With today's inflation figures being released we now know the indexation rate for HECS debt will be ~3.9%
Keen to hear if people will be paying off their HECS before indexation hits?
HECS Indexation to be 3.9% for FY22 - Will you be paying off your HECS early?
currentfad on 27/04/2022 - 21:53
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Merged from Save 3.9% Indexation on HECS Debt if Paid off by 1 June 2022
https://www.ozbargain.com.au/node/697009
Make an early payment now and save 3.9% getting added to the balance 1 June.
Wouldn’t call this a deal as such, probably fits in better in the forums. But 3.9%, that’s ouch…
But 3.9%, that’s ouch…
Ask an American with a student loan what ouch is
Tertiary education fees which are heavily subsidised, indexed but not charged interest, and are not recouped on transfer of our estate, makes us very fortunate Australians
Ask the outgoing PM what tertiary education fees are… oh wait.
@muwu: I got mine for free, but you can pay up to twice as much for your education.
https://www.theguardian.com/australia-news/2020/jun/19/austr…@ATangk: I recall my fees being subsidised around the 75% mark, and remember feeling very grateful to the government. I hope my subsequent income taxes have been a good return on their investment.
From your article, it appears the average subsidy rate was proposed to have been dropping from 58% to 52%. There's a lot of variation there, for example nursing degrees are subsidised at >80%
Tertiary education fees which are heavily subsidised
Only if you're lucky enough to get a Commonwealth Supported Place. Walk around a university campus these days and it's pretty easy to figure out the CSP students are becoming a minority.
@muwu: Eligible yes, but are there enough CSPs for all domestic students that want to go to university? NO. It's even more egregious is desirable courses.
@salmon123: So eligible undergraduates are missing out on CSPs and needing to accept full fee (with HELP) places?
I know that was happening for a relatively small minority in very competitive professional degrees (e.g. medicine). Is it more prevalent now?
Is it more prevalent now?
Yes - I haven't looked up figures to see how CSP places have been growing, but it's a foregone conclusion it hasn't been keeping up with the rate of growth of year 12 graduates.
and needing to accept full fee (with HELP) places?
I don't know how many domestic students finish up with this, compared to choosing another course with a CSP spot or simply not going to university.
I know that was happening for a relatively small minority in very competitive professional degrees
Not quiet sure what that means. Anything with an ATAR cut-off over 30 is "competitive". It means they were able to fill all of their CSP places.
it's a foregone conclusion it hasn't been keeping up with the rate of growth of year 12 graduates
It'd be more accurate to measure against the number of university matriculates, or those that apply to matriculate (as many high school leavers do not enter tertiary education).
(in regards to accepting full fee places) choosing another course with a CSP spot or simply not going to university
That's immeasurable. It's just conjecture.
Anything with an ATAR cut-off over 30 is "competitive". It means they were able to fill all of their CSP places.
Which is why high school leavers have a preference system and can accept a CSP in other desired degrees depending on their level of competitiveness.
Anyway, these points are becoming more niche. I think the overarching consideration here is that Australian (domestic) high school leavers still have access to subsidised undergraduate courses, which has remained a staple since the 1970s, and it would be interesting to research the data (CSP places, subsidy percentages) on how the numbers have slowly changed over time.
@muwu: Medicine has no full fee places (for domestic students) except at certain universities (Bond, Macquarie) which are fully 'full fee'.
@Amaris: In my experience, I've seen CSPs, bonded CSPs, and full fee medical students at non-private medical schools.
Ask an American with a student loan what ouch is
Ask a starving orphan born in a poor country with no economic mobility what an ouch is. This is such a lazy argument, just because you can find someone somewhere who has it worse does not make the current situation good.
For an example closer to home, you can easily find a number of countries who charge absolutely zero for tertiary education. So anecdotal examples cut both ways.
Tertiary education fees which are heavily subsidised, indexed but not charged interest, and are not recouped on transfer of our estate, makes us very fortunate Australians
But why tertiary education in particular? Should people also take out loans to go to high school?
