Should you help your child pay off their HECS/HELP debt? It’s a question many Australian parents are grappling with, especially in light of recent changes to the program. The HECS/HELP system, implemented by the Australian government, has long been a beacon for students seeking tertiary education without the weight of immediate fees. But with shifting interest rates and the evolving financial landscape, both students and their parents are reassessing how best to approach this debt. In this article, we’ll delve into the intricacies of the HECS/HELP system, the benefits and potential pitfalls of voluntary contributions, and explore how parents can effectively assist their children.
Central to the HECS/HELP system are its income-contingent repayments. This setup ensures that once students cross a specific income threshold, a portion of their earnings goes directly towards their education loan. The design is simple: the more you earn, the more you repay. But it’s not just about mandatory repayments; the system also allows students to make voluntary repayments.
The interest rate on these loans, historically, has been quite benign, generally remaining below commercial lending rates. Pegged to the Consumer Price Index (CPI), the interest rates remained relatively stable between 1.5% and 2.6% from 2013 to 2020. However, in subsequent years, there was a notable shift. 2021 saw a drop to 0.6%, but this was followed by a sharp rise to 7.1% in 2023.
This unexpected increase sparked concern. To merely cover the accrued interest charged in 2023 through the compulsory minimum repayments, people have to earn over $112,000. For many, this meant their debt was growing, not shrinking. This new landscape has prompted students and their families to reconsider how they approach their HECS/HELP debt.
Making voluntary contributions yourself
Given the changed landscape, making voluntary contributions off a HECS/HELP debt seems more attractive than ever. But before jumping in, it’s essential to weigh this option against other potential financial commitments.
For example, let’s say you have some spare cash. If you funnelled this money into additional home loan repayments and saved 6% interest, it might seem like a smart move. However, if your HELP debt accrues at 7.1%, channelling that surplus there could be more financially prudent. However, there is a critical issue to consider first: while home loans typically allow you to redraw extra repayments in emergencies, once you repay your HELP debt, those funds are locked in and inaccessible.
How can parents help their children?
The financial challenges posed by the recent interest rate changes have also prompted many parents to seek ways to assist their children. An emerging trend is the “Bank of Mum & Dad.” Suppose parents have funds tied in a term deposit yielding 4%, but their child’s HELP debt incurs a 7.1% interest charge. In that case, parents might consider lending this money to their children at a rate that’s beneficial to both.
Upon repaying the official HELP debt in full using this method, children can notify their employers to halt the compulsory deductions. The increase in their net pay can then be redirected into loan repayments to their parents instead, ensuring that their net ‘take home pay’ remains consistent.
However, this strategy requires careful consideration because:
- That money has now gone into reducing the HELP debt and cannot be withdrawn. So, if Mum & Dad suddenly need the money back, the child will probably not be in a position to organise that.
- The HELP interest rate changes each year. It is indexed to inflation. So, at the moment, the HELP Interest rate is higher than say current bank interest rates or the rate of return on your super given the volatility in markets recently it is logical to ‘refinance’. However, things might change in the next year or two, and you could find yourself in a position where you have lent money to your child at say 5%; when having that money back in your bank or super fund could give you a better rate of return.
- If you are planning on getting the money to give your child from your super fund, and you want put the repayments received back into your super fund, please make sure you are still eligible to make super contributions (e.g. age test, work test and total super balance caps).
Should these intricacies leave you with more questions than answers, we’re here to help. Engage with us, and we’ll guide you through the issues so you can make the best decision for you and your family.