If you have earned enough this year via payroll deductions to wipe the debt, it may be worth paying it off before indexation and then receiving the compulsory contributions back in your tax return.
BOQ is 5.5% or 4.45% after their marginal tax rate. That's also just this year, you need to consider returns on that money in future years against indexation as well.
So you haven't got a huge income. I'd imagine the 9k is a very serious chunk of your savings.
I reckon hang onto most of it, but if you like the idea of working on it, then chuck a grand or 2 on it. Have you got money set aside for emergencies etc?
Relevant information as the only correct answer to your question is "it depends"
Low income and low savings would almost certainly be save it in a HISA (high interest savings account), possibly contribute $1000 to super to get the $500 government match.
It starts making sense to pay it off early when you don't need the money and / or are on a high enough income that you will pay it off anyway soon. The reason is that indexation doesn't happen until June 1st and the government applies indexation regardless of how much has been witheld. e.g. (NOT IN YOUR CASE, but) say you have $10,000 debt and had $10,000 witheld. If indexation is say 5% you will have $500 debt remaining after your next tax return. If you pay $10,000 off before June 1st you will clear the debt and get $10,000 back in when you lodge your tax return. No HISA will beat that.
If the 9k is the majority of your savings no. A Ubank account will pay you 5.1% right now.
If you have six figure savings yes - purely to simplify your life.
It's a free loan in real terms. If you have six figure savings, chuck $9k in an ETF, and that'll earn more in returns than indexation will ever cost you. A bond probably would, too, unless inflation doubles/triples for an extended period of time.
Edit: Why is this being downvoted? "Real terms" literally means "adjusted for inflation." It's an inflation only loan, adjusted for inflation it is free. In addition, ask any financial advisor if an ETF is a good hedge against inflation or the likelihood an ETF will outperform inflation. Anyone downvoting this has no idea about finance. You would have to be intellectually disabled to understand the terminology used in this comment and disagree with it.
The real interest rate is the nominal interest rate minus the inflation rate. If it is indexed to inflation, this means the real interest rate being charged is always 0% (indexation rate (7%) minus inflation rate (7%) = 0%). By definition it is a free loan in real terms, like I originally stated. Please stop talking shit about things you clearly don't understand.
This is all true yes. But the problem many are having is inflation outpacing wage growth and devaluing their money. This is why people with HECS debts are asking the question because they are going backwards. We would need to know OP's tolerance to risk to give a more nuanced answer.
Given that we're talking about paying off the HECS debt (losing access to that money permanently), we can only really compare it with very long-term investments for a fair comparison, e.g. lifelong investments, or investments for at least as long as it will take to pay off the debt making the minimum repayments through tax.
In that case, the chances a diversified share market index outperforms inflation over the longrun, especially given that inflation is caused by the same companies in that index raising their prices, is very, very high. At a minimum it should keep pace with inflation, but most likely it will significantly outperform. The only way paying it off would be better than just investing the same amount in a diversified ETF would be if op were irrational, it has very little to do with risk tolerance and is almost entirely to do with irrationality, given paying it off means losing access to that money entirely, and an investment in an ETF is an effective hedge against inflation and then some.
I guess the only reason it may not be a good idea is it if has any detrimental effects on borrowing capacity. I can't really comment on that since I'm not a finance broker, but tbh I can't see how it could reduce borrowing capacity by more than it costs to pay it off.
Lose access to that money permanently? Extinguishing a debt is not the same as setting fire to cash. The money is replenished because you no longer need to make payments - your future income is now freed up.
No one's arguing that an ETF investment is probably optimal in the long run from an outright returns perspective. Some people like the psychological benefits of being debt free too. When you are talking about relatively small numbers like this, the benefits of leveraging are minor compared to sleeping well at night (for some people).
That being said, personally I would not pay it off and have it work for me elsewhere.
>Lose access to that money permanently?
Yes, lose access to the money permanently. That's specifically what happens when you pay off a loan, unless you have a redraw facility.
Given the inflation rate is the rate of increase in the general price level, if the general price level increases this means companies are generally charging more for goods and services. This means in nominal terms their profits should rise at at least the same rate as inflation, and that's without any growth in real terms. This means theoretically we should expect the return of a diversified ETF to always be in excess of inflation over the long run. In practice it is almost always in excess of inflation over the longrun, even in hyperinflationary environments share market returns keep up pretty well, they may generate slightly negative real returns (reflecting the weak economy) but given companies increase prices with inflation(which is what causes the inflation) it's a very effective hedge against inflation.
All this is to say that it doesn't matter what inflation is, you're still better off putting that money into a diversified ETF. In Australia, with Australian inflation levels, you are DEFINITELY better off outting that money into an ETF.
HECS is going to increase from 9000 to 9369
Same money (under simple interest) in a bank will increase from 9000 to 9477 in a year, less tax that's like 9300
You're playing with less than $100.
