This article has been written by expert contributor Robin Bowerman, Head of Corporate Affairs, Vanguard Australia.
Students have just received a hard lesson in macroeconomics. Now many face a test in debt management.
Tertiary students – past and present – are getting a crash course on the economics of indexation and inflation.
Financial advisers often like to put different types of debt into “good debt” or “bad debt” buckets.
High interest, non-deductible debt like outstanding credit card balances usually tops the list for the bad debt. But HECS-HELP student loans have typically been regarded as good debt because they are interest free.
In recent years, when inflation has been low, this has made sense.
The catch – which hit home on 1 June for many people – is that while the Federal Government is not charging interest, it does apply an annual indexation amount to ensure the outstanding debt maintains its real value.
This year the indexation uplift factor applied to outstanding balances was 7.1%. So, a student with a loan balance of $50,000, saw that increase by $3,550. That is a steep jump and not surprisingly it has received a lot more attention given that for the five years ending June 2021 the average indexation increase was just 1.82%.
The Federal Government is at pains to point out that nothing has changed, except that the inflation rate has jumped much faster than anyone was expecting, including the Reserve Bank.
The student debts dilemma
So, it raises the question about how to think about your HECS-HELP debt – pay it off as your income builds under the compulsory formula the Tax Office administers or consider paying it off more quickly through salary sacrificing or making voluntary one-off payments?
Compulsory repayments for the 2023-24 financial year will kick in when your income is more than $51,550 and as your income builds so does the repayment percentage, which will hit 10% if you are earning more than $151,201 a year.
Economic forecasts are just that – forecasts. Inflation is unlikely to fall below 2% any time in the foreseeable future. Which means the indexation rate on HECS-HELP loans should be expected to stay high in line with CPI inflation figures.
Higher education has been long regarded as the key to unlocking higher lifetime income levels. After all, investing in education is just possibly the best long-term investment you can make in yourself. But, for those needing to borrow to fund their education via the HECS-HELP scheme, it is also a financial investment that has to be repaid.
Other consequences
A high HECS-HELP loan balance has some other drawbacks as well. For example, take the scenario of a couple looking to buy a first property five years or so after graduating and being in full-time work. Both have student loans and those outstanding balances and compulsory repayments can be factored into the calculation when the bank assesses its loan approval.
And, if they were to go on an extended work break – to start a family perhaps – the indexation factor can continue to apply to their outstanding loan balance and grow along with the family.
For those with a HECS-HELP debt the jump in indexation rates is perhaps a wakeup call to think about when and how you want to repay the loan – sooner or later.
For parents and/or grandparents considering starting a savings/investment account for a newborn, then starting early and making regular contributions can really have a positive impact when that child is walking through the gates of university on the first day.
Or perhaps, more importantly, if they can walk out of those university gates on their last day debt free.
Robin Bowerman is the Principal, Head of Corporate Affairs at Vanguard and a member of Vanguard’s executive team.
In his current role, Robin leads the corporate communications and government relations functions of the business and plays a key role in Vanguard’s long-term strategy development. Robin joined Vanguard in 2003 as Head of Retail and played a pivotal role in the growth of Vanguard’s retail business and the products and services offered to financial advisers and retail investors, as well as overseeing retail sales and marketing.
Robin is a key spokesperson and experienced presenter for Vanguard, with expertise in investor education, funds management, self managed super funds, product development, industry and regulatory affairs related topics. Learn more about Vanguard here.
The above material has been republished with the permission of Vanguard Investments Australia Ltd.