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Good debt versus bad debt, and how to tell the difference

What the heck is HECS, and other types of student debt?

This article was written and provided by UniBank

Debt. It’s a four-letter word that can strike fear in the hearts of all of us. It’s often associated with bad financial management and not living within your means. Almost everyone lives with some kind of debt during their lives – even wealthy people. An important life lesson to learn early is there is good debt as well as bad debt.

The easy way to distinguish between the two is whether or not you’ll be ahead in some way when you’ve paid it off.

The types of debt you’ll likely have as a student are:

  • a HECS-HELP or FEE-HELP loan

  • a credit card

  • a personal loan if you’ve bought a car or taken a trip overseas.

Here’s an overview of these types of debt and how you can successfully manage them.

HECS-HELP loan and FEE-HELP loan

This type of debt can be classified as good debt since you’re using it to obtain an education and increase your earning potential once you graduate. As an undergraduate student, you’ll likely find you’re eligible for either the HECS-HELP or FEE-HELP scheme to pay all or a part of your tuition.

HECS-Help loans cover Commonwealth Supported Places (CSP) at all public Australian universities and some private Australian universities. Each course the university offers will have a certain number of CSP places available to Australian citizens and some New Zealand citizens. A CSP is a place in a course where the government pays part of the course fee; the subsidised part of the fee does not need to be repaid. The remainder of the course fee can be paid using a HECS-HELP loan.

If you’re not eligible for a CSP, you’ll enrol as a full fee-paying student and no portion of your tuition will be covered by the government. As a full fee-paying student, you may be able to access a FFE-HELP loan to cover your course fee.

Repaying your HECS-HELP and FEE-HELP debt

You’ll start repaying your HELP loan once you reach a certain annual income level. You’ll need to let your employer know you have a HELP debt and they will automatically take your repayment out of your pay. If you don’t, you could be hit with a tax bill when you submit your tax return.

Your regular repayment amounts are based on how much you earn, and you can make additional repayments to pay your debt down faster. The repayment thresholds can change from year to year. The 2019-20 thresholds start at 1% of your income once you earn over $45,881 annually and go up to 10% once you’re earning over $134,573 annually.

You can track your HELP debt through your MyGov account where you’ll see your remaining balance and your repayments to date.

One of the best things about a HELP loan is there is no interest attached – instead the balance is indexed every year in line with the cost of living. Indexation is usually much lower than personal loan or credit card interest rates, making a HELP loan one of the cheapest forms of finance you’ll ever have. Since 2012, the indexation rate hasn’t been over 2.9% and has decreased almost every year since.

A HELP loan can alleviate some of the financial pressures that can come up while you’re studying by taking away the need to pay for your course up front. But, if you don’t want to use the HELP loan schemes, you can pay your yearly course fee out of pocket - some universities even offer a discount for doing this.

Credit cards and personal loans

How you manage a credit card or a personal loan will determine if it sits in the good or bad category for debt.

Using a credit card responsibly

Credit cards can be used to build your credit and as a convenient way to buy things in an increasingly cashless society. By putting your monthly expenses on a credit card and paying the balance in full every month, you’re developing good habits and showing you’re responsible with your spending, which helps build your credit score. Having a good credit score is important when it comes time to take out a loan to buy a house, or even a personal loan.

Where you get into trouble and start heading towards the ‘bad’ category is when you don’t pay the balance in full every month. As long as you make at least the minimum repayments, you’ll have a positive impact on your credit score, but you’ll be charged interest on the outstanding balance, sometimes up to as much as 20%, which will cost you much more in the long run.

If you need to use a credit card for a big purchase or to cover an unexpected expense and you can’t pay the balance in full, make sure you’re able to chip away at the balance each month to clear it as quickly as possible.

Making a personal loan work for you

Personal loans are best suited to big, one-off purchases. While saving up is the ideal way to pay for a car or holiday, personal loans can still work for you if you’re smart about it. Personal loans usually have a lower interest rate than credit cards, making them a better option for larger purchases that take longer to pay off.

Look for a loan with a low interest rate, no-ongoing fees, a low or no establishment fee and the ability to make extra repayments to pay it off more quickly. Personal loan terms usually range between five to seven years, so if you take out a loan mid-way through your studies knowing you can only make the minimum repayments until you graduate and get a full-time job, you’ll be able to increase your repayments without any penalty.

Paying off a personal loan can also help build your credit score, which is good, but if you’ve used it to purchase something you didn’t really need, or a more expensive version of something you could have bought more cheaply, then the drawbacks may outweigh the benefits.

Managing debt while you’re studying

Keeping on top of your debts can feel impossible while you’re studying. Your income is often limited due your study schedule and other commitments, but your expenses can remain the same, if not increase, as the costs of things like rent, petrol and public transport fluctuate.

The key to keeping the sinking debt feeling at bay is staying diligent with your spending and sticking to a practical budget. There are many different strategies and tactics you can employ: whether it’s a money tracking app or an old-fashioned spreadsheet, to setting spending limits on your credit card, you’ll need to figure out a system that works for you.

Using a budget is the single best way to managing your debts and help you get ahead. You may have to make some sacrifices along the way, but you’ll be setting yourself up for longer-term financial success. If you need a hand getting started with your budget, UniBank has an online budget planner you can use to kick start your savings and spending goals.

UniBank is a division of Teachers Mutual Bank Limited ABN 30 087 650 459 AFSL/Australian Credit Licence 238981.

Membership eligibility applies to join the bank. Membership is open to citizens or permanent residents of Australia who are current or retired employees, students and graduates of Australian Universities or family members of members of the Bank.

Any advice provided in this article is of a general nature only and should not be construed as providing advice on any of the topics discussed. Your needs and financial circumstances have not been taken into account.

Before you decide on any of UniBank’s products or services, we strongly recommend that you read both the Conditions of use Accounts and access and Fees and charges booklets. You can find these online at the UniBank website or ask at any UniBank office. UniBank has not considered your objectives, financial situation or needs. For further information call 131221 or go to the UniBank website.

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