Should I pay off my HECS Debt?

I have ~25k in HECS debt. wondering if I should pay it off. I was keeping it previously as bank interest rates were above inflation. But now that inflation is higher than bank interest, is it better to pay HECS debt off?

income is ~80k/yr before tax.

Have very low-risk tolerance hence have not invested in share market.

Comments

  • +85 votes

    No, invest your money elsewhere which generates a return higher than bank interest rates.

    • Agreed. If you are comfortable with paying that $25k towards HECS it means you don't feel the need to keep it as an "emergency fund". In that case, you would be far better off investing it in your superannuation instead for the instant gains from the tax deductions.

      • "Far better off" is a risky statement.

        What value do you put on money available to you now vs being locked away in super until 70+ years old?

        What if your superfunds fail to perform (past performance can't be assumed to equate to future performance)?

        What if the individual is in a low tax bracket, ie under the 19% rate, then the deduction they would get would be only marginally better than what you would get in super, and if it reduces their taxable income into the tax free threshold, they may be worse off from a tax perspective.

        • What value do you put on money available to you now vs being locked away in super until 70+ years old?

          If OP pays off their HECS debt they will never have access to that money.

          What if your superfunds fail to perform (past performance can't be assumed to equate to future performance)?

          There are many options available for how your super is invested. You could have it invested 100% in bonds/cash if you were that worried about risk and still claim the significant tax benefit. In the case of our OP (in 32.5% tax bracket), the immediate guaranteed benefit is worth $4,375, or a 25.93% ROI. [$25k pre-tax - 32.5% income tax = $16,875 vs $25k pre-tax - 15% tax on super = $21,250]

          • @donga100:

            If OP pays off their HECS debt they will never have access to that money.

            Except assuming they continue to earn income at that level, they will be forced to repay the HECS plus interest/CPI over time anyway.

          • @donga100:

            If OP pays off their HECS debt they will never have access to that money.

            OP will get pay less tax then used to provided annual gross salary does not fall than prior years. So yes, op will kind of get the money back.

            Generally OP is still better off investing it else where.

      • increased risk vs guaranteed return

    • I feel as though so many people on this forum don't understand this concept or don't want to understand.

      • This is a much broader conversation and very much depends on the individual's current and likely future position, and their goals.

        A few examples:

        • there is tax on gains from investments
        • employers are required to withhold PAYG at a greater amount if you have a HECS debt, so reduces your tax home pay, which is largely used to determine your borrowing capacity from a bank. If you wanted a home loan, paying off your HECS and having a significant bump up in take home pay may be beneficial to you.
        • I just don't think the majority of those thinking about paying off their HECS debt think along these lines…

          • @The-Kremlin:

            I just don't think the majority of those thinking about paying off their HECS debt think along these lines…

            Ignore Arts students for a moment, what about Accounting/Commerce students ???

            • @jv: Doesn't sound like Kremlin is just talking about poor Arts students, but anyone poor enough that their parents didn't just pay the whole thing upfront.

              Must be very nice…

    • As clear as the maths is that you'd likely be better off investing elsewhere, there's also a non-financial benefit of knowing you've kicked your HECS debt for good.

      Why drag it out?

      • Do t they also give you the up front discount if you pay it off voluntarily? I thought that was worth 20-25%. You won't get that return on investment anywhere

        • They stopped that around 2012

          • @Quantumcat: Wow. I guess I was lucky. My debt wasnt going down as fast as my payments because of CPI indexing so I decided to bite the bullet and get the discount for bulk payment (I think it was 10% at the time). Paid $20k and got rid of it. If I had stuck with it for another 4-5 years then the overall payment would have been around $25k for the same debt (I think the balance was around $22k at the time). If they no longer offer the discount then there is really no incentive to pay it off in a hurry and I would be putting into some sort of investment (nothing is doing great atm apart from crypto which is speculative at best).

            • @Piranha2004: Yep, good decision to pay it off when you did! I was thinking it was a dumb move by the government but I guess it is ok - I was thinking encouraging people to pay would reduce the risk of them never paying it off before they die. But someone who earns so little they might not pay it back is also not likely to have the spare cash to pay it back upfront anyway. The only thing it helps us if someone pays it back before they have a freak accident and get killed. But that can't be likely enough to make it worthwhile giving a discount to thousands of people.

        • That depends on how long you would have taken to pay it off. It's not an option any longer, but even if it was, the ASX returns on average 10%pa, so if it was going to take you ~two years to pay off your HECS then it's better to invest the money.

          • @macrocephalic: Investing in shares and expecting a regular % return is based on a longer cycle than 2 years. For a 2 year investment you are basically in a casino. So in that case Black 22

          • @macrocephalic: Its not that simple. Also bear in mind the income you get after selling shares or ETFs, you pay tax on that. Returns are also not guaranteed.

            • @Gaggy: If you hold for a year then CGT is halved.

              Of course it's not guaranteed, but, in the last ten years there haven't been two consecutive ones with negative returns, and there hasn't been any combination of two consecutive years with negative returns. The worst year (calendar or fiscal) in the last ten was 2011 where VAS lost ~10% - but it then gained 20% the following year.

