Should I Pay off My HECS Debt (as a Current Student) ?

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  bobbified on 12/05/2023 - 23:21

  +3

  It's better to keep some liquid cash for a rainy day than to pay off your HECs. The government can wait. Invest it in something that gives a return that is equal or greater than the indexation rate. Even a return that's slightly less is still better than putting it all into your HECs. Nowhere will you ever get a loan that cheap (relatively) again. That's just my opinion anyway.

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  AustriaBargain on 12/05/2023 - 23:48

  +3

  Might you need the money for a car or furniture if you rent an empty house after graduating or anything else? Or a buffer if you need medical bills in the future, the state of medicare at the moment you never know what your needs will be in the future.

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  Hydralyte on 13/05/2023 - 00:21

  +1

  and I still have 4 semesters left before graduating. I have more than enough savings to pay it off,

  Just forget the hecs debt. Work 10 years and it'll be gone.

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  AngoraFish on 13/05/2023 - 00:24

  +11

  You don't have to pay the lot off, just as much as you think you can afford while leaving enough in the bank for a rainy day.

  In practical terms, anything you pay off today is an instant 7.1% return. You'd be hard pressed to find many investments offering that, and all of them will take tax off the top unless you're under the tax free threshold.

  Personally, I reckon an instant 7.1% return, compounding, is a pretty good investment. If you were ever going to throw money at paying off HECS this financial year is absolutely the time to do it.

  In the past it's not made a lot of sense to pay off HECS early because you could easily get more from a term deposit than you'd lose to indexation. This year, however, that equation is completely reversed. Depositing that same amount with ING will get you 5.25% with tax taken off the top, compared to a tax-free 7.1%.

  Also, what I think a lot of people don't fully get their head around is that once you start working you'll be paying HECS back as a compulsory deduction from your salary anyhow. The quicker you pay your debt off the quicker you get to keep the full take-home in your pay packet and the quicker you can start building up some genuine savings.

  • 

    WookieMonster on 13/05/2023 - 09:59

    anything you pay off today is an instant 7.1% return

    There is one small caveat to that statement: only debts left unpaid for more than 11 months will be indexed on June 1.

    Having a quick look at my account statement to see how indexation has previously affected me, I can see a number of examples where only debts more than 11 months old were indexed.¹

    There is a chance OP has some debts that would date back to a census date from the second-half of 2022, which means paying those particular debts off would be pointless from a 2023 indexation perspective, as they would be avoiding 2023 indexation on those particular debts anyway.

    ---

    1. It appears that the indexation calculation uses the effective date to determine the age of a debt, not the processed date. ↩

    • 

      AngoraFish on 13/05/2023 - 10:15

      +1

      Fair point, and correct https://community.ato.gov.au/s/question/a0J9s000000RgxSEAS/p…

  • 

    Ghost47 on 13/05/2023 - 22:37

    The quicker you pay your debt off the quicker you get to keep the full take-home in your pay packet and the quicker you can start building up some genuine savings.

    People can start to build "genuine savings" even when they don't get their full take-home pay due to a HECS debt IMO.

    • 

      AngoraFish on 14/05/2023 - 01:34

      Thanks for your insight

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  Master Bates on 13/05/2023 - 02:17

  +3

  Shameless copy pasta from the Barefoot Investor's Q&A email newsletter on the 1st May 2023:

  Have You Changed Your Mind on HECS?

  Hi Barefoot,

  My hubby has $85,000 in HECS debt, and I’m wondering what your thoughts are on the HECS-HELP debt saga. The Greens are trying to freeze the indexing to inflation. You have always suggested that we don’t rush to pay off our HECS-HELP debt because it’s an ‘interest-free loan’, but I am wondering if you still think the same way now.

  Tania

  ---

  Hi Tania

  Look, I hate inflation like the Greens hate fossil fuels (and Barnaby Joyce).

  Both the Labor government and the coalition Barnabeyed the Greens proposal to freeze indexing student debt inflation. Now the whole concept of inflation can be a really hard one to get your head around … but HECS debt lays it bare in all its brutality:

  For many years the indexing has been bugger all (in 2021 it was 0.6%) – yet this year it’s a whopping 7.1%. So your husband’s debt will be indexed up by $6,035.

  So, have I changed my mind: should you make extra repayments?

  Well, that’s obviously totally up to you. However, I’d flip the Greens’ advice and pay back any bank debt (that attracts an interest rate) first before you repay any HECS debt.

