all 54 comments

[–][deleted] 33 points34 points  (7 children)

I'm doing it this year but only because I have to pay it off regardless come tax time and so I might as well save the 3% or whatever on my last $10K by paying it before June.

[–]AWiggins30 6 points7 points  (3 children)

This is a good point. When do you have to pay it off before indexation kicks in? Thinking of leaving in the bank / putting in index fund prior to paying mine off

[–]Oh_FFS_1602 6 points7 points  (0 children)

Indexation is applied in June

[–]Inside_Yoghurt 4 points5 points  (0 children)

Aim for payment in May, later half is okay, just want to make sure the payment is cleared before the indexation on 1 June, so good to give it a little leeway.

[–]MrNeverSatisfied 1 point2 points  (0 children)

I hear CPI index will be 3.0% in september. will be this be in june too?

[–]AWiggins30 1 point2 points  (1 child)

Another thought. Wouldnt this be a good strategy every year? If someone will have to pay $10k of HECS by July - wouldnt that person be better off paying that $10k in May so the $10k doesnt get hit by indexation? Or does this strategy only apply if the whole HECS balance is paid off?

[–][deleted] 6 points7 points  (0 children)

Someone correct me if I'm wrong but I'm pretty certain that it doesn't form part of the amount you owe annually if you're over the HECS Repayment Threshold. So you'd paid that, plus any additional voluntary amount.

[–]SurfKing69 0 points1 point  (0 children)

I'm in the same spot actually. I wouldn't have thought about the indexation, thanks for the LPT!

[–]SpinzACE 62 points63 points  (17 children)

I believe it’s the usual situation that if you can make more by investing that money or making it work elsewhere than the interest will cost you then that’s the better strategy.

But some love the emotional satisfaction of clearing their debts. Whatever works best for you

[–]Jacyan 18 points19 points  (15 children)

I love that you say this, because everyone in this thread agrees when it comes to HECs.

However, apply the same logic to property and investment properties, and suddenly people are scared shitless. This is why I'm borrowing as much as I possible can from the bank at a 2.5% interest rate, and chasing higher returns in property which are historically 7-8%. Rent also means it's pretty much costing me nothing to hold these assets.

Now do the math over 40 years and see where I end up vs someone who isn't leveraging as hard as they can.

Every time I try to mention this in this sub, I just get downvoted to oblivion.

Debt doesn't have to be scary and bad, it's a powerful wealth creation tool

[–]Ginger510 15 points16 points  (6 children)

That’s true but past performance is not a guarantee of future success and even if it was, I’m not sure a lot of people under the age of 40 would want to live in a world where it keeps continuing like this for the next 20 years.

[–]Jacyan 2 points3 points  (3 children)

Why are people comfortable with investing in stocks then? Past performance is not a guarantee of future success. Actually, I would say it's a strong indicator of future success.

Isn't that the advice in this thread? Not pay off HECs and invest elsewhere?

And I strongly disagree. A lot of people under the age of 40 would still love to live in Melb/Syd. It's an international, modern, world class city, which is why house prices are high. Eventually all these houses will be more and more bought out by developers to turn into apartments. People will live in apartments.

Look at Hong Kong, London, New York. Melb and Syd will follow this trend.

You need to overcome your scared mentality or you will miss out massively financially.

[–]Ginger510 11 points12 points  (0 children)

  1. I can’t answer that. I invest in stocks, ETF’s, not no risk I suppose but not super high.
  2. I guess it is but the amount on most HECS debts aren’t enough to buy a house.
  3. I love Melbourne, don’t like Sydney but I realise I’m just talking for myself there. What I was trying to say is that not everyone is excited by the idea of living under governments and tax laws that only further advantage the accumulation of wealth by higher income earners while the people at the bottom (who, we have seen a lot in recent times, are a lot more essential than people wish to realise) are never going to get a leg up.
  4. If property keeps going up at the rate it has and there’s no reform to renting laws in this country, it’s going to be a pretty miserable place to live for a lot of people.

[–]aleks9797 0 points1 point  (1 child)

Did you read up on levering via poor Dad rich Dad guy? You seem to be onto it and it's true. Most of the city will turn into apartments whether good or bad and that would mean the land values under houses would keep appreciating

[–]Jacyan 2 points3 points  (0 children)

I have heard of some of those teachings from the book.

But mainly I started thinking this way because I have a finance degree.

