Inflation Rates & HECS and HELP debts

Jun 03, 2022
 

This week it's all about... inflation rates and student loans.

This week's video is a response to the indexation rate of HECS and HELP debts in Australia rising to 3.9% (from 0.6% and 1.8% in the past couple of years).. I talk about what rising inflation means for your student loans and whether you should consider paying it off early.

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Transcript

Hi, and welcome to Mel's Money Musings.

And today I wanna talk specifically about inflation rates and student loans, and that's because there has been a lot of talk at the moment around student loans. And particularly in Australia, the CPI for the student loan has been really, really small. So for example, in the last three years, it's wavered between 0.6, one point something. And traditionally over time, if we average it out since kind of when student loans started to be a thing, we're looking at an average annual rate of around about 2%.

From 1st of June 2022, the rate for that year for this year has been set at 3.9. So when we consider that even only a couple of years ago was 0.6%, that's where people are starting to go, oh my gosh, that's such a jump. Should I be doing something about paying that loan back?

And here's the thing: the answer is, you know, by now is 'it depends' because what I'm not a fan of is being reactive in the short term rather than having that beautiful long term plan.

So to set this scene, student loans are almost always 'okay debt' because generally, if you can get a better return than the indexation on the student loan debt in some other type of investment, then that's my, in my opinion, that's where your money is best served.

Now, even at 3.9%, that seems like a massive leap. And it's because it's higher than what most mortgage interest rates are at at the moment. That's where people are going, Ugh, am I better off just getting rid of it? But my question is what is it going to be doing over the long term? Because if you were going to be able to repay your loan in the next 12 months, then sure you may consider getting rid of it early so that you are not affected by that hike.

However, if you know that that debt's gonna be there for the next 5, 6, 7 years, that's a long term debt.

And I wouldn't be as concerned with short term CPI increases, because what we know is that the Reserve Bank are already trying to put a damper on inflation. We know that we have a series of interest rate rises coming, and the Reserve Bank governor has flagged that because he wants to put a dampener on inflation rates. And yes, there's talk about inflation rates hitting 6% by the end of the year, but you can be damn sure that they won't be allowed to stay there.

So interest rate rises are coming to put a dampener on that. So if we believe this is a short term bump or in the same way that if we look in the last three years, there was one year where it was 1.8% and one year where it was 0.6%, when it was 0.6 and going to 1.8 people didn't go, oh my gosh, I need to get rid of that student loan stat. They went, okay so it's a little bit more expensive than last year. If you have many years to pay off that student loan debt, I would be doing the same. Okay. So I've got, so it's gonna be a bit more, it's gonna have a bit more of a hike this year.

But instead what it's about is not being reactive in the short term, but in the long term, looking at your beautiful long term plans and going what's important to me. Is it saving for a house? Is it saving for investing? Is it, um, is it investing in my business? And if I believe I can get a better return on that in the long term, then I can in paying off my, uh, student loan quickly in the short term then I'm better off sticking with that beautiful long term plan.

Now, if you don't have a long term plan, then this is my agitation to go and do that.

 If you don't know where to start, then make sure you jump on the wait list for the next round of the My Financial Adulting Plan, cause we teach you how to create your own financial plan, including how to set those goals that are uniquely yours.

So in summary, don't be reactive to short term ups and downs, whether that's the market, whether that's the home loans, uh, whether it's a home property market or it's the same with student debt. However, if you are able to pay that loan off in the next 12 months, this might be the impetus to do that. If that was gonna happen anyway, that might be your impetus to do that. But if you are looking at, you know, this is going to be a five year thing and sure, I could pay it down quickly in this year, but what's the opportunity cost of that money?

Would I get a better return investing, business, a house deposit, et cetera, then paying off that student loan. Cause what we know is we can't ring the ATO and go, can I have that money back? That's not how it works. It's kind of like your super; once you pay it off, it's not something that you can get access to again.

So I hope that helped. If you have questions, if you wanna know more simply reply to this and let me know. Certainly inside the My Financial Adulting Plan last week, there was a lot of questions about that and this is where they have access to my brain.

And so pre June I was talking to them about right, this is some things you might wanna consider. Cause what I don't wanna do is for you to gut react to things and then realize that, huh? Okay. So I see why I did that, but I wished that I hadn't.

I want you to make decisions with all the facts so that you can start to build your financial literacy and your financial confidence.

 

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