My hunch is that this sort of thinking was back from a time when a minority of people went to university. As in, it was a "premium" option that people took on because they were ambitious. However, it's now the default option, with ~60% of school leavers going to university before they are 22. Basically, the world has moved on, whilst the policy and thinking have not.
I recall my fees being subsidised around the 75% mark, and remember feeling very grateful to the government.
I'm glad you feel thankful the government subsidised your tertiary education. I hope you feel equally thankful that the government subsidised your primary school and high school education, and the road in front of your house, and the train you take to work, and the times you need to go hospital. I hope you feel that sense of gratitude every time you stop at a traffic light and feel so thankful that the government is subsidising this wonderful traffic light so people don't go crazy at an intersection. How could I forget, I assume you must be dropping to your knees with gratitude every time you turn on the light or plug your phone in to charge because of the wonderful electricity grid, the amazing subsidies that enable electricity to flow, yes, have to be so thankful for that.
I'm glad you feel thankful the government subsidised your tertiary education. I hope you feel equally thankful that the government subsidised your primary school and high school education, and the road in front of your house, and the train you take to work, and the times you need to go hospital. I hope you feel that sense of gratitude every time you stop at a traffic light and feel so thankful that the government is subsidising this wonderful traffic light so people don't go crazy at an intersection. How could I forget, I assume you must be dropping to your knees with gratitude every time you turn on the light or plug your phone in to charge because of the wonderful electricity grid, the amazing subsidies that enable electricity to flow, yes, have to be so thankful for that.
Ah, yes to all of that. I know this was probably written tongue-in-cheek, but I do feel grateful for all of this, for living in a wealthy country that provides for all those public services and allows for an unprecedented level of comfort and luxury that has never been greater in human history.
I pay income tax of an amount in the top 0.5% of Australians, and don't debrudge the fact as I can contribute and share in all the great things that we have achieved and that our governments provide and work to advance further.
This is such a lazy argument, just because you can find someone somewhere who has it worse does not make the current situation good.
I agree, to the extent that comparisons aren't necessarily helpful in your circumstances, they can serve one to only wallow in either a positive or negative aspect instead of focusing on being more pragmatic ("comparison is the thief of joy").
It is a good exercise in checking your privelege (okay, my country and fellow man pay for more than 50% of my tertiary education and the remainder is an interest-free loan I can amortise repayments indefinitely, whereas an individual in my circumstances in a more developing country does not even have an opening at achieving the same). And to focus on being grateful rather than begrudging (the same foundation for why we engage in charity every year and not just focus entirely on our personal finances).
you can easily find a number of countries who charge absolutely zero for tertiary education
I'm not well read in tuition-free tertiary education. I've heard that there are a small number, primarily Scandinavian public universities, that offer it (but there are other costs, such as administrative), and that eligibility can be limiting and places selective.
Here is also where comparisons probably fall short of being very tangible, as the tax structures and the living costs vary considerably that it mightn't be that directly comparable to Australian conditions.
I'm also aware from the British example in recent history that sustainability can be poor, and tertiary costs (though subsidised) eventually needs to be met by the individual.
But why tertiary education in particular? Should people also take out loans to go to high school?
Well, the principle of the public providing formal education to minors well proceeds more modern attempts to increase tertiary education uptake for adults. I feel that we will prioritise the provision of basic teachings to children before that of greater subsidisation of advancing education for adults with income-producing potential.
My hunch is that this sort of thinking was back from a time when a minority of people went to university.
I think it has more to do with economics. With social progression in the second half of the 20th century, the Whitlam government needed to expand the provision of tertiary education to meet a growing need, while balancing the costs, and it's sustainability, with the benefits to production and society in general with having a higher skilled local workforce. It was one of our governments greatest achievements to social opportunity and mobility, and subsequent government's have both grown the program to keep the provision of these opportunities to a growing and more ambitious population while counterbalancing for it's ongoing sustainability. We have done so well and it continues on in it's sixth decade.
