As an avid follower of personal finance, frugal and debt-reduction vloggers, one of the hot topics of the Personal Finance Youtube space is the challenges of paying off student debt and the woes of the living with debt shackles which come with such high debt when you’re fresh out of uni and working on minimum wage.
When some US grads start on $20,000 annual salary, it’s amazing that they can pay rent, buy groceries, pay interest and principal repayments on student loans AND have a little extra dollars for some fun.
Luckily for us Aussies down under, we have something magical called FEE-HECS or FEE-HELP debt. This is the bees knees of higher education and without it, I probably wouldn’t have been able to go to uni unless I started saving for it from birth. Thank you amazing government. So, how does it work?
The lowdown: What is Australian Student Loan system that is so wonderful and magical you speak of?
The government will give us a loan to cover all tertiary course expenses up to a maximum of $100,879 or $126,101 if you study medicine, veterinary science or dentistry. It means you can stay a forever-student and keep enjoying those pub crawls, sleep-ins and library dates cramming for exams through your Bachelors, Honours and even Masters if you really love avoiding adulthood and the weight of responsibility and bills.
There is no interest charged on the loan ever, however the loan value adjusts with the Consumer Price Index every year only after the loan is over a year old which is a small ‘interest’ expense of ~1.5%. On top of this, compulsory repayments need to be made only after you start earning more than $55,874 p.a.
With all these heavenly student interest-free perks that come with Australian citizenship, low indexing and non-compulsory repayments until I earn enough to actually live comfortably (~$56k)…
…Why am I not paying off my student loan faster?
Simply put, opportunity cost.
HECS ‘interest’ of 1.5% (CPI adjustment) every year is the cheapest loan I will have my entire life, so I’m going to milk it for all it’s worth. If a mortgage is like a ball and chain to most people, a HECS debt is comparable to a sweet promise ring that your boyfriend gives you when you’re 16. As long as I cover the 1.5% indexing ‘interest’ expense every year, I’d be stupid not to take advantage of the higher returns elsewhere through investing or even just holding cash in the bank!
The Bottom Line
When debt is cheap and affordable and compulsory payments are weighted by income bracket, my priorities are first and foremost 1) building an emergency fund and once I hit 6 months of living expenses, 2) build an investment portfolio and lastly 3) pay off student debt.
Unexpected economic or personal crises hit harder on the wallet than the benefits of making voluntary payments above the minimums. As I’m at the beginning of my FI journey, my priorities are establishing myself first before reducing interest-free debt (no credit card debt whoop whoop).
Do you have student debt? What are the challenges that you face? Does your country’s government help students out with loans and if so, what are the conditions?
xx Miss Piggy
Cover Illustration by Judith van den Hoek