For many young Australian’s, tertiary study is financed by a government-run loan program known as “HECS-HELP“. Basically, the government loans you the money to cover tuition fees; and the loan is only “indexed” at rate equal to CPI. This loan is repaid through automatic deductions taken out using the same system as tax (PAYG) once you’re earning over the minimum repayment threshold, which is currently just over $38,000 per year. After this threshold, a percentage of your entire paycheck is automatically deducted; not the amount above the threshold as happens for income tax.
Unfortunately, many young Australians have no idea exactly how the repayment of this debt affects them day-to-day. Is this a loan that is easily paid off? How long will it take? I decided to do a little bit of number crunching and work out exactly what it means.
For someone earning $40,000 a year, which happens to be just over the repayment threshold, the “normal” take home pay is $2720 per month or $628 per week. The HECS repayments add up to an extra $133 per month, or $31 per week. The figures are downhill from here. Someone earning $50,000 per year has $229 per month ($53 per week) taken out; a salary of $60,000 means $310 per month or $72 per week is deducted. In other words, a 50% increase in pay means a 130% increase in the amount deducted.
This means over a year the average graduate can have anywhere from 23% to 28% more taken out of their pay.
It should be noted that according to the Department of Education, Science and Training the average starting graduate salary is $33,400. This is below the repayment threshold!. For the first few years of working life, the average graduate is making no repayments on their debt.
Now it may seem like $31 per week is not a lot of money; and that’s partly the point. At that rate, it will take over 10 years to repay a $20,000 HECS-HELP debt! What a fantastic way to start a career - earning 95% of everyone else for 10 years! In fact, once the HECS-HELP repayment threshold kicks in a 5% reduction in take-home pay is the minimum. The pay rise from $38,148 to $38,149 per year is going to make for an unpleasant surprise next pay check.
To put it in into day-to-day terms, like I promised I would, what would that $31 buy you? It’s a trip from Brisbane to Byron Bay and back again; it’s 124 text messages, a bottle of Bundaberg Rum, or 18 songs from iTunes Music Store, every week. Over a month it’s the cost of Telstra’s second-most expensive ADSL broadband plan, two pairs of Chuck Taylors, or just over the cost of Foxtel with every channel, World Movies and iQ.
That’s just consumer crap though, and I’m pretty sure we can all live without weekly jaunt to the beach. What’s more concerning though is the long term effect of paying back such a significant debt. If someone without a HECS debt invested their $31 for ten years in my favourite low-risk ING savings account at 6%, the HECS student did the same after the debt was repaid and they both invested for a further 10 years, the difference is substantial. The non-HECS bearing person will be almost $40,000 ahead. After another 10 years, the difference is $72,000. After 45 years, or from age 20 to age 65, the non-HECS bearing person will be over $175,000 better off!
Don’t get me wrong, I’d much rather have a HECS-HELP system rather than the student loan system in the US. But the outlook is not good for young professionals in Australia. Housing affordability is at an all-time low; electricians and plumbers earn more than most graduates; and we have a government that would rather throw cash at people to have babies than ensure the population is well educated.
My problem is this: the impact of a HECS-HELP debt on day-to-day life is ignored by the people setting policy. A $51 per year tax cut? How nice!
Most students don’t even think twice about incurring the debt, either. It’s not until every dollar starts to matter, like saving for a house or trying to pay down credit card debt, that young professionals start to wonder why their salary is a little less than expected.
Baby boomers and Gen X’ers wonder why Generation Y has a reputatation for asking for higher starting salaries. Is there really any question when student debts are higher than at any time since HECS was introduced? For many careers, going to University is not a choice - it’s a must. Do we really want to have our most educated citizens anywhere from $15,000 to $37,000 in debt from an undergraduate degree?
