Better to pay off HELP loan they keep money in HISA?

Lhamole on 28/10/2019 - 15:34

I've always followed the wisdom that your HELP/HECS loan is the cheapest loan you will ever get and you should only make the compulsory repayments. However, with the drop in interest rates I'm not sure this is the best way to go.

I currently have 60k in a HISA that I'd been building for a deposit on a home and a ~50k HELP debt. For simplicity let's say I have 50k of each

RAMs current interest rate is 2% so over a year
50,000 * 1.0202(effective rate) = 51010
Then you need to pay tax on that interest
1010 * 0.63 (depending on bracket) = 636.3

So you come out of the year with $636.30

However the increase on the loan due to indexation is
50,000 * 1.018 (2019 indexation rate) = 50,900

So by not paying off the HELP loan you're ~$264 worse off.

Am I missing something? Obviously there's higher interest investment than a HISA at the moment but if you're after low risk seems to me you're better off paying off the HELP loan than letting the money sit there.

Financial

Comments

  • [Deactivated] on 28/10/2019 - 15:43

    You can't outperform the taxman at the higher tax brackets.

  • spackbace on 28/10/2019 - 16:03
    -1

    Also doesn't help applying for a mortgage when you have a $50k debt…

    You remind me of this guy

    • hamole on 28/10/2019 - 16:12
      +2

      I really don't think banks think much of HELP debt, I've had pre-approval(I know it doesn't mean much). Huge difference between HELP and credit card debt.

  • [Deactivated] on 28/10/2019 - 16:09

    @hamole, agree with your logic, but for the sake of ease. Keeping cash in the bank for emergencies is better than paying pff full help balance. Depending on your salary you could pay thw help down in 6 years. You could make a 20k donation to the tax man, then the indexation wont be as bad.

  • idonotknowwhy on 28/10/2019 - 16:12
    +1

    The wisdom is correct. That interest rate is nothing. It's the cheapest loan you'll ever have.
    And having a cash buffer is good for if you lose your source of income, and don't want to go into debt.

    HISA is not an investment though. After paying tax, you'll be lucky to keep up with inflation.
    If you're looking at investments, there are better options than paying off your HECS.

  • trustnoone on 28/10/2019 - 16:36

    Well I feel any debt is bad debt, but typically you'd want to do better then HISA, and you'd likely only put it in HISA as its a bit more liquid, I can pull money out whenever I need.

    You're right the interest isn't as good as leaving it in the bank through which is whats typically supported. In saying that you actually have spendable money which you could use for deposit of a house, which would be better offsetting that loan then paying back HECS.

  • CheapskateQueen on 28/10/2019 - 20:51

    the biggest difference is having the $50k available as a house deposit… which you'll need if you intend on buying a place.

    on a 600-700k purchase, you don't even have 10% yet, or just barely cover it.

    keep the money for now, unless you don't intend on buying something in the next few years

  • [Deactivated] on 28/10/2019 - 21:20
    +1

    HISA rates have dropped significantly over the last decade, to the point that if those were your only two options then yes, paying HELP is better. BUT lots of people need to take out mortgages which are still around 3%, or invest in shares which have been returning > 10% P.A.

    HELP debt is debt, but it's cheap debt, the only reason it's bad is if you're definitely going to do nothing better with that money over the next 10-30 years than sticking it in a HISA and you're earning a good amount.

    Even though the sharemarket can go backwards, something like an index fund will very likely do much better than 1.8% over 5+ years, and you don't have to pay tax on the portion of capital gains until you sell, and even then you get a 50% discount on that.

    In 2013 you could get 4.2% on a HISA and the HELP indexation was only 2% so a 2.2% spread compared to the ~0.2% now. We live in very unusual times.

  • Thudders on 30/03/2023 - 16:09

    This aged well

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