Australian Mustachians - pay off HECS debt, yes or no?

[mqq]

Hi everyone. I have a question I hope other Aussie Mustachians can help with -
I am currently living offshore (NZ) and as such don't have to make any compulsory repayments on my HECS debt (now called HECS HELP I think?) - I owe around $29k for my degree and postgrad study. I will likely be going back to Aus in 2 years, will work for a year or so and then take time off to have kids. This means I will only have to pay off a small amount in compulsory payments in the year I return, and then may not earn enough to make compulsory payments for some time afterwards. I am wondering if I should make voluntary early payments now, or just wait until I go back to Aus and only make the compulsory payments when required.
My thoughts are:
Pros:
paying over $500 voluntarily currently attracts a 5% bonus which I don't think will last for long
Currently the debt is indexed at inflation, making it a very low cost loan (I know it will go up in 2016)

Cons:
It takes away money from "now" that could be put to use earning money for us
There's no obligation to pay it right now, or at all (until I earn enough while living in Aus)


What are your thoughts on paying down the debt voluntarily?  I've read another thread here which seemed to have a general consensus of saving up and paying it off just before the indexation changes. I wonder though, if that advice would be different for me due to being offshore at the moment, and also the fact I will be taking time off for kids sometime around 2016/2017.

[abyss]

I paid mine off within a few years of finishing my degree, but that was only $17,000 and in the era of a 10% bonus for voluntary repayments.

I am personally uncomfortable with debt, so often err on the side of paying it off to free up cashflow - even if its low interest. Others here would no doubt take a less emotional point of view and say don't rush into paying it off.

[sammyjnr]

I am personally uncomfortable with debt, so often err on the side of paying it off to free up cashflow - even if its low interest. Others here would no doubt take a less emotional point of view and say don't rush into paying it off.

Yep, I'm indifferent, and am not diverting any resources to pay it off early.

Your money could be invested and generate additional cash flows elsewhere.

[agent_clone]

I think we discussed this earlier in the year.  It was decided that if it is increasing each year at the CPI rate then to just leave it.  But if the government changes it to the bond rate it may be beneficial to pay it off as soon as possible.
That being said if your not paying it off at all then it will keep accumulating and compounding and thus if you get around to paying it off it could take significantly longer.

[EngineerMum]

I agree that the 5% discount is unlikely to last much longer. And I don't trust this government one bit to not find a sneaky way to start increasing interest on the balance. Plus I hate debt. So for me, it was a high priority to pay off, but lower than other debts (just mortgage, no facepunching please). I stuck with minimum repayments until the balance was down to nearly 1 year's worth, and paid it off in a lump sum before EOFY. Thus I skipped the interest for that year, and got the 5% bonus, which was a higher return that the 6% mortgage rate I was paying.
Difference with your situation is that you can put off paying most of this debt for the forseeable future. Do you expect to earn above the threshold in Aus down the track? Do you trust that the rules will not change to take the balance of your loan out of your estate if you don't pay it off in your lifetime? Do you have other debts that are more facepunch-worthy to deal with first?
Without knowing your situation, I would prioritise other debts first, but pay off the HECS in a lump sum when you can do so with cash, and the sooner the better to maximise your chance of getting the 5%. If you have the cash lying around now in liquid assets, I'd consider waiting until near the end of your first FY back in Aus, and pay if off then to dodge the interest for that year, get your bonus 5%, but still keep your money as long as you can to work for you.

[marty998]

I stuck with minimum repayments until the balance was down to nearly 1 year's worth, and paid it off in a lump sum before EOFY. Thus I skipped the interest for that year, and got the 5% bonus, which was a higher return that the 6% mortgage rate I was paying.

I did exactly the same (but got a 10% bonus). Interest is charged on 1 June each year, so as long as you pay before 31 May you get the benefit of that strategy.

mqq - if you think very long term, HECS debts are discharged on death. Live long enough and they will compound to something ridiculous, but if you keep your income low enough you won't have to worry about anything except for the angry taxpayers you are cheating :)

FWIW I believe the government will be forced into lowering the income repayment thresholds. Many grads (especially female grads) simply will not earn enough over their lives to pay their loans back through the compulsory tax repayments, given the escalating cost of degrees and the current income thresholds.

There's no point enacting Christopher Pyne's "reforms" if debts will just have to keep being written off.

[agent_clone]

Hmm, yeah thinking about it... HECS repayments start at around the median full time wage of 2012 (so I assume it is still roughly similar now...).  Though its still about 20k less than the average full time wage...

[alsoknownasDean]

Yeah, I've got about $14K worth of it. Considering it's indexed at CPI and I could get a better return from investing elsewhere, paying it off early isn't a concern. I'll just continue doing compulsory payments until the rate changes.

I think the payment threshold is about $51000 a year.

[andystkilda]

Can someone please confirm that the 5% bonus/discount is still available for voluntary payments on HECS/FEE-HELP payments until at least 1st January 2016?

[alsoknownasDean]

http://studyassist.gov.au/sites/studyassist/news/pages/changes-to-hecs-help-discounts-and-voluntary-repayment-bonus

Looks like it. Here I was thinking it had already been canned. Might be worth slinging them a few grand just before the indexation date :)

[11ducks]

I'm saving my money in a high-interest acct instead, but will pay HECS off in a lump sum when/if govt decides to increase interest above indexation.

[andystkilda]

http://studyassist.gov.au/sites/studyassist/news/pages/changes-to-hecs-help-discounts-and-voluntary-repayment-bonus

Looks like it. Here I was thinking it had already been canned. Might be worth slinging them a few grand just before the indexation date :)

Yeah I could have sworn last time I checked the website indicated there was no longer any discount, but it seems that the Government was surprised by not being able to pass any of the reform package and the status quo therefore will apply until further notice.

[aussiegal]

A bump of a thread!

I am tossing up the benefits or merits of attacking the HECs problem. I will have about 7k left after this years payments, but because I make use of salary packaging the impact of the extra tax that I have to put aside is pretty significant.

I am wondering whether I should just knock it on the head, make use of the 5% discount, and then free up about $400-500 per fortnight to invest.

Thoughts?

[mrcheese]

Aussiegal that's what I did last year. My reasoning is that any tax bill you get as a result of owing HECS is a lump sum payment to HECS without the benefit of the 5% discount bonus. So I made the lump sum payment in December and managed to get the maximum salary packaging cap in before the end of the FBT year. Didn't pay very much tax at all for a couple of months...

[marty998]

Yeah knock it out if this is your last year of repayments. Especially do it before 1 June when indexation is applied.

[Gockie]

Yeah knock it out if this is your last year of repayments. Especially do it before 1 June when indexation is applied.

Agree with this, completely. I just paid off the last 6k a couple of days ago near the end of April which was 5k something after bonus. You'd have to pay it off with your taxes anyway so you might as well get the 5% discount.

[aussiegal]

Thanks! You have all confirmed what seems like a logical plan! Do you know if the tax office calculates debt reduction fortnightly, or annually?

[Gockie]

Thanks! You have all confirmed what seems like a logical plan! Do you know if the tax office calculates debt reduction fortnightly, or annually?

Annually. Well, its at the time the money is received. Indexation is applied on the full amount as at 1 June each year so now's the time to pay (or reduce) it if you are looking to clear it. Note, you should give the tax office at least two weeks to process your payment, maybe longer if you want to be on the safe side.