Can someone pay off my hecs for me? I will be very grateful
DM Miranda Kerr
Many economists will tell you that 3.9% interest is low. Invest the money, for example, in stocks, because the likely returns are much higher than the 3.9% rate. When interest is up near 8% you may have a much better point.
Ah yes because stocks always go up…
Or you could be buying at the bottom. You know timing is everything.
If you put your money into home brand facial tissues when it was $1 at the start of the year you would be looking at 30% saving.
@ATangk: You can't wipe your face with crypto.
You know everyone loves crypto because it is get rich quick.
If you put $1k a month into the S&P for the last 20 years you'd have close to $3m but that is get rich slow.
The probability ends up being a function of time.
Look at equity prices (indices) in any window of less than 6 years and you will find much variation (though more often positive than negative).
Look at equity prices (indices) in any window of more than 20 years and you will find that positive returns approach a probability of near 100%.
The long-term (centuries) average is ~8% per annum. The most recent history (since 2000) show ~10-12% per annum.
Once you rationalise risk and long-term investing, you don't need to expend much energy on the human psychology involved with considering the chances of short to medium term negative returns.
Then you can start appreciating the most substantial benefit of long-term investing - compounding.
@muwu: Theres so many factors as to whether you should/shouldnt pay off HECS, the biggest being whether you're looking to buy a home, since this debt directly impacts borrowing power.
Regardless, stocks are and have always been a riskier investment than straight banks, because where theres risk there is reward.
the biggest being whether you're looking to buy a home, since this debt directly impacts borrowing power
But not how you might think.
Lenders only consider HECS/HELP debt as a matter of serviceability, that is how much your education repayments will affect your capacity to pay your mortgage. In that case, it doesn't matter if you have a HECS/HELP debt of $4,000 or $400,000, what matters is the income you earn and what percentage of your income gets paid to the debt (say 4% if you earn $70,000, for example).
That's why any good financial planner will advise you not to repay your HECS/HELP voluntarily unless you have very little and it can be paid off immediately before approaching a lender, because that's the only way to demonstrate better serviceability and improve your lending capacity.
In any other scenario, you are always better off using cash for other financial goals (removing consumer debt, saving for a deposit, investing).
@muwu: I saw a chart. If you have money in the index for 10 years you have a 99% chance of making money.
People always try to time the markets. Then end up selling at the lows and buying at the highs.
@netjock: This 👆
And to add another benefit to this - not transacting (e.g. buying or selling in an attempt to time the short to medium term volatility in equity valuations) also means not triggering capital gains tax events, which means retaining your gains and augmenting your compounding, which makes up an ever growing majority of your growth the longer you invest.
Been discussed ad nausuem in forums. Not a deal. Just a fact of life.
This isn't 3.9 per cent per annum, this is 3.9 per cent paid off at the time you pay if. If you are going to pay it off this year anyway at tax time (which is 1 month away), it makes sense to pay it off now and not accrue the indexation. Put another way, you can save 3.9 per cent over one month (if you do your tax 1 July), so the effective annual interest rate return would be 12 x 3.9% = 46.8%.
Huh…. this isnt right.
OK. Let me put it another way. If you are on $100K a year, and have a $7000 HECS debt: You can pay off $7000 on 31 May to pay it all off. If you wait until you do your tax return on 1 July, you will have $7273 added to your tax bill to pay off the same debt. You will have paid $273 in interest (3.9%), over one month. If you annualise that rate (to compare to say a home loan rate), it would be 46.8%.
@Champagne Comedy: Why would you randomly 'pay it off' at tax time? If you're eligible, it comes out as PAYG. The question is whether they want to pay it off today or really, keep indexing every year until they pay it off over time.
@ATangk: As i said in my first post, if you are going to pay it off this year anyway (ie. the last year of payment), which you would in my $1000K/$7K example above, you will have to pay it off, either by voluntary repayment on 31 May, or at tax time. In that case, if you pay $7000 off a month early, you will get the $7000 back in your tax refund when you do your tax, or you will have $7273 added to your tax liability.
