Author Topic: Should I think about making voluntary repayments on my HECS debt? (Australia)  (Read 7265 times)

stripey

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Hi there, this is one for the Aussies.

I would like some opinion about whether I should make some voluntary repayments on my HECS debt or not, given the Australian federal budget 2014- which changes interest on HECS-HELP debt from being in line with the CPI to being in line with government long-term borrowings.

Here's some background:

- Five years at university with the highest HECS bracket for practically every subject;
- A couple of years out, the professional salary I received was 'relatively' low ($40k), which is not uncommon in the industry (and fair, I believe, as during the first few years the employer has to invest a lot of time and patience in further on-the-job training);
- I then ended up in a training program which offered a tax-free stipend for three years. This was actually quite generous ($50k p.a. in the hand, plus a little extra taxed funding, plus ability to apply for a little extra travel funds) given that I got a post graduate degree and significant one-on-one professional training. And I managed to go overseas for several conferences and holiday at the same time, *plus* put money into a First Home Savers Account (which looks like it may also be scrapped in this budget). During this period, no HECS repayments were made.
- I have never made any voluntary repayments, considering interest on HECS has been in line with CPI, and I have been able to 'beat' that interest by high-earning savings accounts.
- I now have employment that will see me reliably earn somewhere between $70k - $90k p.a for a four-day week. The reason for the range is that penalty rates for after hours work exists which is 'lumpy', and there is often consultancy work on the side, which is not very reliable, but when I do get it, it pays very generously.
- Over the past five years, my expenses have averaged out to be about $25 - $30k, living what I would consider very comfortably. This average has included multiple interstate moves, several overseas holidays, donations to charity, etc. It also involves professional indemnity insurance and income protection (the former is necessary for consultancy work, the latter I feel is wise given the risk of serious injury in my line of work). I acknowledge I could go lower with my expenses but I like to be able to donate to things.
- Don't intend to purchase a house in the next few years. I like where I live- it's close to public transport, in a good suburb, the rent is well below market average for the location and well below what I would be paying on a mortgage. The landlord has no intention of raising it or selling the property any time soon.
- Other than my HECS-HELP debt, I have no other debt. Never owned a credit card, etc.

So... I have about $32k of HECS-HELP debt.** At what could end up being a 6% interest rate, should I start flinging some of my money into voluntary repayments? Barring any significant changes in my circumstances, I should be able to wipe out my debt easily within 2 years if I put my mind to it.

Any advice, comments, and reasoned ridicule would be appreciated.


** Sounds high, and it is, but not as high as one of my siblings, that has HECS-HELP + PELS = approx $40k.


deborah

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My understanding is the the First Home Savers Account will cease making government payments as of 1st July 2014, but they have to make this year's payment, and that after that, if you don't buy a house within another year, it will revert to a normal account (and it won't have to go into super). I'd check with your bank about that sort of account it will change to, and when. Check that I'm right about the another payment for this year, and if they do have to make this year's payment, make sure it is for the full amount.

I think that the HECS-HELP debt will start being 6% (or whatever the treasury rate is at the time) on 1 Jan 2016 (but check this date - I know that the interest rate has not yet changed, but I am not sure of what date it does). Given that the current situation applies until that date, I would start socking money into a high interest account, and pay as much as possible just before the HECS-HELP debt interest rate rises. That way you actually pay more off your loan - and you might be able to put your First Home Savers Account towards that debt.

urbanista

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I believe that voluntary repayments of HECS attract 5% discount. This alone has motivated me to wipe out my HECS debt completely.

Kepler

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Given the budget proposals, certainly beginning to set aside funds to pay it off, in case the interest rate jumps, seems like it could be a good idea.  While things are still only indexed to CPI, you can decide if you want to put the funds aside into something that earns more than you lose on the loans - it's still possible to do this even in high-interest savings accounts at the moment.  And it looks like we'll get one more go (through June) at the FHSA - and then from July 15 that money looks like it will convert into just a common or garden bank account, not even restricted to home loans - so probably still worth maxing that out this year and watching to see what actually passes the Senate...

In terms of paying off the loans, I'm no longer across the pre-payment bonus amounts - I know they aren't as good as they used to be, but I have a vague memory there still might be 5% discounts for paying off a high enough lump sum?  The one time I carried HECS-like debt (whatever the postgrad version is called - HELP or something), I didn't have repayments taken out via the payroll system, but instead worked out what was going to be taken out, and prepaid that in a lump sum to get the discount.  I'm not sure whether this is still possible, but if you thought you could set aside enough to pay off your debt in a couple years, then you could possibly get a further discount by doing it this way.  Others will probably have more up-to-date info though...

Primm

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Agree with Kepler, put the money aside but don't commit it yet. 5% discount coupled with the indexing going up will tip me over the edge, I currently have a FEE-HELP debt but given it's for post-grad study it's cheaper than undergrad. I have the money in my mortgage redraw at the moment, which effectively earns me ~5% tax free, so that's better than the current CPI I'm being charged on my FEE-HELP. But if the interest rate goes up it disappears.

stripey

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Aha- thanks for the opinions everyone! A bit more research on my part:

As far as I am aware- the 5% bonus for voluntary repayments over $500 still stands- as it's still on the ATO website? :

https://www.ato.gov.au/Individuals/Studying-and-student-debt/In-detail/HELP/Repaying-your-HELP-debt-2013-14/?page=1#Repayment_process__at_a_glance

And the change in interest rates will occur in 2016:

http://studyassist.gov.au/sites/studyassist/helpfulresources/pages/studentoverview_budget2014