26 comments ↓
Maybe that’s why there is a huge group of young adults working as bar tenders, retail operators, taxi drivers etc… not because they CAN’T get a job in their chosen field (although I’m sure that plays a part too) but because they DON’T want to get a job only to have a sizeable chunk taken out to repay their HECS debt…
I always thought the opposite about HECS Craigy. I admit its not as good as it was (i.e. free education in the extreme, cheaper HECS than currently in recent memory)
What’s the alternative??? Don’t think we have a choice and like you said, its better than the alterntive such as the U.S.
Condition of most loans is physical collateral - a house, boat, other assets etc. If you default they repossess the loan. Problem of a university education loan is that the asset is intangible. Short of going Sylar on a fiscally-irresponsible student and cutting off the individual’s head and taking the brain, there’s no way to repossess the loan in the eventm of default.
Without HECS or some similar loan arrangement, I’m sure a market would emerge that provide students with education loans but I can assure you the repayment would be in excess of HECS. This idea was floated a couple of years ago by the Howard Government - giving organisations and banking institutions the power to offer education loans, and the provision of repayment were scary. Imagine forfeiting 15% of your income for the first 10 years of your life?? If an organisation offered the job, imagine part of the contract being mandatory work for them at a reduced rate until the loan is paid?? Bet that bottle of rum / itunes additions are lookiong pretty good in comparison.
The HECS-HELP system at least allows choice, and asks for the repayments to be at a minimal interest rate with levels dependent on income bracket. The loan is so small you don’t notice it really (as you have shown), and the interest repayments are low enough not to mandate fast repayment. It really is one of the best loans, if not the best, you can get. I don’t think I’ll ever pay it off aside from mandatory contributions - it just doesn’t compare.
As far as trades are concerned, it does make the choice interesting in terms of income foregone. I still suggest though, that being a university graduate increases your long term earnign potential enough by and lareg for most, to make the decision to get a degree worthwhile. Investments in human capital payoff long term. Australia is also in a skills shortage, even our public servants are getting paid well
From my limited personal experience, repaying HECS has not made a huge impact on my life; my situation, however, is a little different to most.
I work as a sub-contractor and invoice the company I work for every week. This money goes into a discretionary trading trust fund, of which I am the sole trustee and beneficiary. Every week I put money aside for tax, HECS, super, and GST etc… so by simply adding another 4-6% to the money I put aside, I hardly notice the effect HECS has on my net pay.
I guess it really depends on how you view your income; especially when you have control over the tax and super provision etc… If you make a provision for the extra 4-6% tax you have to pay before you even look at your net income then you will base your cost of living on the net pay with HECS already taken into account. This way you will more then likely not even notice the effect HECS has.
In saying that, the federal treasurer and most of the MP’s in the government now, who pushed so hard for VSU etc… all got a free education.
>> If you make a provision for the extra 4-6% tax you have to pay before
>> you even look at your net income then you will base your cost of living
>> on the net pay with HECS already taken into account. This way you will
>> more then likely not even notice the effect HECS has.
That’s true, at least to start with. It doesn’t last forever though, before long you start wondering how the hell you’re going to afford to buy a house; or the “keeping up with the Jones’s” factor kicks in and you wonder why your standard of living is a little below that of colleagues without a HECS debt.
While I don’t advocate basing your judgment on quality of life against what other people have; the problem is that by the time you start wondering where all your cash is going it’s a little too late to make a change - you’ve already spent the 20k on a degree :).
Ah, but you have an education, and in the end, isn’t that priceless??
Al,
I completely agree with all your points about HECS being the best loan around. I’ve read articles about extending “Income Contingent Loans” to other markets, such as for drought relief instead of handing out grants (see http://www.theage.com.au/articles/2004/06/09/1086749775988.html?from=storylhs). I know you’re more than likely aware of the general term for the loan, but most people wouldn’t be :).
I guess my motivation for writing the article stems not from a criticism of HECS itself; but the following two points:
- The impact that going into a large amount of debt at a young age has in the long term;
- The expected increase in earning potential isn’t as much in times gone by, but the HECS debt incurred is increasing.
