Author Topic: Has my student loan become emergency debt?  (Read 5257 times)

delucks

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Has my student loan become emergency debt?
« on: May 23, 2016, 02:00:26 PM »
Hi all,

First post, woo! Started reading Mr Monevator and am trying to get my finances sorted, starting, of course, with debt. I am very debt averse, the only debt I have is my student loan.

I went to university in Australia, which follows a student loan system similar to that of the UK. We take out a 'HECS' debt from the government (since rebranded HELP). It paid for all of my university costs, which was great because I got suckered into doing a 5-year double-degree course. I've since learned the very difficult lesson that this was completely unnecessary, but no point crying over spilt milk etc. This loan is indexed against inflation, and is repaid automatically once you start taking home more than $54,126AUD. The repayment rates go up as you earn more, and the payment is taken before tax so you don't even notice it. See this table for more details. Pretty cushy, right? For me, this sat right in the realms of a 'low interest rate loan' (maybe even lower than low?), as outlined by MMM in a comment on the Emergency Debt blogpost:

Quote
Student loans especially those at low interest rates are one exception. Its much less of an emergency to pay off a loan like that (while you might not delay child-raising, youd still be wise to live a very frugal lifestyle until you get back out of the red).

Fast forward 6 years (wow, really that long?) and I'm sat on the other side of the world in my country of birth, sunny England. I've been here for nearly 4 years now. I'm not paying off anything towards my student loan, because I'm not paying any tax in Australia. Who cares, right? It's indexed at inflation and it doesn't transfer on death, and they're not going to chase me for it. I'm living the dream.

Crap.

So now they're chasing me. Fair play, I owe the money and I should pay it back. However I'm worried that this debt is now more of an emergency than it would have been if I was back in Australia, making the before-tax repayments.

I have to declare my income with an Australia tax return every year (which I'm sure will be fun, yay), and then based on that income they will determine how much I have to pay back. This means I'm going to be declaring my gross income, which will determine the % I have to pay back, but I'm going to have to pay back out of my net income.

Some numbers:
My income is 46,500 p/a, and my debt is $35,807 (which is roughly 18,000). According to the repayment table, I need to pay back 7%, ~3300. Further complicating this amount is the fact that I get quarterly bonuses, which will increase my yearly pay and therefore increase the amount I need to pay back (maybe even pushing my up a repayment bracket).

The loan has indexation applied, 2.1% last year.

So, the ultimate question. How should I treat this loan? Should I drop everything and focus on paying this out completely ASAP? Or should I still treat it as a low-interest loan and just make the 'regular' repayments? I've tried doing the maths, but the situation is a bit to complex for my baby financial brain to compute.

Any help would be greatly appreciated!

nereo

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Re: Has my student loan become emergency debt?
« Reply #1 on: May 23, 2016, 02:12:08 PM »
Don't make this any more complicated then it has to be.

You have a loan which has a ~2% rate. Just make "regular" payments but make sure that you are also investing as much as you can.

ShoulderThingThatGoesUp

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Re: Has my student loan become emergency debt?
« Reply #2 on: May 23, 2016, 02:13:13 PM »
So, it's a 2.1% loan? Doesn't seem like a big problem at all. I guess the only problem would be if the currency issue threw you a curveball, like the Australian dollar appreciated a bunch but your British salary remained the same and they calculated what you owe based on a dated conversion rate...seems fairly unlikely.

Kwill

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Re: Has my student loan become emergency debt?
« Reply #3 on: May 23, 2016, 02:15:24 PM »
It sounds like you ought to be able to make whatever payments are required and send some extra when possible. You're making a lot of money with the bonuses included, and your debt isn't so big. But what is the interest rate on the loan? Is the indexation instead of interest? How is your spending, saving, and investing overall?

I'd probably be so confused by the whole thing that I'd want to pay it off as quickly as possible and get back to building savings. But others here may have more insight.

delucks

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Re: Has my student loan become emergency debt?
« Reply #4 on: May 24, 2016, 01:55:48 AM »
Thanks for the replies. For now I'm going to treat this like a regular repayment and hold back 7% of my salary every month and see what happens at the end of the year. Might be easier to make a more informed decision once I've been through the process once.