              If you can afford to pay off your HECS then that money is 'spare' - and you're better off doing something more productive with it. If you have to keep it invested for a longer period than two years then it doesn't matter.

              • @macrocephalic: Thanks. If we invest back with in a year after selling a share, do we still pay CGT?

                • @Gaggy: Yes, you pay CGT on the profit you made off any buy-sell transaction where you didn't hold the shares for a year or more. Working it out can get tricky because shares are a fungible asset; if you buy some and then buy some more, and then sell some, did you sell the first ones that you bought or the second?

                  • @macrocephalic: yea, thats what I am still confused. I did sell few of them this year after good profits, but not all. Added some more money and bought some more shares. Not sure how will this look at the end of year. Will ask the accountant next year while filing.

                    • @Gaggy: you can use first in first out method or last in first out method, but the method you choose needs to be consistent between reporting years. so some may be tempted with LIFO to minimise taxes on significant gains in first trading year but then get taxed more later down the track.

      • It's about mindset…sure you can think hooray you don't have anymore HECS debt…then years later you meet a person who was in the exact same situation as you and they decided to invest that money elsewhere and now they're substantially better off…then I don't think you'll be 'hooraying' any longer…

        Those who want instant gratification will remain 'poor'. Those who play the long game are on their way to creating true wealth.

      • Rule number 1 with money, use math, not feels.

    • I recommend a high ROI luxury car.

  • Do you think the Government will spend it wisely if you do? lol

  • Paying off liabilities that are costing you less than what assets could pay out is I'd say generally a bad idea.
    If you want to pay off your HECS because you want to buy a house in the near future and you don't want it to affect your mortgage, go ahead.
    But if you're wanting to give away your money, just because the indexing is higher than bank interest rates, then maybe look at putting the 25k into an appreciating (in an ideal world) asset instead. Chucking it into a vanguard etf or index fund would be my first suggestion, as then the amount you make on that year on year is more than what you're losing on your HECS, you come out with a net positive.

    This is not financial advice, I am not a financial advisor, take what I say as a grain of salt and apply to your own circumstances.

  • huh if inflation is higher why are you paying!? im not sure what course you took so not sure about you future earning potential, but as a general rule if the government want to give me a loan and the inflation rate is higher it means a "real" negative rate of interest im going to be paying back my loan with dollars that are more worth less.

  • Sometimes it is just nice to know that you have no debt. That's why I paid my HECS debt off as soon as i could.

    • +16 votes

      Yup, as did I. It doesn’t make financial sense, but I was happier having it paid off.

      • Don't confuse maths with sense. There is some advice on here "my calculator says go into debt and invest". It doesn't consider that there is stress involved in gambling on interest rates staying low and investments performing.

        Personally I'm a maths man, so with these low interest rates I have close to $1m in debt. But I don't have a life because I have to manage all these investments, and my life will surely be shorter than someone with a stress-free life.

        You just have to choose your path. No regrets!

        • Poor analogy. The alternative to paying off HECS doesn't have to be high risk, in fact it can be zero risk. It could be paying off a car loan or offsetting a mortgage, or even simply sitting in that low interest savings account as a safety net.
          HECS is indexed to inflation, so you have literally nothing to lose by not paying it off early. You gain absolutely nothing other than knowing it's not there. But knowing this shouldn't change anything, given you don't pay interest on it, and given you only make repayments once you're earning enough to live off.

    • 'Poor' man's mentality…there is some debt that is good…debt is not evil…it can be used to create a lot of wealth if you are smart enough to know how to do it…these days you don't need to be that smart either.

  • If you have a lot of money sitting around doing nothing you should be investing in something that will appreciate better than a bank account. I don't think paying off your hecs is ever the best move. If you can't be bothered to invest and you want something tax deductible then make a contribution to your super

  • I got told to pay it off by the broker when I got a home loan

    • I don't understand the logic of this by the banks. Hecs debt is just a bit of a reduction to your income. It isn't a proper liability since if you lose your job you don't have to keep paying it. You would think the cash in hand would be worth a lot more than the reduction in salary from hecs payments

      • Yeh I really struggle with this too and think it’s stupid, from memory different banks considered it slightly differently too. On the one had I thought it was just them trying to make initial loan just that little bit higher if you are shifting 20-70k out

      • I bet it's because
        no HECS = higher income.

      • Not necessarily, the extra cash flow might be able to be leveraged into a bigger loan than the HELP debt.

      • Cash in hand doesn't balance a debt. The day after approval the borrower could have a boat and a debt and no cash.

        • I mean that you can use it as extra deposit. Surely banks would prefer you to have $70k deposit and $20k hecs loan than $50k deposit and no hecs loan.

          • @Quantumcat: You say surely, but I don't agree and either would a lender: you tell me it's a deposit, but when I check your internet searches you've been looking at $70k boats.

            I agree with your logic - that debt apparently can be deferred indefinitely, but I think it comes down to a bird in the hand is worth two in the bush.

