Should I pay off my student debt early?

Depending on your situation, there may be pros and cons to clearing your student debt before you have to.

According to government estimates, the average debt for a tertiary student in Australia is currently $19,100, with the average time taken to clear that debt more than eight years.1

For many, making a dent in their loan or paying it off in full will be a great idea, but given the low-cost nature of Australia’s higher education loan program, maintaining compulsory student repayments while addressing other debts or financial goals might also be a good way to go.

We look at how these loans work, the pros and cons of paying off your debt early and how proposed changes could impact what you pay in the future.

The higher education loan program

What loans are available?

The government’s Higher Education Loan Program (HELP) consists of four HELP loan schemes (HECS-HELP, FEE-HELP, OS-HELP and SA-HELP) and the VET Student Loans Program.2

The initiative enables you to defer your tuition costs until you’re earning a certain level of income, with the right loan dependent on your circumstances, eligibility and place of study.3

What do different loans cost?

HELP loans are 100% interest free, but they are subject to indexation, which means the amount you owe is adjusted on 1 June each year to keep up with changes in the cost of living.4 The indexation rate for 2017 is 1.5% and since 2011, has never been more than 3%.5

Note, loan fees and limits can apply to various HELP loans, so it’s worth doing your research6. The FEE-HELP loan scheme for instance currently has a limit of $100,879 or $126,101 depending on the course you choose, with a loan fee of 25%.7

How are repayments made?

You must advise your employer if you have a student loan and once your income reaches a certain amount, they’ll need to withhold a portion of money from your pay to cover compulsory repayments via the Australian Taxation Office.8

If you’re earning below $55,874 in the 2017 financial year, you won’t need to make compulsory repayments but if you are earning above the minimum income threshold, you’ll pay between 4% and 8% of your before-tax salary.9 Note, these figures can vary year on year.

Pros and cons of paying off your loan early

Advantages of paying more than you have to

  • You can wipe out your student debt in a shorter timeframe. This could be important to you, particularly considering around 25% of Aussie households admit they experience financial stress, partly due to incoming bills.10
  • You can concentrate on other financial goals sooner, such as moving out of home, travelling, getting married, having children, or buying property.
  • You may pay less if you make additional repayments before indexation is applied.11

Note, while there were discounts for eligible students who made upfront and voluntary repayments on their HELP loans previously, these were done away with on 1 January 2017.12

Disadvantages of paying more than you have to

  • You could pay more in interest if you prioritise your HELP loan ahead of other debts, such as credit cards and car loans. As HELP loans are interest free, paying off debts that accrue interest first may be worthwhile, keeping in mind HELP loans are still subject to indexation.
  • You might leave yourself short when it comes to unexpected costs. Having cash on hand for emergencies such as a flat tyre, broken phone or a visit to the dentist may give you peace of mind.
  • You might put all your energy into one financial goal when you may have room to concentrate on several. For instance, if the return on an investment can cover any movements in indexation (bearing in mind the risks), looking at other areas to invest your cash might be a consideration.

Further changes in the pipeline

Proposed changes in 2018

The government has proposed the following reforms to the higher education loan program, but remember they are yet to be legislated, so not yet set in stone.13

  • The maximum student contribution (for those in a Commonwealth supported place) will increase from an average of about 42% currently to around 46% by 2021. This will be achieved, in part, by steadily increasing student contributions by 7.5% from 2018.  
  • All students with a HELP loan will have to start repaying their loan once their income reaches $42,000, down from the current income threshold of $54,875.

For details and information on higher education reforms, check out the Study Assist website.

We’re here to help

Whether or not you pay off your student debt early will depend on your circumstances, goals and priorities. If you’d like to map out your short and long-term goals, try our goals explorer tool.

Meanwhile, if you need help creating a workable budget so that you can manage your student debt, and any other loans you might have, try our budget calculator.

You also may want to talk to your adviser and if you don’t have one, you can call us on 131 267.

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© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.