@Champagne Comedy: But because of PAYG, if you're earning 100k, your HECS debt amount will already be going down as you get paid. Or is that not how it works?
@ATangk: That's not quite how it works. PAYG (tax withholding) is like the government forced saving over the year to make sure you can meet your tax liability when you do your tax return. Your PAYG will include an estimate of how much HECS they estimate you will need to repay this year (eg. in my example above, it will include $7000). Come tax time they will work out how much you owe, and refund or bill you for the difference. Therefore, if you pay the $7000 before it is indexed, they will take that away from your tax liability and you will get a refund. If you don't pay it then, your tax liability will pay off the $7000 and add the $273 in interest, so you might get a tax bill for that much.
@Champagne Comedy: You didn't calculate the opportunity lost with the money being withheld for hecs by your employer
@krisspy: I'm not sure what you quite mean, but the tax withholding by your employer is a separate transaction to paying off your HECS early. If you are confident you will pay your HECS off this year and want to avoid the opportunity cost of the money being withheld, you can ask your employer to reduce the amount of tax withheld each pay.
And why do you think this isn't right?
The interest gets added on in one day so especially if you are in your final year, it's likely worth it to just pay it right before indexation.
Next deal by OP: Pay off your mortgage sooner to save on interest.
Protip: If you're homeless just buy a home!
Don’t do that! They’re bloody expensive.
Probably need to get a good job first.
1 year of interest is not added in one single day.
I have $23K left. This doesn't feel worth it to be paid off, right?
You can get a home loan for less than 3.9% atm. But HECS debt will reduce your borrowing power by exactly your HECS debt amount. If you've got money in a savings account, the maximum you can get from interest is 3% with the new BOQ account, but its probably closer to 1% for other banks. It depends what you're looking to do in the near future.
I've already secured my first investment fortunately so the rest of my savings are just sitting in my offset accounts. The loan interest rates are all lower than 3.9% so I guess the break even is whether or not 3.9% against the $23K is more or less than what I'd be paying in interest extra if I were to take money out from the offset accounts.
Hopefully I'm interpreting this correctly
@tsugnev: It's not comparable because the HECS/HELP repayment is 3.9% this year only, then will be variable thereafter, with long-term averages and central bank policies aiming for CPIs of 2-3%. Compare that to long-term home loan interest averages being closer to ~5-6%, but again highly variable.
That's not to mention that cash in offset is accessible (you still hold it), whereas repaid HECS/HELP is not.
Keep your cash (as far as HECS/HELP is concerned)
But HECS debt will reduce your borrowing power by exactly your HECS debt amount
No, that is not how HECS/HELP affects your lending capacity and it's very important to understand how it does before you make the error of voluntarily repaying a substantial sum of your HECS/HELP.
If it helps I had the same amount and I paid it off using my offset. The pros are:
My borrowing capacity probably went up more than 23k with paying this off, and I can borrow from bank at much less than 3.9% currently.
Tax refund at tax time from however much has been withheld so far.
Peace of mind from ato debt free
More salary each month now.Cons:
I'm 23k poorer in the short term.Appreciate the insight. I was lucky enough to secure my first property earlier this year and so most of my savings are also in an offset account. The interest rates on the loan are less than 3.9% but of course owing for a higher amount. I mentioned it above but I guess the break even is whether or not 3.9% against the $23K is more or less than what I'd be paying in interest extra if I were to take money out from the offset accounts.
Hopefully I'm interpreting this correctly
Another con is your mortgage rate will be more than this 3.9% within twelve months so your effective gain from voluntarily paying down HECS at the expense of keeping that in your offset is debatable at best.
@lordrupertliverpool: I agree it definitely could. On the other hand - You can also argue the next year indexation rate is likely to be 5% or higher (given inflation) which may come earlier than mortgage rates climbing higher than 3.9% so will be worse off again.
