HECS, interest, tax - what is the best option?

bargin424 on 17/05/2015 - 12:31

Currently in 30K~ debt from hecs as a typical university graduate.

I've been thinking of what is my best option to obtain the greatest benefits.

Based on my research I think have 3 options:

  1. Earn bank interest 3%~ on money that I earn (but this will get taxed anyways.)
  2. Make voluntary payments (100% commitment) to hex greater than $500, to obtain a 5% discount
  3. A half of option 1 and 2, make voluntary payments (50% commitment) to hex greater than $500, to obtain a 5% discount

It seems that the best option is to take advantage of the 5% because earning bank interest at 3% will lose me 2% in the end. Also, any interest earned will be taxed under my circumstances. In addition, I don't think banks will go over 5% of interest.

I might have answered my own question. But what are your thoughts on this?

Downside of paying hecs ASAP is I'll have not much money in my account from all the hard work I put in.

Financial

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Comments

  • toristo on 17/05/2015 - 12:45
    +3

    I think HECS is reindexed/adjusted annually for inflation (not daily like an interest calculation) - Can anyone confirm?
    If that's the case, save the money in a high interest savings account, get the interest, and then before the EOFY, make your payment to get the 5% discount. Best of both worlds.

    • bargin424 on 17/05/2015 - 19:05

      Could anyone provide me with any high interest saving accounts?

  • YTW on 17/05/2015 - 15:04

    April is when they apply the indexation I think, so you'd have to pay before then if that's what you wanted to do.

    The issue with that is that you will probably want to purchase a home, car, etc etc at some point. If you've used up all your money paying off your HECS debt then you'll have to take out a larger loan instead of already having an extra $30K or so put aside.

    In the long term, HECS is the best kind of loan to have (compared to mortgage, car loan, personal loan, credit card etc). If you lose your job you don't have to keep making repayments. The loan is indexed rather than charged an interest rate. If you don't end up earning much or end up moving overseas (although there sounds like there are moves for this to stop) then you may never end up having to actually pay it back. When you die, your debt dies with you.

    So HECS is last on my list when it comes to paying off my loans. Have a think about the next 10 years or so and what you imagine yourself doing, and whether or not you'd be better setting aside the money to minimise future loans rather than do a direct comparison with bank interest now.

    • bargin424 on 17/05/2015 - 19:06

      Very good points and good to see your perspective

  • pao2x on 17/05/2015 - 16:35

    HECS should be the last loan you should think of paying off if you have debts like credit cards, mortgage car or personal loans. Pay minimum on HECS.

  • cypher67 on 17/05/2015 - 17:58

    HECS is the cheapest loan you will ever get and if you don't earn over the threshold you don't have to pay it, as previously stated I would leave it as long as possible. 3% interest on your money isn't great, you can do better if you look around. Unless you can rope in your parents to pay up front, I'd be saying for a home deposit or Holiday or something and let HECS do its thing

  • martinj on 17/05/2015 - 19:12

    If you pay off your HECS you get a 5% discount once. If you keep it in the bank you get interest every year.

    • bargin424 on 17/05/2015 - 19:18

      I'm not sure how interest works but for the past year, I've seen NAB savings accounts with an interest rate of 4%~ to 3% now.

      It seems like 5% interest account is hard to get? Also to keep in mind that the 5% discount may take be discontinued.

      • martinj on 17/05/2015 - 19:26

        Say bank accounts have an interest rate of 3.5% p.a. CPI on your HECS is 2.5% p.a. So you're making 1% interest every year. If you pay it off, you'll make 5% once, compared to 1% every year, so after 5 years you'll be better of having kept the HECS debt.

        Imagine instead you buy a house with an interest rate of 5% p.a. The difference between the interest on your loan and CPI on your HECS is now 2.5% p.a. This means by not paying off your HECS debt you'll be better off in only 2 years.

        Remember that interest rates right now are incredibly low. In 5 years time you might be paying off a home loan with interest at 7.5% p.a., while your HECS might only being increasing at 2.5% p.a. At that stage you'll be kicking yourself for taking a 5% once off discount, when you could have put that money towards your home loan and been saving 5% every single year.

  • momov3 on 18/05/2015 - 21:49

    Well if you read the latest report - 1 in 5 only of graduates have repaid their HECS debt. So why be in such a hurry? Join the crowd. Government will now make graduates working overseas repay their debt if they are earning over the threshold. Whereas formerly if you were working overseas you needn't pay. But as for indexing with inflation which was what it was during my time, didn't Abbott say that they were going to impose a interest rate over the outstanding debt the way the banks charge interest on a loan? How dare they. Imagine what your HECS debt will look like with a 5% compounded interest rate every year until you pay up. The most foolish thing Julia Gillard did was to reduce the upfront discount by half. It made paying upfront not so worthwhile anymore and people preferred to hold onto their money.

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