Uni debt? HELP yourself

Households may be racing to pay down their mortgages and using credit cards more sparingly, but there's one type of debt that's still growing quickly: student loans.

Households may be racing to pay down their mortgages and using credit cards more sparingly, but there's one type of debt that's still growing quickly: student loans.

The value of debt outstanding under the Higher Education Loan Program (HELP) has ballooned more than a hundred-fold since the late 1980s to $26.3 billion, government figures show.

This is partly because more people are going to university, of course. But tuition fees - and the time it takes to pay them back - are also rising.

The average HELP debt today is $15,200, and takes more than eight years to repay. It's a far cry from the mid-1990s, when the average repayment time was four years.

For the students racking up these debts, and their parents, these numbers can look daunting. It might be tempting to pay down the debt as quickly as possible - the government even gives you a 5 per cent discount on voluntary repayments.

However, it's important to not let the big numbers on student debt lead you to the wrong conclusion. While it can make good sense to pay down a home loan as fast as possible, HELP debt is a very different beast. Indeed, it isn't rational to pay a HELP debt any faster than you have to.

How's that possible?

Unlike student loans in countries such as the US, HELP loans have little in common with loans issued by banks. For one, there is no interest charged. Instead, the balance is indexed to inflation - a "real" interest rate of zero. Second, you don't have to start repaying a HELP loan until you earn about $49,000 a year. And if your income drops below this threshold, you can stop paying without penalty.

In short, you will never find a bank loan as cheap or as considerate of your financial situation. If you're the one paying it off, it makes sense to exploit this.

So if you do have spare cash that could be used to make extra HELP debt repayments, it generally makes more sense to leave this money in the bank earning commercial rates of interest, or to use it to pay down any bank debt you may have. This will give you a better return than paying HELP debt early. By paying off your HELP debt quicker than required, you're doing the government a favour - like paying more tax than you have to. So why do people do it?

In many cases, it's an act of generosity from parents who don't want their kids to start their working life owing tens of thousands of dollars. And it's true, leaving uni without a HELP debt leaves you better off financially.

Also, many people aren't strictly rational with their finances. Debt has a bad ring to it, so they want to pay it down.

As a result, some students (or more likely, their parents) will probably continue to pay off HELP loans early, even if it may make more financial sense to put the money elsewhere.

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