@itslittfam: Understood. I estimate that I will only have another year ontop left and then HECS will be cleared so if anything it should be fine to leave it as-is for now. Cheers for the insight mate
I estimate that I will only have another year ontop left and then HECS will be cleared so if anything it should be fine to leave it as-is for now
In which case you may be one of the rare examples of when it may be beneficial to repay voluntarily. A small sum that can be repaid a year in advance will save one years' worth of indexation (when it would have been paid in the upcoming financial year anyway) and provide you with increased serviceability for loan purposes, if buying a home and investing with leverage is desirable for you.
A financial planner will give you the same advice and guide you at this important juncture
@itslittfam: Short-term predictions on inflation aside, if you're taking a bet on whether home loan interest (long term ~5-6%) or CPI (long-term ~2-3%) is going to be greater going forward (especially over the course of a typical 25 year home loan), the very safe money is getting a better return in your offset account. With the added benefit of being accessible (i.e. still your cash and not the governments) to use at your discretion.
A financial planner can advise you on doing the right thing here, and will pay their own fee in a short period when you compare it to making the wrong decision, such as voluntarily repaying your interest-free HECS/HELP.
That's right.
Leave it and amortise your repayments based on your mandatory income-based thresholds, and then only voluntarily repay a small remainder when you project to be in your second-last year of mandatory repayments (just to avoid the last year of indexation and bring forward a year of better cash flow).
Before then, use your cash for better purposes with better returns (pay off consumer debt, accrue a house deposit, invest). Any good financial planner will tell you the same thing.
Please note if you earn below the minimum amount required then you don’t need to repay your HECS debt for the rest of your life. Effectively this could mean a saving of over half a million dollars by the time you retire. And I don’t think the rules surrounding this will change either.
They can change the minimum amount whenever they want like they did 3yrs ago (from 55 to 45k threshold).
When will it drop to 20k, 15k, or 10k?
It's like 2 percent.
Yes. And better yet, your HECS/HELP dies with your estate, so it doesn't need to be cleared by your other assets or inherited by your beneficiaries.
Hopefully this is not applicable to most. If you've invested in tertiary education, you are more likely to be rewarded with higher remuneration and a better capacity to pay off debt.
It's much like how you would consider a pension. If you're doing well and have higher means, you'll do better with superannuation and a self-funded retirement than you will if needing to claim a pension.
your HECS/HELP dies with your estate
Dies with your estate? Your estate doesn’t die…
@MuddyClear: Yeah sure, bad phrasing.
What dies is your ownership of it (your estate) as it transfers to beneficiaries.
This is the chef's kiss gift to us by the Liberal Government. They bait you with lower taxes but then quietly lowered Hecs thresholds in 2019 so now the poor will be paying off that 3.9% boost.
You are paying as little as 1% at a threshold close to $50,000, for a debt that you accrued for a tertiary education, that the government subsidised for you (usually greater than 50%), and packaged into an interest-free loan, with no term length, which is rendered void when your estate is inherited.
Check you privelege!
Oh boy I’d pay off mine… if I could. Prob not going to happen for another 10 years though minimum
Go Fund Me
It is still the cheapest unsecured loan.
So if I pay off my remaining HELP debt. Do I get a refund of what had been witheld/compulsory payments my employer had made throughout this financial year? Does it come back as a lump sum during tax return or something?
Thanks
Yes to both.
When's the last day to transfer this and for it to get processed? Conscious that it's only a few days until 1 June and not sure if a payment today will make the cutoff.
Also the ATO website is down…Took 2 business days for me.
Thanks. Any idea if the reference number changes from year to year? Have previously paid some off, but can't access the ATO portal today and want to put it through before the cutoff.
No idea re ref number since this is the first (and hopefully only) time I make voluntary payment.
Anyone know whether the payment is processed according to the time it was made, or from the time it's received?
Conscious that there are several days lag before the ATO will receive the payment, and we are very close to the deadline.Took 2 business days for me (via bpay). I made it last sunday and i could see it on tuesday evening the updated balance on ATO Website.
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That is my understanding yes.