  What I think the Greens are picking up on is how the current economic climate is screwing people on low incomes (which includes students). Rents have increased at the fastest pace since 2010, and the cost of most things is skyrocketing.

  But despite all that, given that HECS is an income-contingent loan (i.e. you only start repaying it once you earn $48,361), I’d be more inclined to put your money in Mojo as a buffer, than make a voluntary extra repayment to the government.

  • 

    brendanm on 13/05/2023 - 07:40

    +1

    $85k 😂

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  EightImmortals on 13/05/2023 - 07:21

  +5

  Yes, live your life free of debt as much as you possibly can, you'll be better off in the long run.

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  freefall101 on 13/05/2023 - 16:30

  I wouldn’t, simply because once you pay that money you can’t get it back out again and HECS will generally be the lowest interest debt you can get.

  Next year it’ll likely be 3%, but you can’t draw the payment back out and stick it into an ING account.

  The idea of paying the highest interest debt first is solely on the assumption it will continue to be at that interest rate, HECS won’t be.

  • 

    Ghost47 on 13/05/2023 - 22:44

    I wouldn’t, simply because once you pay that money you can’t get it back out again and HECS will generally be the lowest interest debt you can get.

    I'd say this year is an outlier with CPI being at 7.1%. Being an outlier it might not hurt OP to put some money towards it.

    Next year it’ll likely be 3%

    Rumblings are that rates will go down towards the end of this year as we start to slide into a recession, but it's still not definite yet (although a consumer recession was announced on Tuesday). With immigration increasing (which will affect the economy, possibly boost it), inflation could stay high. I don't think it's possible to make a call on where interest rates will head, i.e. better to be safe than sorry and put some money towards HECS rather than assume rates will return to a lower level next year.

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  We Out Here on 13/05/2023 - 19:13

  +3

  feel sorry for you young lot

  expensive uni degrees, house prices, food, insurance etc…lol

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  MND on 06/04/2024 - 23:07

  -2

  Ask yourself this question; how are you handling your finances with your current hex repayments? Are you struggling? If you are not struggling; this is what my wife does. She lets her Hex payments be taken from her pay even though she had paid off her hex debt! This may sound stupid; however for us its a blessing and can set up you for pain free financial obligations for the year or give you a nice budget for a holiday.

  1. Let the hex payments be taken from your pay even though you have paid your Hex off.

  2. at the end of the financial year, at tax time, you will get a good lump sum payment of all your over paid hex payments, including what you claim on tax. Where I am married with kids, this does the following for us: It saves us from having to save money ourselves as its taken as a tax payment from my wife's pay. Since we didn't feel that extra tax being removed and we didn't see it, we didn't care. I don't know about you, but once we get some form of payments insurance, rates, rego, etc.. We end up not saving any money for anything. Have you heard the saying: 'when you have money you find ways of using it'.

  Take this example: 10k extra in your pay = $384 per fortnight extra in your pay. For me that $384 would go in a heart beat to bills, going out, the want to spend on luxury items such as upgraded phones etc. This means you also have to budget yourself in order to save (which in our case would not eventuate).

  She has been doing this for years as her pay goes up, the hex payments go up and the bigger payment you get back from the tax office at tax time. The last tax return she got 10k in over paid hex and what ever claims she made. Since we didn't see or feel the hex payments being taken out. That 10k lumpsum 'for us' equated to: Insurances on all cars, rego on all cars, House Insurance, and some money for taking the kids out. To have this money as a lump sum, saves us from thinking how are we going to pay these expensive bills.

  You may say, you are single now & how will this help me?
  1. you can use your lump sum payment as a holiday down payment, without taking an extra loan.

  1. you can use your return, of that over paid hex to invest in things like: Investing 10k of shares is better than investing the miniscule interest from a bank if you were to save 10k yourself.

  2. You won't be single forever, you will get a partner and probably have children. When this occurs this suggestion I have made helps heaps. It will become even a less burden as two people will be working setting yourselves up in life.

  When I decided to tell the tax office to stop my hex payments because I paid off my hex, I regretted it because I cannot save money given I have a mortgage now.

  Lastly; you say you make 85k, well you have a Uni degree! Meaning you will get paid more as you get more and more experience. If you continue to do what I said your return will get bigger and bigger at tax time and you will endure less pain in paying off bills, going on holidays etc….

  If you tried this for one year and it wasn't for you. Then you can still do what I did and advise the ATO you have paid your Hex off.