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Higher learning, lower loan costs

Students are saddled with more debt than ever but, Clancy Yeates finds, their burden can be eased. Inside On Page 4 we look at the highs and lows of the share house experience - a rite of passage for many of us. And on Page 8, John Collett has some tips for inexperienced credit card holders.

Students are saddled with more debt than ever but, Clancy Yeates finds, their burden can be eased. Inside On Page 4 we look at the highs and lows of the share house experience - a rite of passage for many of us. And on Page 8, John Collett has some tips for inexperienced credit card holders.

Going to university opens up a world of opportunities. Depending on the student, these might include acquiring skills that will land them a good job, getting an education for its own sake, or meeting new people.

There is, however, a financial reality students must consider. They are likely to leave uni owing a substantial debt.

Figures published this year show there is about $26 billion in outstanding debt under the government-operated Higher Education Loan Program (HELP) scheme, an amount that's ballooned more than a hundredfold since the late 1980s.

Graduates are also taking longer to repay the government. The average HELP debt of about $15,200 takes more than eight years to repay, compared with the mid-1990s, when the average repayment time was four years.

Four years ago, when Kevin Rudd was campaigning to be prime minister for the first time, he highlighted the burgeoning HECS debt, as it was then known, as part of his push for an "education revolution".

But in the years since, the amount most students owe has only continued to climb. So how should students, and their parents, approach the growing HELP debt that comes with university?

To many, the word debt has a bad ring. But HELP loans are, in many ways, different from other types of debt.

Devised in the 1980s as a way to make students contribute to the cost of their education, and previously known as the Higher Education Contribution Scheme or HECS, HELP loans allow students to borrow on generous terms from the government. The differences to bank loans are substantial.

For one thing, the only interest charged on the outstanding balance of your loan is the rate of inflation, which is now 2.4 per cent. In financial jargon, that's a "real" interest rate of zero.

A financial adviser at AMP's Genesys Wealth Advisers, James Jagodnik, says it's crucial to keep this in mind if you're a parent who is concerned about your child's HELP debt. "It's essentially an interest-free loan," says Jagodnik, a 27-year old who has a HELP debt after studying commerce and law.

The second thing to remember is that you don't have to start repaying your HELP debt until your income passes a threshold, which is $51,309 for this financial year.

How much you have to repay each year depends on what you earn. Repayments range from 4 per cent of your income to 8 per cent for high earners. Jagodnik tells anxious parents that these conditions make HELP debt "fairly reasonable".

"Their children won't have to pay it off for many years," he says. "And then if they're an employee, they won't see it. It will come out of their pay as a percentage, and the more you earn, the more you pay back."

However, despite these differences to other types of debt, the sheer pace of the increase in HELP debt has some experts concerned. Consumer Credit Legal Centre principal solicitor Katherine Lane says there are tentative signs of a generation of younger people who are more cautious about big life decisions such as buying a house, in part because of their HELP debts.

"They've got so much debt that they feel overwhelmed," she says. "I do think it affects people's behaviour. You're starting out your life with a weight on your shoulders."

HELP debt tends to have a much lower profile than credit-card debt, but it also reduces the disposable income you have. This can make it more difficult to have a home loan approved by a bank.

National Union Students president Jade Tyrrell also worries that bulging HELP debts are threatening to "commodify" higher education, making more students concerned about whether they are getting value for money in the courses they choose.

"It used to take eight or nine months to pay off a HECS debt when it first came in back in 1989. These days it takes almost a decade to pay off," she says. "That's a huge concern for us because it makes university a huge life choice."

So why have HELP debts increased so much? It's partly because more people are going to university, but also because young people are typically studying longer. The range of HELP-supported schemes has also ballooned.

If your place at university is "Commonwealth-supported" - meaning the government is subsidising part of its cost - you can take out a HECS-HELP loan.