I had thought about earmarking the funds in the FHSA for paying off the HECS-HELP debt (and may be close to enough to pay most of it off) and so maybe putting a little more money into my FHSA account in the next month or so may be the way to go.


deborah

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I had thought about earmarking the funds in the FHSA for paying off the HECS-HELP debt (and may be close to enough to pay most of it off) and so maybe putting a little more money into my FHSA account in the next month or so may be the way to go.
Just make sure you have a plan B, in case the FHSA is not available to you at the time, or legislation changes and it gets put into super - after all, the budget still has to be passed. So, what happens if one part passes and the other doesn't (or changes are made while they are negotiating with the minor parties)

agent_clone

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I would think about saving the money to pay them back.  Also, you want to pay extra money to it just before the indexation date.  It is calculated on the amount in there on the day of indexation, so put your money into a high interest savings account then put the money in there a couple of weeks before indexation and it should give you some interest, and reduce the amount that is indexed.

marty998

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The interest rate is going to be changed to the long term bond rate (currently 3-4%) with a legislated maximum cap of 6%. Should the bond rate go higher, the HECS-HELP interest rate will not go higher.

It only makes sense to pay it back voluntary repayments in your final year of compulsory repayments. Because where else can you borrow at CPI (now) or the government bond rate (future).

The final year is when your balance gets down to say $5000 after all your years of compulsory repayments, and your repayment for that final year is say $5000.

Having said all that, the average graduate is going to be fucked if they don't quickly start earning a decent income (which doesn't seem to be a problem for you). The outcome for those people is either (a) death, upon which the debt is discharged, or (b) starting to repay debt in their 40s and 50s when it has compounded for 20-30 years.

Some serious mathematical analysis will be required to determine the optimum outcome for the next couple of years.

Primm

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Having said all that, the average graduate is going to be fucked if they don't quickly start earning a decent income (which doesn't seem to be a problem for you). The outcome for those people is either (a) death, upon which the debt is discharged, or (b) starting to repay debt in their 40s and 50s when it has compounded for 20-30 years.

Or do what my sister did - move O/S when you hit the minimum wage for paying back your debt and never come home. She has a theoretical debt of something like $70k now, but since she plans to stay in the UK until she retires, and her retirement income will be less than the payback minimum, she is gold. :)

stripey

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The interest rate is going to be changed to the long term bond rate (currently 3-4%) with a legislated maximum cap of 6%. Should the bond rate go higher, the HECS-HELP interest rate will not go higher.

It only makes sense to pay it back voluntary repayments in your final year of compulsory repayments. Because where else can you borrow at CPI (now) or the government bond rate (future).

The final year is when your balance gets down to say $5000 after all your years of compulsory repayments, and your repayment for that final year is say $5000.

Having said all that, the average graduate is going to be fucked if they don't quickly start earning a decent income (which doesn't seem to be a problem for you). The outcome for those people is either (a) death, upon which the debt is discharged, or (b) starting to repay debt in their 40s and 50s when it has compounded for 20-30 years.

Some serious mathematical analysis will be required to determine the optimum outcome for the next couple of years.

Very good points, I might digest a little further.

And in response to deborah, at this stage for me a plan B (if FHSA funds are unavailable) shouldn't be that difficult to achieve I would think, barring long-term unemployment or marrying into debt. I suspect having the funds waiting/sitting for a few years (if required) won't be too onerous a burden for me anyway.

moestache

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Agree with what the others have said so far, put aside the money for it but don't pay it just yet.

My plan with my HECS-HELP debt is to not make any voluntary payments until just before 1 Jan 2016, which is when I plan to pay it off in full. At that point the outstanding balance would be somewhere in the vicinity of $8000.

HappierAtHome

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It only makes sense to pay it back voluntary repayments in your final year of compulsory repayments. Because where else can you borrow at CPI (now) or the government bond rate (future).

The final year is when your balance gets down to say $5000 after all your years of compulsory repayments, and your repayment for that final year is say $5000.

This is what I did. An 8% return (5% discount + 3% CPI) just for paying a bill early was very pleasing.

Nudelkopf

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Balls. I hate change.

Anatidae V

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Balls. I hate change.
+1.
I have no debt, but SO has what I'm estimating at $35k after the equivalent of 6ish years of full time study, which I was happy to ignore until now...

marty998

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Balls. I hate change.
+1.
I have no debt, but SO has what I'm estimating at $35k after the equivalent of 6ish years of full time study, which I was happy to ignore until now...

Don't blame me. I voted for the other liars.

Notch

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Paying off your HECS debt is like buying a bond which pays a low, albeit tax-free, yield.  Except you cannot sell the bond, and it disappears if you die or leave the country and never return.

Every voluntary dollar you put into it is matched with a 5c contribution from the government. So $1 becomes $1.05. And this HECS 'bond' will likely yield (be indexed) around 2.7% this year.

So your return is this:  (1 + 0.05) * 2.7% = 2.84%

So putting $500 in will save you $14.20, this year.

If the indexation goes up to 6% in 2016, the return becomes (1 + 1.05) * 6% = 6.3%

My advice, don't pay off your HECS voluntarily, at least until 2016.


dsiee

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I'm going to be naughty and revive this old thread.

I'm a current student and i have the capacity (almost at least) to pay my course fees outright from now on (i have already done 1.5 years of study at about $8k/year). Do you think this is a good idea, or should i just keep dumping 5K into VAS every 6 months?

I have been thinking just pay it off as i go so whatever debt i have now wil be what i graduate with (~12K).


I think i'm going to agree with
Balls. I hate change.