On the first point, how many 17-year olds know exactly what they want to do for a career? University drop-out rates are anywhere from 10% to 20% depending on who you believe; it’s a natural tendency to chop and change until you “find your calling”, so to speak. Perhaps university isn’t the place for this, but the expectation is that you NEED a degree to succeed. When incurring a significant debt is EXPECTED of you, even if you don’t know what you want to for a career, something is amiss…
The second point, concerning earning potential, obviously doesn’t apply to all degrees. I guess there’s a bit of jealousy involved around seeing how much tradie’s are earning, even though I know it’s a natural cycle and it will change over time. But you and I are paid much better than most graduates, even grads in our circle of friends, and it’s for them I’m concerned. We’ll have to see how it pans out over the long term.
Next question… from an economists point-of-view, would you make extra payments on your HECS or not? While you get a 10% bonus, that 10% gain is spread over the term of the loan; savings can pull in 6% per year and investing even more than that. Your thoughts?
>> Ah, but you have an education, and in the end, isn’t that priceless??
In the feel good, education-is-good-for-our-society-and-I-like-knowing-stuff way then yes. In pure economic terms, it depends on what value you place on the abstract concept of “being educated”, and that will vary from person to person. My answer is that going to uni was worth every cent. That won’t be the case for everyone.
I would say that in pure economic terms the value of an education is very high; if you think about the two most important things for an economy, health and education, then I am sure you could place a more tangible price on the value of an education.
Lets have a look at the difference then Craig. When you say economics, I assume your talking about the opportunity cost of the amount of cash going towards HECS that could conceivably be invested elsewhere.
A few random thoughts in response:
- By and large, your earning potential will will be better as a university grad than not. This argument is straight forward, but could vary from person to person (point - don’t do science
Even if you don’t know why your getting into debt, your long term earning potential inspite of this debt will still be better regardless.
- The 6 % of your income that goes towards HECS could (for instance) be stuck in a svaings account that earns 6% - definitely true. When I said it was a good loan to have I meant that I would pay off my credit card/personal loan whatever before I thought about HECS. Even more so, I would borrow $5000 and put it in a fund earning an average rate of 8% per annum paying it back over 3 years at 12 % before touching my HECS loan. Commercial banks don’t even ask you anymore if you have a HECS debt when you apply for a credit card/loan - its that insignificant.
- There are other elements to conisder here also. Education increases quality of life, happiness, social well being etc.. They count in the whole scheme.
What about climate change Dave???
Put down your capitalist driven, industry obsessed agenda, and think about the damage that all that education is doing to the god damn mother fuckn’ trees man!!!!!
>> I would say that in pure economic terms the value of an education is very high; if you
>> think about the two most important things for an economy, health and education, then I
>> am sure you could place a more tangible price on the value of an education.
I agree… and I also think that the current HECS system does a good job in balancing the costs between the two parties that benefit most from education (the individual and the government).
A few thoughts:
-I’d agree with the overall benefit of education. Even if you are a uni drop-out, I would still wager that you have been exposed to far more education and learning. Education is societies biggest challenge - even a hihgly skilled tradie earning 150K a year is still a drain on the intellectual stability of this country - they should do a degree as well and learn to think a little.
- Good on the tradies though for getting paid more. As far as I am concerned, they do jobs that I would hate/wouldn’t do and I think they should be paid accordingly. I’m an ofice worker who likes my shit cleaned where I cannot smell it.
- I concur Dave about our current MP’s - they run the country on free degrees from the seventies. I am not sure of the feasability to an economy of maintianing a free uni education system, or the potential waste/dangers, but I’m sure our Defense White Paper has wasted billions of the years in cocked up submarines and outdated war planes!
- As for HECS, blood and fire if they are ever going to get that loan back! My mission in life will be to die with as much left as possible. I think this also answers the debate about voluntary payments.
