Student debts – pay now or pay later?

In Australia, we have (what I think is) a pretty good payment model for tertiary education system.  It’s not anywhere near as cripplingly expensive as the US, but it’s not (effectively) free like in France.  The balance is struck by students paying 1/4 of their education costs, and the government covering the remaining 3/4.  When I started studying over a decade ago it was called HECS (Higher education contribution scheme).  Now it’s called HELP or HECS-HELP, where HELP stands for Higher education loan program).  This post looks at how I paid my debts, and whether I’d recommend the strategy to others. It’s also a little bit of a lesson on how Australia’s university fees are structured, for those who might not know!

How much is a year studying in Australia (for an Australian, of course!)?  A student will pay, for an annual full time load

$9,792 for law, dentistry, medicine, veterinary science, accounting, administration, economics and commerce (Band 1)

$8,363 for mathematics, statistics, science, computing, built environment, health, engineering, surveying and agriculture (Band 2)

$5,868 for humanities, behavioral science, social studies, foreign languages, visual and performing arts, education and nursing (Band 3)

That’s the student’s 25%.  They can pay it as they study, or once they start earning over $49,096 per annum (pa).  Once they are earning this amount, they start paying, they will start repaying their debt at 4% pa.  This rate increases to a maximum of 8% when you earn more than $91,178 pa.

The first thing I notice when I write that is that those earning figures are probably much higher than US earning figures.

However, if you want to pay your fees up front, you may.  When I was studying, there was a discount in any lump sum payment, either at the time of study or afterwards.  So if you got a nice lump sum of money, you could throw it at your student debt, and you’d be given a 10-20% discount (it’s been sliding down :().  BONUS! Of course, this has just been announced that it’s no longer going to be an option.

Lastly, there’s no interest.  Sure, the money is indexed to the Consumer Price Index, but otherwise, it’s the ‘best’ debt you could have.  No one offers interest THAT cheap.

So now that I’ve given a crash course in Australia’s higher education sector, let’s get down to business.  What’s better? Pay now or defer?

Well, I’ll tell you what I did, cause I’m not sure I’m worthy to advise anyone, but I can justify my thoughts and perhaps persuade anyone who might be unsure, that my model might work :p

The costs above to adjust annually, so when I started studying a little over 10 years ago, the costs were in the vicinity of $2,500 a semester, so $5,000 a year (I did mainly engineering, with some foreign language.  But I didn’t always do a ‘full’ load of 8 subjects, due to pre requisites and timetabling).  It took me six years, cause I went to France for a year, and then dragged out the harder part of my degree when I returned.  It should have taken five years – which means my total cost would have been $25,000.

I decided a ‘pay as I can’ model:

2003: My first year, I paid everything up front, so won a discount! Woot!  As I no longer can find the paperwork, let’s guesstimate $1,137 discount, as I studied 8 subjects

2004: In second year, I was still living off the $10,000 first year scholarship and started a casual job, so I paid both semesters.  Let’s assumed at $995.4 saving/discount for the 7 subjects

2005: In third year, I paid first semester saving $538.60 but not second semester (Debt +$1966).

2006: Fourth year, I was in France, so I had MUCH better uses for that coin :p  (Debt +$3920)

2007: In fifth year, I paid both semesters, saving $853.20 on the 6 subjects I studied

2008: But in sixth year, I had a full time job as a boarding mistress and I paid some upfront (and through payroll!).  So semester 1, I just had $700 to <, meaning I left (Debt + $574) outstanding, and I saved as well as in semester 2.

Paid Saving Debt
2003  $    4,494.60  $  1,137.60  $               –
2004  $    3,761.60  $     995.40  $               –
2005  $    2,154.40  $     538.00  $  1,966.00
2006  $                 –  $               –  $  3,920.00
2007  $    3,412.80  $     853.20  $               –
2008  $    2,440.80  $     607.50  $     574.00
 SUB TOTALS  $  16,264.20  $  4,131.70  $  6,460.00
3.4% indexation  $     133.00
2.8% indexation  $     168.00
 TOTAL  $  6,761.00

So overall, for those playing at home, I graduated with a $6,761 debt (with two indexations at at 3.4% and 2.8% adding $133 and $168 to my debt).  With an upfront payment, I could have been home free for $6,146.  Instead, I left it to be paid through payroll deductions, and by my second year working in my profession I had it paid off.

See, back then, I had the advantage of the upfront savings.  And I’m no mug, I like simple savings like that.  I knew when I graduated, I’d want to do other things with my money.  Like travel to the US (again), Canada, Cuba and the Bahamas, which I did five months after starting as an engineer.  After I returned from that trip, I thought I better get saving to buy a house (eventually) and travel some more.

In summary, it’s a great system.  It makes it possible for someone to study, without any upfront outlay of money or debt (there are books to buy, and campus fees to pay, but these are negligible in comparison  and both can be ‘avoided’ :p)  The savings for an upfront payment was a great incentive to limit my debt, but the structure was flexible to allow me to study abroad whilst at university.  I think that even without the savings, it’s a prudent approach to chip away at your debt at any time.  Others might argue that a no interest loan should be the lowest priority.  But, education should be a higher priority to spend your money on than many other things (like cars, in my opinion, holidays, eating out etc).  Sure, I didn’t live like a pauper, but every semester I ‘saved’ to pay the next semester’s debt if at all possible.

What do you think?  Should paying student debts be a priority?