How does a HECS/HELP debt effect your life?

For many young Australian's, tertiary study is financed by a government-run loan program known as "HECS-HELP". Basically, the government loans you the money to cover tuition fees; and the loan is only "indexed" at rate equal to CPI. This loan is repaid through automatic deductions taken out using the same system as tax (PAYG) once you're earning over the minimum repayment threshold, which is currently just over $38,000 per year. After this threshold, a percentage of your entire paycheck is automatically deducted; not the amount above the threshold as happens for income tax.

Unfortunately, many young Australians have no idea exactly how the repayment of this debt affects them day-to-day. Is this a loan that is easily paid off? How long will it take? I decided to do a little bit of number crunching and work out exactly what it means.

For someone earning $40,000 a year, which happens to be just over the repayment threshold, the "normal" take home pay is $2720 per month or $628 per week. The HECS repayments add up to an extra $133 per month, or $31 per week. The figures are downhill from here. Someone earning $50,000 per year has $229 per month ($53 per week) taken out; a salary of $60,000 means $310 per month or $72 per week is deducted. In other words, a 50% increase in pay means a 130% increase in the amount deducted.

This means over a year the average graduate can have anywhere from 23% to 28% more taken out of their pay.

It should be noted that according to the Department of Education, Science and Training the average starting graduate salary is $33,400. This is below the repayment threshold!. For the first few years of working life, the average graduate is making no repayments on their debt.

Now it may seem like $31 per week is not a lot of money; and that's partly the point. At that rate, it will take over 10 years to repay a $20,000 HECS-HELP debt! What a fantastic way to start a career - earning 95% of everyone else for 10 years! In fact, once the HECS-HELP repayment threshold kicks in a 5% reduction in take-home pay is the minimum. The pay rise from $38,148 to $38,149 per year is going to make for an unpleasant surprise next pay check.

To put it in into day-to-day terms, like I promised I would, what would that $31 buy you? It's a trip from Brisbane to Byron Bay and back again; it's 124 text messages, a bottle of Bundaberg Rum, or 18 songs from iTunes Music Store, every week. Over a month it's the cost of Telstra's second-most expensive ADSL broadband plan, two pairs of Chuck Taylors, or just over the cost of Foxtel with every channel, World Movies and iQ.

That's just consumer crap though, and I'm pretty sure we can all live without weekly jaunt to the beach. What's more concerning though is the long term effect of paying back such a significant debt. If someone without a HECS debt invested their $31 for ten years in my favourite low-risk ING savings account at 6%, the HECS student did the same after the debt was repaid and they both invested for a further 10 years, the difference is substantial. The non-HECS bearing person will be almost $40,000 ahead. After another 10 years, the difference is $72,000. After 45 years, or from age 20 to age 65, the non-HECS bearing person will be over $175,000 better off!

Don't get me wrong, I'd much rather have a HECS-HELP system rather than the student loan system in the US. But the outlook is not good for young professionals in Australia. Housing affordability is at an all-time low; electricians and plumbers earn more than most graduates; and we have a government that would rather throw cash at people to have babies than ensure the population is well educated.

My problem is this: the impact of a HECS-HELP debt on day-to-day life is ignored by the people setting policy. A $51 per year tax cut? How nice!

Most students don't even think twice about incurring the debt, either. It's not until every dollar starts to matter, like saving for a house or trying to pay down credit card debt, that young professionals start to wonder why their salary is a little less than expected.

Baby boomers and Gen X'ers wonder why Generation Y has a reputatation for asking for higher starting salaries. Is there really any question when student debts are higher than at any time since HECS was introduced? For many careers, going to University is not a choice - it's a must. Do we really want to have our most educated citizens anywhere from $15,000 to $37,000 in debt from an undergraduate degree?