            • @SlickMick: I dunno if i agree. Surely, they wont be able to spend the extra money because it will mandatorily be part of the house payment. So they wont be able to spend it. For X proprety, worth 500k, the bank's laon document will only agree to loan 380k or whatever, forcing the purchaser to spend it on the house and transfer fees.
              Certainly my broker and bank never questioned paying off my hecs debt.

              Perhaps in their calculators it might make sense if you are borrowing at close to your limit. But that's probably a quirk of their calculators. My gut feeling is if they are recommending this, the broker is either an idiot or your are borrowing too much.

            • @SlickMick: That makes no sense. If you spent the $70k on a boat then you have no deposit. You can't have a 70k boat and a 70k deposit at the same time. If you get approval for a loan on the proviso that you have 70k cash to put into it you can't change your mind just before settlement and expect to still get the loan.

            • @SlickMick: Don’t think this guy knows how home loans work.

      • Agreed - made no sense because the CPI was lower than my mortgage rate with offset. So cash in the offset would work better than cash paying off HECS.

        Was only a few thousand left though so wondered if that's why they forced it.

  • If it is the last debt you have, sure why not. Otherwise pay something else first

  • +1 vote

    Is there a discount if you pay it off, what’s the percentage? If not, just let it slowly get deducted from pay.

  • CPI is currently higher than bank interest rates soooo i'd definitely look at paying it off.

    Once you factor in tax into your interest earned on your money you're coming out ahead if you pay it off.

    Unless you have a sure fire way of earning more than CPI, say stocks for example, although nothings ever guaranteed.

    • 0.9%??? you can get more than that with a bank… plus it's always handy to have money in your bank account in case you ever need it. you can't redraw from your HECS loan…

      • if you do well you'll be on 1.2%, so making roughly 0.3% more pre tax.
        After tax you'd be close to parity

    • +12 votes

      So buy at ATH and sell during a dip right?

      • Yes, but if you do it again and again you'll make it up in volume!

      • Buy at ATH and let the next sucker buy it off you setting new ATH. Just don't run out of suckers.

      • People have been saying that ATH at USD 15 was too high, then 260, 1150, 3000, 9000, 20000, 30000, 40000, 52500, etc.

        What they should've done is to say USD 15 was cheap, 260 cheap, 1150 cheap, 3000 cheap, 52500 still cheap.

        • If anyone could have accurately predicted ATH and ATL then they would be rich beyond belief (or maybe so smart they are just enjoying not being in a spotlight)

        • You forgot the part that when it was 1150 ATH, the ATL became 150 and 20000 became 2700 etc etc

          It's relative.

      • It's going to 100k and there's nothing you can do to stop it

  • Inflation is higher than HECS?

    • The HECS owed amount is indexed once a year at CPI. In otherwords, there is no interest on HECS but rather the amount you owed is adjusted for inflation once a year on 1 June.

      Even if interest rates are lower than CPI, there are niche cases where interested earned will still be higher than the index amount because of compounding interest. (This is ignoring tax, and the niche cases would involve extremely small rate discrepancies)

  • Found the answer for you Here

  • I'm not sure if regulations have changed, but with my HECS debt, I held onto it for years up until I had a good chat with my accountant about it.

    Benefit to paying it off was that I got some (%) discount - the fact was I had to pay it off any which way, so why not get some discount on it.

    The debt was also deducted from my fortnightly pay cycle, which came back to me as a return come tax time. It's the same money at the end of the day, but I liked having more money over the year at my disposal (once paid off).

    • The discount is no longer offered. It was shut off back in circa 2012-2013 IIRC.

      • Dumb move of the government. Give enough of a discount to entice some money collection.

        They also started asking Australians living overseas their income so they can send them a tax assessment for it.

  • Invest unless you are looking to borrow money from the bank for like a house.

    In that case, pay it off as it will affect your borrowing capacity.

  • being out of debt is always good and a great feeling….

  • No. That will be the cheapest debt anyone apart from your parent will give you.

  • Wait for Labor to get back in, and see if they'll reintroduce discounts for paying off your HECS lol.

    • It could be a while before Labor gets back into power. In my observation, the Liberals are more willing to take votes from the centre than Labor is right now (even if the Coalition does not plan to govern from the middle).

      • Never said anything about expecting that to happen anytime soon.
        I'm currently happy to just pay the minimum off my income fortnightly and wait to see if there are any beneficial changes to entice me to pay off my HECS. Until then, there is no incentive for me to pay it off.

  • Take 1/3 of your cash and pay your HECS down, take another 1/3 and invest it. Keep 1/3 as cash.

  • HECS is the cheapest debt anyone can get. It is the only debt people don't have pay back as long as they keep their taxable income low.

    • Or get on JobSeeker for life. Australia is the only country that there is no limit (time) you can be on JobSeeker. Although mutual obligation really messes with the social schedule.

    • It sucks for those who live overseas now, unlike a few years ago. I didn't pay any of my HECS debt until 30. By that time my wage had shot up so much I paid off my debt in 3 years just from compulsory contributions.

    • Plus, it has no succession obligations, meaning it dies with you so your kids don't get stuck with it :)

    • True but why go to university if all you aspire to is a low paying job.

      Oh that's right, they're called Arts degrees!