HECS in Low Interest Rate Periods

postform on 22/06/2020 - 15:47
Last edited 22/06/2020 - 15:48

TLDR:- Savers Interest Rate is lower than the inflation rate, paying off HECS better strategy.

Information:

Inflation rate = 2.2 pa (source - https://www.rba.gov.au/inflation/measures-cpi.html)
High interest savings rate = 1.75 ~ 2.10 pa (2.00+ % - only on 4 months promotion) — source - shorturl.at/cpBM0 — Finder

Assumptions:

  1. You have large HECS debt (More than 10k).
  2. You have adequate savings (~25k+).
  3. You do not have dependents.
  4. You do not have high-interest debts (CC or Mortgage).
  5. You are earning a wage or are living with parents and do not have big financial commitments.
  6. You do not have any planned investment/expenditures coming up in the near future.
  7. Your immediate future is somewhat stable.

Coming up to tax season, I've been doing some basic maths and I find that it's smarter to pay out some of your HECS debt, assuming you aren't losing out of opportunity costs (i.e. saving for a deposit, saving for investments). As of this post, HECS indexes at 2.2%, which is higher than the interest I get from a high-interest savings account.

Note most people on their savers are on 1.75% P.a. savings accounts. Which the 1.75 pa is classed as income which then is taxed on an average Australian tax rate @ 36% (Source - http://www.oecd.org/tax/tax-policy/taxing-wages-australia.pd…)

So.. effectively by keeping your money in savings (Assuming you have enough savings to last you for the few coming months) and with RBA signaling more money printing (Meaning inflation would go up), I believe paying off HECS might be beneficial in the longer run.

What do you guys think?

I'm planning on paying a bit back.

FYI - I'm not a financial professional, just someone who is into optimizations.

Financial

Comments

  • TheMindsetTraveller on 22/06/2020 - 15:55
    +2

    Your points are valid, though I would consider using the 'adequate savings' to 'invest' in the stock market. The potential to grow is much better than a 'high earn' savings account, plus any losses can be offset down the track. Besides your immediate future is secure so short term losses is OK.

    • postform on 22/06/2020 - 15:57
      +2

      I am exposed to the stock market, but given reporting season is coming around the corner in August, I do see many companies go red real quick. Saying that I have moved a bit into defensive stocks. And I think the stock market currently is way too inflated.

      • Drakesy on 22/06/2020 - 17:17
        +2

        Someone forgot to drink the sweeet sweet unlimited coolade being dished up by the Amercian Federal Reserve.

        But yep, couldn't agree more.

        • postform on 22/06/2020 - 17:34

          Yeah sorry. Might gamble some money but not all my money. Definitely I think the Feds have been doing everything they can do inflate the US stock market. And I think for anyone here who's reading if you got spare money that you don't mind risking, put it into US stocks or SPY. US stock prices are directly and only influenced by liquidity at the moment.

          • Diji1 on 22/06/2020 - 18:43

            @postform: Wait you think the US is undervalued and about to go up? Are we even on the same planet …

    • netjock on 22/06/2020 - 16:32

      Or property, doubles every 7 years!

      • Drakesy on 22/06/2020 - 17:17
        +1

        INFINITELY!

        At least according to Domain…

        • Diji1 on 22/06/2020 - 18:45

          These are the same brainwashed fools insisting that privatisation makes everything cheaper at the same time right?

          • netjock on 23/06/2020 - 02:02
            +1

            @Diji1: Private ownership of rental properties makes social housing cheaper for the government. Then tax payers pick up the bill for rent subsidy.

      • postform on 22/06/2020 - 17:32
        +1

        Not sure if you are joking.

        • netjock on 23/06/2020 - 02:00

          People don't get satire.

  • p1 ama on 22/06/2020 - 15:55
    +1

    Yes, real interest rates are currently negative, so anything that's indexed to inflation like HECS should be paid off as soon as possible.

    Be careful of opportunity costs though, you can't redraw your HECS once you pay it off. Think about how much liquidity is worth to you before you pay it off.

    • postform on 22/06/2020 - 15:58

      True. How would you say one would go about calculating the value of opportunity cost ?

      • rambutann on 22/06/2020 - 16:54
        +1

        Depends on everyone's personal circumstances.

        If you want to buy a car or property in the near future, and place more value in that than paying off your hecs debt then don't pay off your hecs debt.
        If you're chillin with $50k in the bank with no real intention to spend bulk money in the near future and you have no potential large costs entering your life then sure it's probably worth paying off.
        If the government incentivised me to pay it off (e.g. 5% discount), then at this specific point in time, I personally wouldn't pay it off, because i'd rather have a saftey net in the current economic times, but if you ask me in a year i'd probably pay it off.

  • Anonym0us on 22/06/2020 - 16:20
    +1

    Just some things to consider.

    Indexation happens on 1 June each year and rate is 1.8%

    source

    https://www.ato.gov.au/Rates/Study-and-training-loan-indexat…

    • netjock on 22/06/2020 - 16:31
      +1

      Think OP might be planning for 11 months ahead!

    • Ozbarganator 2000 on 22/06/2020 - 17:22
      +1

      Was going to say this, you beat me to it

    • postform on 22/06/2020 - 17:31

      oh interesting. So they've already been set at 1.8%? They wouldn't change it now right?

      This is new. Haha maybe then I can amend my strategy for next year's FY20 index probably about 2% or more.

      • Ozbarganator 2000 on 22/06/2020 - 17:41
        +3

        You have already been charged for this financial year if that is what you mean by set. You needed to have made a payment before 1st June 2020

  • Unorthodox on 22/06/2020 - 17:26
    +1

    Would also need to consider that you get taxed on your interest income from the HISA

  • [Deactivated] on 22/06/2020 - 18:55

    Or just let the system chase you down, if it wants its money back

  • peterpeterpumpkin on 22/06/2020 - 22:31

    Unless you're maybe a permanent civil servant, I think it's a little bit premature to talk about the future like we'll all have jobs, regardless of how "stable" they seem now.

    A third of the Australian working population is now on Jobkeeper. And a fifth are in jobs only because they work in the public sector. Most Australians only landed their cushy jobs because all the other candidates were already in similar jobs, qualified in other fields or on student visas - not because they're irreplaceable.

    So depending on what happens in the coming months, one day we might be all like "let the hunger games begin!!!"

    That aside, it is good to stay on top of these things.

  • LemonShapedRock on 23/06/2020 - 08:40

    I'm in the same predicament and I made that call to pay it off all together and be done with it.

    I'd much prefer a guaranteed saving of 1.8%-2.2% than risking it in the stock market for a chance to be +/-10% or 20%

    Pay it off and use the freed up cashflow to invest or focus on your other financial goals.

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