getting a home loan because you will have to service that debt at different thresholds.”
Financial experts often talk about good debt and bad debt. HELP debt is certainly good debt. Not only is it contributing towards your future earnings, by aiding a career and the money you get from it, but it costs next to nothing.
Weigh the rates
You should work out what position you would be in if you pay down debt versus the position you would be in if you invest that spare cash.
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