Hi all,
It has just come to my attention that the 5% discount for hecs will be discontinued as of 1 January 2017.
I have read a very interesting article here
Which got me thinking, that I should save up 20K and pay hecs off just before tax time (within 6 months).
But my thoughts are, if I invested 20K, I could be better off. Just wanted to know if others have faced the same situation as me? and what sort of safe investment ideas did you come across and how well your returns are?
For 20K you could hit the tables, leave it in the bank, pay off HECS.
Tables - Possible return of $1,000,000,000 tax free. Or be 20K+ down.
Leave it in the bank - Get around 4% interest, of which all of it is taxed.
Pay off HECS - Instant 5% saving, dollar saved is a dollar earnt. No CGT.
There is good debt & bad debt. Hecs is a bad debt so if you can afford to pay it off quickly why wouldn't you?
But if you get a return on investment greater than 3.5% from investing it's better investing that paying off hecs
Not necessary greater than 3.5%, and any interested earned will be taxed (assuming your in the $37,001 – $80,000 bracket which most people are)
But you will only be taxed if you are receiving cash from that investment, assuming you are receiving cash as your dividend then you will need to earn approximately 4.5% a year
Hmm… could you explain? I've always been told that if you had a choice to pay of HECS or invest, always take invest as the HECS interest is really low.
Hecs is definitely not bad debt if you follow Paul clitheroe and warren buffett they will both tell you that an Investment in yourself and your future earning potential is one of the best investments you can make
I believe hecs is indexed in line with Cpi so if you can beat that rate after you have paid tax ( last I heard it was 1.5% p.a.) your winning, although if you are offered a 5% discount for paying up front you would need to beat that rate or pay up front
You're way behind!
Here is a list of past indexation rates:
https://www.ato.gov.au/rates/help-and-financial-supplement-i…
Last year was at 2.1%
Okay 2.1% it is, so actually by paying early you would save 2.1%+ 5% = 7.1% so your investment after tax would have to beat that.
Not necessarily… i think the 5% saving is a once off saving of your hecs debt. By paying off only the minimum you really only need to see the 7.1% after tax once, then 2.1% after tax every year thereafter.
I've got a huuuuge hecs debt, somewhere between 60 and 80k, i have never even considered paying off extra, as my cash i could have paid off the hecs is making me well above and beyond 10% per year in investments… its a very cheap loan at 2.1%
in other words, say my hecs debt is 100k, im charged $2,100 pa in interest. if i paid it all off up front, i would save $5,000 in the payment. considering i'm earning 10%, in the first year i've already earned an additional $2,900, and then in the second year, i've earned a further $7,100 in interest.
Of course, not everyone can exceed the 2.1% after tax income without adding in risk - but yeah, do the math and work out whats best for you. For me i will never pay more than the minimum :)
What sort of investments are you doing?
Must have done a degree in finance and be good at it, getting a 10% return.
Seems like the best option is to pay the debt and get the 5% discount!
If you 'invested' the 20k and had to get out in 6 months to pay off HECS, you won't be getting capital gains discounts so your efforts to invest may not be worth the return.