Should I Take Out a Student Start-up Loan from Centrelink?

Should I Take Out a Student Start-up Loan from Centrelink?

The Student Start-up Loan is a voluntary loan of $1,094 that can be claimed up to twice a year by eligible students who are currently receiving Austudy, Youth Allowance, or ABSTUDY living allowance. There are two loan periods per year, the first between the 1st of January and the 30th of June and the second between the 1st of July and the 31st of December. Student Start-up Loans are tax-free meaning you are not required to declare the loan as income for your regular Centrelink payment. For a more detailed explanation of the Student Start-up loan, you can visit or view the short video below.

The Student Start-up loan is basically the best loan that will ever be available to you

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This is because unlike all the other types of loans available the Student start-up loan does not charge interest. Your Student Start-up Loan will be paid back the same way other debts are paid back through the ATO, such as Higher Education Loan Programme (HELP) debts and Higher Education Contribution Scheme (HECS) debts. This means that although you do not pay interest on your debt it will be indexed every 11 months to ensure its value remains in line with the cost of living, which is measured by the consumer price index. Current indexation rates can be checked at . Moreover, unlike regular loans, the Student Start-up loan does not have a fixed repayment date. Rather the loan is paid back through the tax system once an individual earns above the compulsory repayment threshold. This threshold will vary from year to year, for example in 2020-2021 the compulsory repayment threshold was a yearly income of $46,620. Current repayment rates can be checked at .

When discussing the idea of paying back student HELP debt, which is paid back in the same manner as a Student Start-up Loan the famous Aussie investor Scott Pape (the Barefoot Investor) asks why would you bother rushing to pay off the cheapest loan you’ll ever get?

The way to make the most out of your Student Start-up Loan is to put the money into something that will outpace the cost of living and therefore outpace the rate at which your loan is being indexed. There are numerous ways that this could be done. However, two options stand out as the best depending on how soon you may need to access the money.

Let’s take a look at how much you would owe for the loan if it is compounded annually at the average rate of indexation of 2

If you invest your Student start-up Loan into a low-cost index fund or exchange-traded fund it should easily outpace the rate of indexation over the long term. The most rational type of index fund would be a cap-weighted total stock market index fund or ETF such as Vanguard’s MSCI Index International Shares ETF (VGS) because it offers a great deal of diversification across more than 20 developed countries. Using VGS and its growth per annum since inception of % p.a as is listed at the time of writing () and using an initial investment of $1,094 (the value of the Student Start-up Loan) as an example, the growth at 5-year intervals over a 30 year period would look as follows.

The returns of your Student Start-up loan are evidently quite significant. Within five years your investment has almost doubled, by year 15 your $1,094 loan is now worth $5,762, by year 30 your $1094 loan is now worth $30,337.

By comparison, if we consider how much your loan would be valued at as a result of indexation, and therefore how much you would owe for the loan based on the average indexation rate, which is derived from the indexation rates provided by the Australian Taxation Office at , we can see that the average rate of indexation is 2.01%. This is a percentage that we can reasonably expect to outpace by investing in assets such as exchange-traded funds . 01% over a 30-year period in the table below.