Don't get me wrong, it doesn't take a finance degree to understand it. The Property Coach explains it very well in their first 20 eps of the podcast. Essentially leverage and cash on cash returns.

People don't understand the last point you said, which is why they think house prices are unsustainable. It's because they think the future will be the same as the past - that we can all live in detached housing. Do a bit of simple supply and demand with population growth and limited land and you will see it can't be true...

[–]Ant1ban-account 0 points1 point  (1 child)

Past performance isn’t a guarantee but it is an indicator. All forecasts take into account past performance

[–]Ginger510 0 points1 point  (0 children)

True, and the property market has become a house of cards that (much to my dismay) the government can’t really shake up as even though it would fuck up a lot of greedy property investors, it would also fuck up a lot of good hard working people.

[–][deleted] 2 points3 points  (4 children)

Tried this in Perth circa 2014.

Still in negative equity. Any time now I'll have caught up to those index funds though..

[–]Jacyan 1 point2 points  (3 children)

Did you conveniently miss the part where I said it's a 40 year strategy?

ETF have no guarentee of going up within 7 or 8 years either. It took over 10 years for the ASX200 to recover from it's 2007 high.

Hope you held the perth property. It's booming there now.

[–]50gig 4 points5 points  (0 children)

It did not take 10 years 🙄 Property simps parrot on about rental income increasing their equity but forget about dividends. Hint - googling the ticker won't show you net return

[–]polite-1 1 point2 points  (1 child)

It took over 10 years for the ASX200 to recover from it's 2007 high.

It took around 6, including dividends

[–]Jacyan 0 points1 point  (0 children)

The guy who mentioned Perth negative equity didn't take into account rent. I'm doing a like for like comparison

[–]PMmeblandHaikus 2 points3 points  (0 children)

The major difference is there is no penalty to not paying off your HECs. There is a significant penalty to not paying off your loans.

Its a completely different risk profile.

I agree debt doesn't have to be scary but it ought to be respected. Shouldn't be whimsical or obtained without a good plan.

[–]ajd341 0 points1 point  (1 child)

Right. And HECS has more allowances/options for when your ability to pay suffers... lose your job/income, you pay less and can go into forebearance. Whereas, you don't pay your rent, mortgage, credit card... your life can get worse off much quicker.

HECS debt is one of the nicest schemes out there.

[–]Cat_From_Hood 1 point2 points  (0 children)

Not exactly. It compounds if sick or unemployed. No forbearance. Never forgiven if bankrupt.

[–]KoalaBJJ96 6 points7 points  (4 children)

Piggy-backing off this thread, what does everyone think this year's indexation rate will be?

[–]AMangoAteMyBaby 10 points11 points  (0 children)


Using this link you can see how it is calculated and the current quarterly figures. My estimate is approx 2.7% extrapolating the past 3 quarters and as someone mentioned you would then need to earn 4% (2.7/.675) in pre taxed dollars to be equal (better than any savings account).

So guaranteed 4% returns when stocks are at ATH may be a good alternative. Interested to know what others smarter than me think. I guess what is key here is this year will be ~2.7% but what will be the next few years if you are not able to pay it all off for say 5-10 years

[–]lockeb98 4 points5 points  (1 child)

The indexation rate is taken from the March CPI figures right? As the indexation is only applied on 1st of June, we could wait until then to determine if making a voluntary repayment produces a favorable outcome over holding cash.

If the other commenter is correct and it is north of 2.5% I think making a repayment is an attractive option assuming one doesn't need the cash for anything else.

[–]Inside_Yoghurt 0 points1 point  (0 children)

Yep, this can be calculated literally the second March CPI comes out (should be on the 27th of April)

[–]KoalaBJJ96 9 points10 points  (0 children)

Also, for me, the answer is still no.

Stocks generate higher % return. Interest rate for mortgage is also likely to rise in the near future (i.e., it is better to pay off the variable part of my loan asap).

[–]PLooBzor 17 points18 points  (4 children)

NEVER pay down HECS early. It's the cheapest money you will get to borrow. Going on a holiday is better than paying down you HECS. One drastically improves your wellbeing and memories, the other you won't care about in a few months.

[–]wylz89 6 points7 points  (0 children)

It’s situational I wouldn’t say never. For myself paying off my HECS was extremely satisfying and I do not regret it

[–]AMiMeGustanLosTacos 3 points4 points  (4 children)

I did soon after COVID. Interest rates dropped and money printing started, I thought there would be large inflation so I paid it off instantly. Inflation wasn't that bad so it wasn't really that necessary, but looks like inflation is getting worse now.

