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The Pros and Cons of Income-Driven Repayment Plans

Posted by Revive Financial on Jun 29, 2016 12:00:00 AM

The yearly cost of student (HECS) loans is likely to reach a figure of $11.1 billion by the year 2025. The number of new loan applications is rising and, according to a report published by the Parliamentary Budget Office, the nominal value of the Higher Education Loans Scheme will likely hit $185.2 billion by the year 2026.

This is partly because of the changes brought about by the previous government to the university sector. The government has cut funding to universities and has allowed them to list their own fees, passing on the cost of higher fees to students and their families. These reforms will, however, increase Australia’s debt and make the whole HECS system very unstable.

What are Income-Driven Repayment Plans?

Income-driven repayment plans are loan repayment plans for federal student borrowers. Rising university fees have increased student debt and the demand for flexible loan repayment options like income contingent payment plans.

Students in Australia can choose from 5 different loan schemes under the government administered Higher Education Loan Programme. Those eligible for this scheme don’t have to pay full tuition fees, but lower student contribution amounts. Students may also be given state-subsidised placement in certain universities, based on their individual circumstances. Once enrolled in the HELP system, borrowers are given a payment reference number so that they can keep track of their payments and amounts due.

How Are Repayments Calculated?

Under the HELP scheme, your repayments are based on the income you earn. A certain percentage of your income will go towards the repayment of your student loan. You won’t be charged any interest on your HELP debt and you won’t have to make payments until you earn more than $54,869 a year. If you can’t afford to make any payments you will have to write to the Australian Tax Office to request them to temporarily postpone your student loan repayments.

You have to give the ATO valid reasons to support your application for a deferral. You will also have to provide all your salary slips and bank statements to show them your income and expenditure. Special circumstances like illnesses are also taken into consideration to approve applications for a deferral.’

What are the Pros and Cons of Income Driven Payment Plans?

One of the biggest concerns for students using the HELP scheme is the high amount of debt they accrue by the time they finish graduating. The other problem is that the government has already lost more than $6 billion from students who aren’t able to secure jobs that pay more than $54,000 a year.

Moreover, some students don’t end up repaying the borrowed amount when they move overseas to work.

According to research studies carried out by the Grattans Institute, students who pursue higher studies are more likely to have better financial stability in the long run than those who’ve only completed Year 12, even after loan repayment amounts are taken into consideration. Moreover, the education sector generates revenue of almost $24 billion a year, making it a very lucrative business in the nation.

To sum it all up income-driven repayment plans help you get the career you’ve always wanted. You just have to make sure you understand your responsibilities as a student borrower before you sign the dotted line.

For more information on personal insolvency, check out our personal insolvency page here.

Topics: Personal Insolvency

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