To HELP or not to HELP
The value of a university education can really help children prosper, but it comes at a cost. A big question for many parents is understanding the merits of paying off tertiary HECS-HELP loans for your children versus a longer-term strategy such as channelling the money into super or savings for a home deposit. There are pros and cons to all three approaches.
1. Help today and enjoy a bonus
There is only a short window of time left to receive a bonus for making upfront payments or voluntary repayments toward HECS-HELP debts. Currently if you make an upfront payment, you receive a 10 per cent discount, which means a $2,000 fee upfront would only require you to pay $1,800. However, you need to make that payment prior to the student census date when the institution finalises enrolments. If you make a voluntary payment towards the debt after the student census date, you will only receive a five per cent credit for that payment.
Most importantly, from 1 January 2017, no discounts or bonuses under either scenario will be provided so if you want to take advantage of the five or ten per cent bonus there is a short window and it is closing. As HECS-HELP debts are only indexed with CPI (currently 2.1 per cent), generally reducing these debts through the mandated repayment rate deducted from a worker’s salary and wages allows any surplus income to be directed towards interest bearing debts or investment opportunities. It should be noted that repayment of HECS-HELP occurs once income levels exceed $54,126 through the deduction of an additional four per cent from wages or salary. As income levels increase, the rate of repayment starts to grow. For income levels of $100,520 or more a repayment rate of eight per cent will be deducted.
2. Save, save, save
Setting aside a lump sum to help with a deposit for a home can provide a big boost to your child’s financial position. Home ownership does not guarantee financial wellbeing but can provide a level of stability that makes managing career, life and cash flow significantly easier. Care must be taken to buy a quality property at the right price but for most people the hardest step is actually accumulating the deposit. With the current very low interest rate environment, the cost of servicing a mortgage may not be much more than the cost of rent.
There are a number of tips to increase the likelihood that this large financial gift will set your child on a strong course for financial wellbeing. Firstly, make the financial assistance contingent on them saving a minimum amount themselves. Some parents request their contribution is met by dollar for dollar savings but it depends on your child’s capacity to earn. Secondly, consider what your child actually wants. If living in another city or travelling is a possibility, think about whether the mortgage can be managed if the property was rented. Finally, discuss with your child what a large debt with compounding interest means. In particular, highlight features like an offset account, the need for income protection and disability insurance, fixed versus variable and the need to have cash reserves to cover repairs, maintenance and changes in employment situations. You may also wish to document the funds as a loan, however banks generally will not approve a loan if the deposit is also funded from a loan; and if your child has a partner you should seek legal advice and consider how to structure this in the event of a relationship breakdown.
3. Investing in super
Depending on your child’s income, a modest payment of up to $1,000 into super may create an entitlement to the Government’s co-contribution benefit of up to $500 to be paid into their super account. However, there is a large risk that the age at which today’s 20-year-old can access their super will be deferred (perhaps to age 65 or 70) and this lack of access is not likely to compensate for the opportunity to use their funds in other ways, such as to help obtain a home, raise a family or manage living expenses in the early stages of their career. Directing voluntary savings towards super for younger people who do not yet own their own home does not tend to offer the same variety of opportunities that saving for a deposit does so consider this option in respect to your child’s current situation and life goals.
Regardless of how you choose to channel this available money, if you are in a position to gift your child a lump sum it is important to seek advice and to fully align your child’s motivations with the most appropriate long-term strategy. The opportunity to help a young person today is a true gift for tomorrow.