Don't make this any more complicated then it has to be.

You have a loan which has a ~2% rate. Just make "regular" payments but make sure that you are also investing as much as you can.

I had feared that I'd made this more complicated than it needed to be in my head.

So, it's a 2.1% loan? Doesn't seem like a big problem at all. I guess the only problem would be if the currency issue threw you a curveball, like the Australian dollar appreciated a bunch but your British salary remained the same and they calculated what you owe based on a dated conversion rate...seems fairly unlikely.

Yeah, the conversion could be a problem but I believe the ATO pin the currency quarterly, and then take the average at the when you do your tax return.

It sounds like you ought to be able to make whatever payments are required and send some extra when possible. You're making a lot of money with the bonuses included, and your debt isn't so big. But what is the interest rate on the loan? Is the indexation instead of interest? How is your spending, saving, and investing overall?

I'd probably be so confused by the whole thing that I'd want to pay it off as quickly as possible and get back to building savings. But others here may have more insight.

That's part of my issue, I don't really like having this confusing situation hanging over my head. I also don't like the idea of having to set aside x amount that I can calculate, but only approximately. I don't want to get bitten by it at the end of the year when it turns out I didn't put enough aside.

There is no interest, it's indexation only. I'm really only getting started, so my savings/investing isn't that great, I'm building up an emergency fund while contributing the maximum to a Help-To-Buy ISA (not sure what the US equivalent of this is). Savings rate is currently ~38%, really pushing hard to get it to 50%.

Primm

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Re: Has my student loan become emergency debt?
« Reply #5 on: May 24, 2016, 02:05:44 AM »
As someone with a sister who is deliberately not coming back to Aus because of her HECS debt (she is in the UK and makes something like 95k (pounds!) a year), and someone who knows several people who have racked up fairly substantial HECS debts and left the country, can I just say this is one government initiative that I fully support.

Thanks for paying your share! And I wouldn't stress about paying it ahead of your other loans etc, like others have said just think of it as a 2.1% (this year...) loan and pay it accordingly.

Playing with Fire UK

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Re: Has my student loan become emergency debt?
« Reply #6 on: May 24, 2016, 05:20:27 AM »
Due to the no/low interest, it isn't an emergency IMO.

I would pay the minimum and continue to accrue savings in the UK (38% is great!). Can you contribute to a UK pension (ideally salary sacrifice) and would this be worthwhile for you (are you planning to go back to Oz and how would it be treated, can you QROPS)?
Would contributing to a UK pension reduce the 'gross pay' that your loan calculations are based on? [For North American folks, pension contributions reduce your adjusted gross pay for a bunch of UK tax related things, this is not a crazy question, I know what gross income is]. The final 3,500 that you earn will be taxed at 40% but you will pay loan repayments after tax; if you can pop this into a pension you might save on the tax.

I would also set up an alert for the GBP / AUD exchange rate. If the rate gets favourable, I'd send whatever savings I could towards the loan at that point; you could get a decent early payment discount this way. Also, if the indexing went really high back home, but wages were stagnant in the UK, I'd think about paying it off at that point.

alsoknownasDean

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Re: Has my student loan become emergency debt?
« Reply #7 on: May 24, 2016, 05:43:09 AM »
Yeah I'd just keep paying it as normal. If you're paying $6-7000 AUD a year off it, it'll be gone in five or six years naturally.

If you were working and paying tax here in Aus, your HELP contributions would still be paid from your after-tax income :)

I'm guessing the HELP debt is the main reason you're still required to complete an Australian tax return?

Not long until the end of the financial year and that'll drop by another few grand anyway (once you complete the tax return) :)

Although I'm not sure if the 5% payment bonus remains.

delucks

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Re: Has my student loan become emergency debt?
« Reply #8 on: May 24, 2016, 07:36:21 AM »
...Can you contribute to a UK pension (ideally salary sacrifice) and would this be worthwhile for you (are you planning to go back to Oz and how would it be treated, can you QROPS)?