- Craig, in terms of the ‘true’ cost and ‘how much’ we could be saving or even investing - I think this is the age old argument. What about those roundies on the weekend? The kebab? The round of triple rums for 5 mates? We waste money every single day…we could pay HECS, put another $30 away and invest that and we could still reap the benefits - but that is not life. Our thirst for a good time will always over ride any sense of fiscal responsibility….and AMEN to that!
“even a highly skilled tradie earning 150K a year is still a drain on the intellectual stability of this country - they should do a degree as well and learn to think a little.”
I agree with most of what you said, but not this; if someone has no need for a university degree why do one? How are they a drain? One could argue that someone who has a degree should also learn some trade skills (not an entire trade) so that they can be a little more self sufficient. Although both those arguments aren’t really valid as people not being self sufficient is exactly what creates such a big market for tradesmen such as domestic plumbers and ‘handymen’ etc…
You have to remember that a university degree isn’t the only kind of education. A trade is an education as is an internship with a company; just because your education is from one particular institution it doesn’t necessarily make you any more valuable to the overall ‘stability’ of a country.
Good call Dave, I realise that was a bit of generalisation - however I still maintain that in terms of exposure to ideas/thought I think uni is a very powerful facilitator. I do think learning and educating yourself to as many ideas as possible is something everyone should do. Saying that though, there are also a lot of dumb fuck courier mail reading john howard loyalists at uni so u really never can tell.
Who is more dangerous…the tradie with little education…or the conservative-capitalist uni grad?
‘You have to remember that a university degree isn’t the only kind of education’
I think this hits the nail on the head. Education comes in many ways and it i about combining life experiences to gain perspective and knowledge. A tradie should read more widely…a laywer should be able to fix a gutter…and we should all question daily.
So if you abolish HECS who is going to pay for your education? Should the government increase taxes so that the general population supplements your degree? Or is a user pay system such as HECS appropriate given you will directly benefit from the increased earning potential that a degree affords you? Let’s invest tax payer dollars in primary and secondary education, health and infrastructure instead. You have to pay for your degree in one form or another, whether it be through increased taxes or a direct levy.
Would your point of view be different if our parents had paid tens of thousands for their degrees, and then the government introduced HECS as a way of lowering the cost of education and making it accessible to everyone?
HECS is an important source of funding for universities that can’t be cut by governments to fund the pre-election budget promises of baby bonuses and tax cuts for the wealthy. It also provides a stable source of funding that will enable universities to attract and retain the top academic talent rather than allowing them to go overseas.
I agree with Dave an apprenticeship is a form of education and one that one society should value highly. Al will back me from an economic standpoint that the productivity gains generated from a specialised labour force may outweigh the benefits of an entirely tertiary educated society. Each has their place. If anything Woulfe I would think that a bloke who just wants to be a sparky is more of a drain on society filling a paid spot in a university seat for a degree they will never use or even wanted in the first place.
Al, if you have a spare dollar, do not pay a cent off your HECS debt. If the debt is indexed to CPI then your cost of borrowing (opportunity cost) is 3%. You can put the cash into an ING saver account and earn 6.5% a year (risk free) and pocket the arbitrage profit of 3.5%. The picture gets even better if you have a lower level of risk aversion and are prepared to buy some stocks on the ASX200 which returned over 20% this year. Trust me, you can spend that cash better than the government can.
‘Al, if you have a spare dollar, do not pay a cent off your HECS debt. If the debt is indexed to CPI then your cost of borrowing (opportunity cost) is 3%. You can put the cash into an ING saver account and earn 6.5% a year’
Or in my case, do not pay a cent more off HECS or invest money in a fund returning 6.5% until my 27.% GE credit card is payed off…
Hey lads. Apologies for not replying to your comments earlier.
The comments from Al and Leigh about not paying off HECS is really good advice. I’ve had similar thoughts in the past, but lack the financial credibility to know for sure.
I’m sorry Amon, but I’m going to have to agree with the sentiment that not everyone should to University. In a way, it’s a very similar to the point of my article - tertiary study has certain costs associated. I focused on the financial cost in the form of HECS, but the other costs of reduced productivity are equally as valid.
