IT’S the debt we all like to forget we have, and Australians owe a combined $48 billion.
But while a HECS or HELP balance is the best debt you can have, given that it doesn’t attract interest, ignoring it could harm your finances in less obvious ways.
And you might want to think about paying it off before you saddle yourself with a home loan, Finder money expert Bessie Hassan suggests.
“Even though this is no-interest debt and therefore better value than commercial interest-laden debt, it’s still a good idea to clear it as early as you can and before you look to acquire any further debt, as further debt will be more expensive to pay back and therefore more difficult to clear,” Ms Hassan said.
And, she said, your HECS debt could impact on how much the bank will lend you to buy a house or car, because your income is reduced by the repayments taken out of your wage each week.
“It’s worth considering paying off this HELP debt as soon as possible to rid yourself of the burden of having an incremental chunk of your wage being taken out every year,” she said. “This can make you more attractive to a lender.”
If you are paying the minimum amount off your student debt while you earn the median full time wage of $82,804, you’ll have $5382 taken out of your pay each year. For those who fall into the $95,627 to $101,899 income bracket, the maximum annual repayment is $7642.
An analysis of ATO data by finder.com.au found that the amount of HECS and HELP debt has doubled in size in the five years from 2011 to 2016, rising from 1.6 million Australians owing $22.6 billion to 2.5 million Australians owing a mountain of debt valued at $47.9 billion.
Almost half a million of them owe more than $30,000, accounting for about 46 per cent of all HELP debt.
“This number keeps creeping up, and it could take graduates years to repay,” Ms Hassan said.
Until January this year, those who opted to make extra payments towards their debt were given a 10 per cent discount, but this incentive was abolished by the Turnbull Government.
THE GREAT HOME LOAN CHALLENGE
As young Australians battle to enter the housing market, with rising property prices making the task of saving a deposit ever more challenging, it seems counterintuitive to put extra cash towards paying down a debt that only increases in line with the cost of living, measured by the consumer price index (CPI).
That’s about two per cent a year under current economic conditions; compared to a personal loan, on which the banks will charge about 12 per cent a year in compounding interest, it’s a very good deal.
And, despite calls for reform, your HECS dies with you; when you pass on, your debt is wiped and it is not passed on to your estate.
But, Ms Hassan said, paying it down before you pursue the home ownership dream may still be worth it.
“Once your HELP debt is paid off, you’ll be keeping more in your pocket from what you earn at work — and potentially get a larger tax refund,” she said.
“While this may not seem like much, this could be the shortfall in completing a deposit on a loan.”
The extra cash could make it easier to both save for a deposit, and service a home loan, depending on “your income, the amount of other liabilities you have, and the property purchase price.”
“Making extra voluntary payments can be good if you have no other debts and if you have spare cash to put towards your student debt,” Ms Hassan said.
“On the flip side, if you have other debts, such as a personal loan or credit card, you should work on servicing this debt first as you’ll be charged interest.”
It only becomes compulsory to start paying off HECS or HELPS debt once income exceeds $54,869, a threshold that is adjusted each year.
Australians can make a voluntary repayments on their HECS or HELP debt at any time through their tax returns.
While no interest is charged on the debts, they are indexed on June 1 each year to keep pace with inflation.
Original Post: Here
Written by Dana McCauley, from www.news.com.au.