Not sure what QROPS is, I imagine it's some kind of pension transfer? If i'm honest I haven't looked into it. At the moment I am paying ~8% into a company pension (the company matches up to 5%).

Would contributing to a UK pension reduce the 'gross pay' that your loan calculations are based on? [For North American folks, pension contributions reduce your adjusted gross pay for a bunch of UK tax related things, this is not a crazy question, I know what gross income is]. The final 3,500 that you earn will be taxed at 40% but you will pay loan repayments after tax; if you can pop this into a pension you might save on the tax.

I don't think so, I'm pretty sure this is going to be based off non-adjusted gross income. The 8% I contribute is intentional to drop me into the normal tax bracket. I make ~80 I believe by avoiding the 40% tax on this and chucking it into the pension. Regardless, I don't think that the loan payments will be affected by my pension contribution. Guess I'll find out when I do the tax return...

Not long until the end of the financial year and that'll drop by another few grand anyway (once you complete the tax return) :)

Another annoyance of the situation is that the Australian financial year is offset by 3 months from the UK one, which means I can't just blindly enter the amounts from my P60 and will have to calculate it based on my payslips. This is going to suck.

Stashing Swiss-style

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Re: Has my student loan become emergency debt?
« Reply #9 on: May 24, 2016, 07:59:32 AM »
There is the minimum repayment that you need to make but there is no issue about paying more is there?  This is not a huge loan and you can clear it fast.  You're young, earning good money and you have the right approach to savings already.  Get this debt out of the way as quickly as possible and avoid painful international tax returns etc.  As long as you are contributing to your UK pension and putting aside some additional money into an ISA, you can throw whatever else you have at the debt.  The Aussie dollar is low at moment because their economy is strongly linked to China's need for commodities.  China's growth has slowed considerably which has negatively impacted the Aussie economy.  Use your strong GBP to pay off the debt quickly.  Currency fluctuations could make a big difference to this debt.  Take a Brexit scenario linked with strong Chinese growth and your Aussie debt could double. (OK so that's being very alarmist :-))

delucks

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Re: Has my student loan become emergency debt?
« Reply #10 on: May 24, 2016, 08:29:34 AM »
There is the minimum repayment that you need to make but there is no issue about paying more is there?  This is not a huge loan and you can clear it fast.  You're young, earning good money and you have the right approach to savings already.  Get this debt out of the way as quickly as possible and avoid painful international tax returns etc.  As long as you are contributing to your UK pension and putting aside some additional money into an ISA, you can throw whatever else you have at the debt.  The Aussie dollar is low at moment because their economy is strongly linked to China's need for commodities.  China's growth has slowed considerably which has negatively impacted the Aussie economy.  Use your strong GBP to pay off the debt quickly.  Currency fluctuations could make a big difference to this debt.  Take a Brexit scenario linked with strong Chinese growth and your Aussie debt could double. (OK so that's being very alarmist :-))

Thanks for the contrasting opinion, it's great to hear another side. I must admit I am erring more on this side of the argument, mainly down to the "painful international tax returns".

Playing with Fire UK

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Re: Has my student loan become emergency debt?
« Reply #11 on: May 24, 2016, 08:40:57 AM »
...Can you contribute to a UK pension (ideally salary sacrifice) and would this be worthwhile for you (are you planning to go back to Oz and how would it be treated, can you QROPS)?

Not sure what QROPS is, I imagine it's some kind of pension transfer? If i'm honest I haven't looked into it. At the moment I am paying ~8% into a company pension (the company matches up to 5%).


Yes, it's a pension transfer (Qualifying Recognised Overseas Pension Scheme) that let's you move a UK pension overseas without paying penalties or having the money taxed by the UK and country you're moving to. Google tells me that you can do this, but there are some reporting requirements.

Paying into a pension down to the lower tax rate makes a lot of sense - I wish someone had told me about it earlier.

The balance of paying off non-emergency debt vs savings vs investments is a really personal one. If this is the way you lean after hearing the benefits of cheap debt then paying it off is almost certainly the right call for you.