Election result changes student loan strategy

One of the first things Prime Minister Anthony Albanese did after winning the election was to knuckle down and implement changes to Australia’s student loan program.

It is a good idea for anyone with a HECS-HELP debt to copy his example, given that the changes suggest a very different strategy from normal.

Usually, anyone wanting to pay down their student debt would do so near the end of the financial year, due to the inflation linked increases in loans happening at the end of the financial year.

This year promises to be very different because the Albanese Government is spending $16 billion to cut the outstanding amount of all student loans by 20%.

That means for this year only, an early repayment could be costly because you want to leave the loan as high as possible before the 20% discount is applied.

Early repayment could cost you money

For example, if you repaid $10,000 before the end of the financial year, then you have effectively cost yourself $2000 in forgone debt forgiveness.

That compares to the uplift factor which this year is 3.2%, still quite high but a long way short of 20%.

Due to the way in which HECS-HELP debt interest is calculated, the best time to repay debt is usually before the end of the financial year to avoid the indexation factor being applied to a larger figure.

Some strategies around student loans

There are some interesting financial planning ideas around repaying student debt which are usually trying to reduce the debt to allow for better access to property loans and also to stop payments earlier.

One interesting idea is to save up progressively during the year using a high interest savings account before performing the actual repayment in May to ensure the amount is reduced before the indexation is applied on July 1.

That allows for the earning of interest for the best part of the year and also saves the maximum amount by reducing the student loan just before the indexation is applied.

Salary sacrificing also worth consideration

Another financial planning strategy around repaying student debt includes making extra contributions through salary sacrificing, if permitted by the employer.

That can be helpful not just in reducing the outstanding loan but also as a method to increase the amount that can be borrowed to buy a house or apartment.

Interestingly, the Albanese government has promised to try to make it easier for young Australians with student debts to buy a home by urging regulators to reassess the role of those debts for banks granting mortgages.

At the moment, student debt is usually taken into consideration by lenders who consider the impact of all debt on income.

Even if they don’t consider the debt directly, the repayment of HECS-HELP reduces the income that is used by financial institutions to calculate possible loan amounts.

However, the Federal Government wrote to the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) before the election, with the regulators now reviewing their loan guidance to banks.

It will be interesting to see what action is taken about this advice when it arrives, hopefully this year.

Old ideas not as helpful as they used to be

The old strategy of dealing with student loans was to let them run and have them taken automatically out of your pay gradually because they were seen as the cheapest loan available.

However, this idea has come into question due to some student loans growing much faster due to higher prices for some degrees and also higher uplift factors on the loans due to much higher inflation.

That has made the amount of student loan outstanding yet another negative factor to consider as the cost of housing continues to escalate.

The positive way of looking at this is that banks are likely to have a very favourable view towards a customer who has already proven to be capable of paying down a loan at a higher rate than they needed to.