However you won’t get any argument from me on the “education is a good thing” train of thought. The form that education takes is the big question, and unfortunately the desire to learn and improve yourself isn’t ingrained in our society.
Leigh, I do agree with your sentiments on HECS in that it is a system that works well for a variety of reasons. Two points though:
- We are on the path towards privatisation of tertiary education. With continual cuts in funding, universities are being nudged towards having to self-sustain (ie. private funding, foreign students). Universities fight this battle every budget and if we don’t reverse the trend then we will have a user-pay system for our children. HECS could be seen as a stepping stone for governments handing of the higher education burden?
- The next point is the age old argument, ‘do we agree with what the government spends money on?’. Most of the recent budget for uni’s is for capital projects. Our defense white paper on the other hand is almost 20bn, growing at 3% annually.
I dont think anybody should get a free ride as it creates a lot of inefficiency and waste in the system, but we need to make sure that unis remain very accessible to everyone. What is to stop the budget easing the HECS burden?
One could also argue that we already lose most of our good innovation and researchers o/s as we are very poor at commercialisation…This is the result of years of poor spending in R&D.
My comments as to overall education are much as you said Craig. Even though you may get a degree that you will never use etc etc…I would still wager that your chances of being ‘more educated’ have greatly increased by exposure to a uni institution. Education is the only way out of igorance…the disease of the 21st century.
Rising student fees is a increasing concern for many, as it is daunting to think about the huge debt to pay off once the course is completed. A good alternative is to undertake a distance education course such as those provided by Thomson Education http://www.thomson.edu.au/ ,which are less expensive, more accessible, and more flexible than campus-based university programs, allowing more free time to work.
Thanks for stopping by, Helen.
While courses like those offered by Thomson Education are much cheaper (about $1000 per course, from what I can see) I don’t think they can compare in substance to a Bachelor’s degree from a tertiary institution.
However, I can see the usefulness as a cheap way to both get some knowledge and experience in a field without committing to 3+ years of study. If you do one of these courses, make sure you can count it towards a tertiary degree and go on for more study afterwards.
hello , I am very new here, suddenly came through this column and could not stop reading till the end, it is such an interesting discussion.
Can anyone please clarify who is eligible to get HECS debt for higher education, one has to be a citizen or even if a permanant resident’s child too can avail that help?
Hi Juhee. According to the eligibility requirements on the Australian Governments “Going To Uni” website you have to be either an Australian citizen, New Zealand citizen or “the holder of a permanent visa who will be resident in Australia during the duration of your study.”
http://www.goingtouni.gov.au/Main/FeesLoansAndScholarships/Undergraduate/CommonwealthSupportForYourPlaceAndHECS-HELP/BeingEligibleStudentEntitlement.htm
Would someone please tell me how many years HECS an undergraduate is entitled to? I finished a 4 year commerce degree at melbourne and want to do an arts degree, which would be an additional 3 years.
I have already checked goingtouni.com but cannot find the answer.
Many thanks
I am sad to say that australia will lose most of its graduates because there is not much opportunities for uni students other than the financial and mining sectors. since the time al was battling out, we have sub-prime crisis and it is impossible to live with proper living standards. we are going into recession, that we must have.
i guess generation y will need to be more brave and harder in spirit than say the soft hippies or the yuppies of g-x. i think we will be the generation that will make the first decisive step to leave our ‘home’ planet. it has to happen someday and i think we have the spirit than other generations dont have.
The HECS policy is a grossly sexist, unfair and expensive to administer system.
People who graduate and go to live and work overseas never have to pay it back.
Women who have a family before they reach the starting pay probably never pay it back. In the meantime, how many expensive public servants does it take to administer it? If we’re having a resources boom and “never been better off”, how come students went to University on Commonwealth scholarships as long as they kept passing in the 60s and went free in the 70s? Do we want the brightest educated or the richest?
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