But there are also FEE-HELP loans - made to domestic students such as Lorraine Walsh (see story, right) who are studying a full-fee course. There are also HELP loans for Australians studying overseas or in the vocational sector.

The cost of a full-fee degree can vary widely. A master's degree in the humanities might be about $25,000, while Bond University's bachelor of medicine and surgery is probably the priciest in the country, at more than $300,000.

While it's possible to work up hefty debts, the Tax Office says 44 per cent of people owe less than $10,000 in HELP debt.

Some, however, will never repay their HELP debts. The Grattan Institute's higher education program director, Andrew Norton, this year predicted about $6.2 billion in HELP debt would never be repaid, and much more is likely to be written off in future.

"It potentially is a concern for taxpayers that 20 or so per cent of an increasingly large sum of money is expected never to be seen again," he says.

When you consider such trends, it's hardly surprising that some parents worry. Jagodnik says the topic comes up "a lot" in conversations with parents.

How can parents best help children to manage HELP debt? Jagodnik says parents need to weigh up the benefit of paying off highly concessional debt early with the returns from putting the money elsewhere.

Contributing towards a deposit for a house, for instance, might be more beneficial because it could reduce the amount they need to borrow from a bank, at commercial rates of interest.

"If you want to pay for this education where your children essentially have an interest-free loan, why would you pay for that when potentially you could maybe loan them the money for a deposit on a house?" he asks.

There are also financial inducements for early repayment of a HELP loan. If you make a voluntary repayment of $500 or more, you will receive a bonus 5 per cent of your repayment towards the outstanding debt. It might sound tempting.

Jagodnik says whether to repay HELP debt early is one of the questions he is most often asked in this area. But again, he urges students - or, more likely, their parents - to consider what else they could do with the money. Putting it towards a home loan, for instance, is likely to be a better option.

"If you have a home loan, and you have an offset account you could sit that $500 in your offset account, you'd be reducing your home loan by about 5.5 per cent," he says.

People who don't have a home loan need to ask themselves whether they can get a better return than 5 per cent, after tax, and whether they want the extra money to be available.

At any rate, the days of weighing up the pros and cons of early paying off of a HELP debt appear numbered.

The size of the discount has been progressively cut in recent years, and it will be eliminated from January. This should mean one less thing for nervous parents to consider in the HELP equation. But it is unlikely to spell the end of concerns about the growing cost - and debt - involved in getting a tertiary education.

What's owing

Case study: Lorraine Walsh

When Lorraine Walsh was considering postgraduate study, the financial cost was not a big concern.

She's now doing a master's degree in international law, which is likely to add about $27,000 to her HELP debt.

But rather than being spooked by the big number, Walsh says she feels lucky to have the opportunity to study a topic she feels passionate about.

"Ultimately, I wouldn't question taking on further HELP debt because of the opportunities I think further education brings," Walsh, 26, says. "For me, that outweighs the debt."

Before the master's, she completed a four-year full-time undergraduate degree in media and communications and government and international relations. That led to a HELP debt of about $20,000.

After working for a few years, she decided to do the master's, which is likely to cost a further $27,000 when finished. Her postgraduate study is being funded with a FEE-HELP loan, which is for domestic students who pay full fees. But she says money was not top of mind when she decided to go back to university.

"It was not in the top few considerations in terms of deciding what courses to do or whether to go back at all," she says.

Walsh had already started repaying her HELP loan from her first degree when she decided to study again. She likens it to paying a bit of extra tax.

"It wasn't the same in my mind as if I had decided to go and take out a $30,000 loan. I don't view it as the same as other debts that I might incur," she says. "If something happened with my job or if I'm not earning enough, it's not like there's going to be someone knocking on my door demanding payment."

Research also suggests postgraduate study makes financial sense. People with a postgraduate qualification typically earn 9 per cent more than those with a bachelor's degree, according to a study by AMP and the National Centre for Social and Economic Modelling.

Clancy Yeates

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