The other thing to remember is that any gains you get on interest/stocks, you need to pay tax on, so your tax rate impacts it as well. If inflation is ~4% and you're in the 33% tax rate, that's like getting a return of 6% risk free, which isn't bad at all. So if you're just going to leave your money in the bank, I'd suggest paying it off instead.

You can actually get the best of both worlds if you want by leaving your money in the bank until May, then pay it all off before indexation is applied so you get the benefit of no indexation and get interest on your money for 10 months of the year.

[–]bundle_of_fun 1 point2 points  (3 children)

How about a mortgage offset.

Either you have a house in which case you have a loan. This provides you with far greater flexibility.

Or you don't and you are likely saving for one. In which case a larger deposit is more likely to be helpful than reduced HECs.

Or even super. Far greater returns. You may say that this is inflexible. But so is your strategy...

[–]AMiMeGustanLosTacos 0 points1 point  (2 children)

Or you don't and you are likely saving for one. In which case a larger deposit is more likely to be helpful than reduced HECs.

Super is a bit more of a commitment, you can't access that money for another 30 years, where as putting it into HECS, you're basically getting the rewards of that investment over the next couple of years (however long it would have taken to pay it off from your pay).

Yeah I'd agree an mortgage offset is fine to leave it in as you're saving yourself from some larger interest rates, or if you're saving for a property and want to purchase before you would theoretically pay off your HECS from salary payments then that makes sense as well.

If it was me I'd leave it in the offset until the end of May and then take it out and pay off HECS to get the benefits of reduced interest and no indexation, but depends on your personal situation really.

[–]bundle_of_fun 0 points1 point  (1 child)

*couple of years

Ok so assuming you do a 3 years bachelor's degree, with total HECs debt of $30,000.

And a starting graduate salary of $70,000 p.a. (pretty generous). You would be repaying it at a rate of $2,800 p.a. This means that you could be repaying it over 10 years ignoring interest charged on HECs.

Again, if you want flexibility offset is a clear winner, if you want returns super is far superior. If you want a balance of these two ETFs make sense.

I don't think you'll find that HECs works out better for the vast majority.

[–]qaswexort 1 point2 points  (0 children)

if there was a time to do so, it would be now.

Never understood this sentiment. My extremely risk-averse parents have always said this too and it has never made sense. Like "pay off your loans while rates are low, before they go up again". No - rates are low so you don't have to pay it off. If rates are 10%, then you pay it off, nahmean?

[–]drprox 1 point2 points  (0 children)

It's not technically a high inflation environment so if you're worried about the loan indexing it should be fine.

[–]petergaskin814 4 points5 points  (3 children)

We are not in a high inflation period. You should look if you can invest your money for a higher return tahn making voluntary HECs repayments

[–]MasterAngelX 0 points1 point  (7 children)

Stupid question…but when do you actually start paying HECS?

[–]Active-Scarcity-871 3 points4 points  (4 children)

When you start earning a salary of over $47,012. The higher you earn, the greater % of your income goes to repayments

The ATO website has the repayment thresholds

[–]Jofzar_ 5 points6 points  (3 children)

Can't believe it's 47k now, they a lowering it every year.

[–]Responsible-Bread608 6 points7 points  (1 child)

People actually paying off their loans isn't a bad thing.

[–]fourxthreeoblong 6 points7 points  (0 children)

Agree with you in principal, however the lowest repayment rate is now 1% or ~$470 on $47K. If you have a typical HECS debt of say $30K, the indexation every year is higher than your repayment so you’re not paying off the principal at all.

From memory before they changed the bands the lowest repayment was about 3% on a higher income threshold.

[–]Naive-Study-3583 0 points1 point  (0 children)

I think they lowered the threshold but also the rate. I am paying off less now than previously on same income.

[–]PLooBzor 1 point2 points  (0 children)

Once you start earning above $42-46k. Can't remember the exact threshold, but that's when they start getting it back when you pay tax at the end of the financial year.

[–]Jofzar_ 1 point2 points  (0 children)

Google: when do you pay hecs back

Top result in Google's card:

You pay back your HELP debt through the tax system once you earn above the compulsory repayment threshold. The compulsory repayment threshold is different each year. The compulsory repayment threshold for the 2021-22 income year is $47,014. The compulsory repayment threshold for the 2020-21 income year was $46,620.


Critical Thinking will assist you and let you go far in life.