Let’s talk about HECS (baby)

As this year’s crop of year 12’s sit for their HSC, some 100,000 parents around Australia will be high fiving the end of private school fees. Something to celebrate indeed but all too soon the question is what financial support is needed for the next stage?

If you’re one of those parents, or soon to be one, read on.

Last year, that was me. Going from two to one child at school instantly halved my term 4 fees statement and my wife and I were high fiving non stop! Soon enough though it was back to providing full room service and TLC for our precious HSC candidate. The next few months were a roller coaster of exam stress, schoolies, results and course offers. I can happily report Charlie my eldest son is now enrolled in a four year double degree course at ANU in Canberra. So far so good.

It’s taken me some time to get my head around the financial aspects of university fees. My personal story won’t cover all the angles, but it covers the mainstream.

Everything’s easier with hindsight. So much of parenting is about controlling, supporting and then letting go. I’d enrolled Charlie in a private school from year 7 – without asking him – and paid a small fortune in school fees through to year 12. I couldn’t control what he did at school but at least I knew what it’d cost and when.

Not so with higher education. Suddenly it’s your child who does the enrolling. And legally, they’re paying for it, not you. In fact, that’s over a quarter of a million kids each year making a huge unknown financial commitment through password protected university admission portals. No parental controls in sight and don’t dare ask for the password.

Did I say unknown financial commitment? Yes, students genuinely don’t know how much their degree is going to cost. Its “pay as you go” by subject and by semester. A frightening number change courses and universities along the way. So the eventual cost will be determined by the path and electives chosen, government and university policies and of course the exam success of the student. Don’t look for a price list, there isn’t one. Or you could try find a recent graduate in a similar course and ask them what their HECs debt is. Or maybe not!

Here’s how it works.

Most undergrad courses at Australian universities are “Commonwealth Supported Places” meaning that each study unit is subsidised by the Federal government (to an unspecified amount) if taken up by a domestic student, with the remainder of the fee paid via a “Student Contribution Amount”. This student contribution can be paid by the government on the student’s behalf with a student loan called HECS HELP. This loan is administered by the Australian Tax Office (ATO) as part of the annual tax return and must be paid down by a minimum percentage each year that the student’s earned income exceeds a given threshold.

This tax year the income threshold is $51,957. The rate of minimum repayment each year is 2% at $51,957 rising to 8% if earnings are over $107,214.

The interest rate for HECS HELP loans is the rate of inflation, last year the rate was 1.8%. The important benefit is that because the interest rate is inflation itself, the loan stays the same each year in ‘real’ terms. So there is no theoretical disadvantage in paying it off later when, hopefully, the student can afford to.

The rules have changed over the years. There’s no longer any discount for paying up front, and there’s no longer any ‘bonus’ credit for additional repayments over the minimum payment. Only course fees can be met through HECS HELP, not study materials, travel or living expenses (no help there for Charlie’s accommodation or beer money).

At the superficial level, it’s simple. Charlie and all of his friends pay for their courses with a HECS HELP loan. Bank of Mum and Dad do the accommodation and students get part time jobs for spending money. Charlie said the HECS HELP application process was easy enough, the only difficulty was locating his tax file number before the deadline. That was solved with a simple phone call.

And the eventual cost? It seems most students try not to worry about what it really costs until they’re in a serious job. At age 18 they just want to get educated and have precious little visibility or bargaining power when it comes to fees.

I’ve seen stats saying that course fees for the average degree add to around $25,000- $30,000. But expect a lot more for a top course at a prestigious university. And a double degree? Seemed like a good idea at the time – but its seductively easy to rack up a large debt that never goes away if career earnings stay low. Under current rules you can keep borrowing with HECS HELP up to $104,000. Some speciality courses are eligible for loans of up to $150,000.

One hopes our children don’t go anywhere near these figures but bear in mind that federal funding for universities remains a live issue with the Liberal Government introducing and then shelving a plan in 2016 to deregulate fees. This plan allowed universities to set global market rates for their courses and the government expected to cut university funding by 20%.

So where does this leave us in terms of wealth planning advice? The first point is for all its complexities the higher education decision needs to be owned by the student and not the parent. Chopping and changing courses adds to the cost. Ultimately the study required, the cost and benefit arising are the students’ responsibility alone. The cost is almost as hard to fathom as a parent as it is for a child, but the HECS HELP system provides a gentle and practical start.

Perhaps this is how it should be. Should 18 year olds be forced to confront final costings for their courses up front? At least under the HECS system, the loan statements should start to influence decision making around career and study opportunities. And with a ‘real’ interest rate of zero (you’d be hard pressed to find better loan terms than that), gradual repayment of HECS HELP is probably more logical than early repayment.

So should willing parents help reduce HECS debts? Maybe, maybe not. Down the track outstanding HECS debts do impact housing loan affordability assessments but given the low interest rate for HECS HELP, any parental assistance might be better left for getting a bigger home deposit together that results in a lower home loan.

Just for now I think my role is to encourage Charlie to read his HECS HELP loan statement. He’s best placed to judge his ‘return on investment’. Trouble is he hasn’t seen one yet. Perhaps that’s how the system is designed, the ATO starts with a low profile and turns the heat up later. Right now, the tax man is the last thing on his mind. He’s a year one uni student and the world’s his oyster.

Don’t hesitate to take advice with us. School fees, dependants costs and one off financial assistance to children can be budgeted for in Sovereignty, our free to use financial wealth projector.

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