Should You Be Paying off Your HECS Debt Early?
By Sandy Naidu | August 9, 2008
Young people today are buying their first property much later in life. They spend their initial working years repaying their debts - HECS (HELP) debt being one of them. Paying off credit card debts, phone bills and car loan is one thing but should you be paying off your HECS debt before you start investing into assets (be it property or shares).
Why You Should Payoff HECS - HELP Debt Early
- Psychological Boost: Clearing off any debt is a good feeling. If you have HECS debt accumulated, you might feel that the sooner you can get rid of it the sooner you can start focusing on investing.
- Government gives you a generous discount of 20% if you pay off your debt upfront.
It is highly unlikely that many students will have this amount of cash with them - but lets just assume that they do, then they might be tempted by this huge 20% discount. - If you make a voluntary payment of $500 or more than the government gives you a 10% bonus (so they contribute 10% of your contributions - so a contribution of $500 becomes $550). This might tempt people to make more and more voluntary contributions.
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Why You Should Not Be Paying Off HECS Debt Early
- HECS debt is interest free. Irrespective of however long it might take you to pay it off, no interest will be charged. The outstanding amount increases in line with inflation (debt is indexed for inflation). It can be argued that if there is a huge rise in inflation, then your outstanding balance will also increase by a huge amount. But whats missing in that argument is that along with inflation your future salary will also increase.
- Once you join the workforce, you will start paying HECS installments only after your salary reaches a certain threshold. What if you pay off your HECS upfront (while you are still studying) and your salary when you join the workforce is below this threshold.
- Rather than paying upfront, you can use that money to invest in property/super/shares.
- Some might be tempted to borrow and pay it off just so that they can make use of the discounts offered by the Government. This does not make any financial sense - You are basically borrowing at a high interest rate to repay an interest-free loan.
I personally feel the arguments for not paying it off early far outweighs the reasons for paying it off early. I like the idea of voluntary contributions. When you do have some spare money (more than $500) make a voluntary contribution. Otherwise don’t let HECS debt bother you too much.
You should not use this debt as an excuse for not buying property either. Just think you are being taxed at a slightly higher rate for a few years. This debt will clear off in its own time - Meanwhile concentrate on saving for your future.
What do you think…Do you agree with my viewpoint or do you have a different one…Would like to know where you stand on this?
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8 Responses to “Should You Be Paying off Your HECS Debt Early?”
Comments
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August 10th, 2008 at 5:32 pm
I would never pay my HECs debt out early. There are no advantages to it the way the debt is structured, it’s simply an extra tax at a very low rate. With smart tax planning you can avoid paying out a lot for HECs. I graduated almost 5 years ago and last year was the first year I paid any. It is interest free, it is linked to how much you earn, and on death it is wiped out.I can’t see any advantages to paying it out early myself.
August 10th, 2008 at 7:49 pm
I agree with your idea strategy…And btw I love your blog too. It is a very interesting read.
May 13th, 2009 at 6:30 am
Hey Guys,
Here’s a hypothetical for you….
Lets say you do a degree then take a year off then do another full degree and accrue a total HECS debt of $40k. For arguments sake lets say you earn a really low wage your whole life and by the time you retire you still owe $10k. At this point you will not earn more than the threshold (assume no assets) - so what happens to this debt/
Accumulates throughout retirement until you die?
or
If you tried to take out a lump sum from your super would / could the government take that owed out of your lump sum payment (without your permission)?
I know it’s a random question but I like to know the ins and outs of these things, and my father has a big uni debt still (did it later in life etc) and is planning on retiring next year.
Thankyou.
May 17th, 2009 at 12:37 pm
I agree with you. However, don’t invest in property since houses tend to have no innovation and hence have the same real rental rate (inflation adjusted) and therefore have lower rate of growth than shares. Rather, investing in companies or shares is better because they can improve their profitability by making better products and hence their stock price goes up. But companies can make bad products too, so risk is higher.
May 29th, 2009 at 1:57 am
Damon don’t take my word for it - please check with financial planning professionals - Having said that here is my understanding - I dont think it comes out of super. If you never pay and die, it gets deducted from your estate.
June 22nd, 2009 at 11:31 pm
Don’t be fooled. A HECS debt is like any other debt. When you die, it will be paid out of your estate. It doesn’t just ‘disappear’. If you are putting it off, wishing it will go away, just make sure you have enough in your life insurance or super fund to pay it out in full.
June 23rd, 2009 at 3:24 pm
Sandy, Damon:
Compulsory repayments only occur if you earn income above $40000, roughly (indexed each year). If you are drawing more than $40k from superannuation before turning 60, you will need to make compulsory HELP repayments. Once you turn 60, this money is tax-free and therefore you can draw at will and not have any ‘income’ to tax.
On the sad occasion of your passing, the Government simply cancels the debt.
As an example, my brother has moved to London and is taxed in the U.K., not in Australia. Therefore he has no ‘income’ here and as such does not pay off his HECS-HELP debt at all (and will never need to if he doesn’t return).
August 4th, 2009 at 1:28 am
From ATO website:
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What happens to my debt if I die?
If you die, your trustee or executor should lodge all outstanding tax returns up to the date of death. Any compulsory repayment included on an income tax notice of assessment relating to the period prior to the date of death must be paid from your estate, but the remainder of your debt is cancelled. Neither your family nor the trustee is required to pay the remainder of your accumulated HECS or HELP debt.
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Crystal clear!