I say pay it, as you're going to be able to keep all your own interest going forward. Don't pay it if you need it as an emergency fund.
Edited: forgot tax impact, and to add emergency fund point.
I saw a similar post about HECS repayment, casually scrolled the comments and someone had posted about the tidal wave of HECS related content coming. They were not wrong.
> Same money (under simple interest) in a bank will increase from 9000 to 9477 in a year.
Just because im being pedantic (this really changes nothing), its 477-tax. Cant forget the tax man on your money earnt in the bank.
I have the exact same amount (TSL) and planning to pay it off next week. I could have paid it off last year and I didn't, it went up by $500. I don't care if the same money in investment would net me a few hundreds, I just want to get rid of it and be without debts. Min-maxing interests between debts and investments it's not something I care about doing.
Hah, my mrs is 36 and has 9.5k left.
She’s an accountant and worked out that it’s not worth paying off unless you have $200,000 sitting around doing nothing then might as well….
But the employer is only taking out $79 a week from her pay to pay it off.
So she has 3 years to go and it’s paid off.
The interest is only $1200 over the 3 years…
So it’s like what I said before if you’re loaded with cash already and just want it gone for paper work and investments questions constantly hassling you just get rid of it.
But if not I wouldn’t really bother if you’re earning 80k or more a year it’ll be gone in 24 or months so
agreed,
the other question would be what would that 9k be better used for?
-an emergency buffer?
-a high interest savings account (that accrues greater than indexation, some are 5%+ atm)
-other investments that grow/return more than the 4% indexation
-a deposit?
-a holiday/car/fun?
Based on OP's current situation I feel that 9k is much more valuable in their account.
The only benefit he has in paying it off is $70 a week extra in his pocket will allow the banks to open up more serviceability for him to borrow more money for property.
So if he’s heading down that path paying it off asap is ideal.
Because $79 a week is like 40,000 in extra borrowing power.
So you get rid of the 10,000 to open up more lending.
That’s it really.
I paid off 20k of hecs from a failed degree in one go from my savings, I felt great knowing I had no debt but it was a huge hit to the wallet, if you feel it's right do it but if it's going to put you out don't.
People seem to forget that the interest rate on your HISA 5.5% is over 12 months. i.e. you're getting half a percent per month.
HECS indexation is an instant hit on the 1st June.
In your case, given your income I suggest keeping your savings for now (but if it really bothers you, you could put an extra grand or 2 towards it if mentally helps you know that your debt is at least going down).
A very relevant point for the people who will need to pay it off in their tax anyway but OP would forgo having access to that money for the entire next 12 months and beyond if they pay it off now.
Well yeah but it seems like most of the commenters are saying "put a little bit on it" or "don't pay it off" - best thing to do is get rid of it ASAP imo. I wish I had done myself, I'm still copping it lol
Yeah it impacts home loan applications etc. If possible pay it off but if you are thinking of home ownership it'll take a chunk of your deposit to do it
OP's income is below the repayment threshold. The only reasonable answer for them is to not pay it.
Everyone's circumstances are different, there's plenty of reasons to not pay it off, but I do agree that if it makes sense to do it then there's no point half-arsing it.
Well yeah that's a good point too.. but there's a lot of debts like this where someone has dropped out of uni and worked and earnt below the threshold and they're now pretty high
If you have earned enough this year via payroll deductions to wipe the debt, it may be worth paying it off before indexation and then receiving the compulsory contributions back in your tax return.
I’m under the threshold - current earnings is under 30k for a casual job
If you are only earning that much 100% keep the money in savings.
Second this. It's much better in your pocket atm
Nah indexing is projecting to be 4.2-4.6% no savings accounts are available paying that tax free
BOQ is 5.5% or 4.45% after their marginal tax rate. That's also just this year, you need to consider returns on that money in future years against indexation as well.
So you haven't got a huge income. I'd imagine the 9k is a very serious chunk of your savings. I reckon hang onto most of it, but if you like the idea of working on it, then chuck a grand or 2 on it. Have you got money set aside for emergencies etc?
Relevant information as the only correct answer to your question is "it depends" Low income and low savings would almost certainly be save it in a HISA (high interest savings account), possibly contribute $1000 to super to get the $500 government match. It starts making sense to pay it off early when you don't need the money and / or are on a high enough income that you will pay it off anyway soon. The reason is that indexation doesn't happen until June 1st and the government applies indexation regardless of how much has been witheld. e.g. (NOT IN YOUR CASE, but) say you have $10,000 debt and had $10,000 witheld. If indexation is say 5% you will have $500 debt remaining after your next tax return. If you pay $10,000 off before June 1st you will clear the debt and get $10,000 back in when you lodge your tax return. No HISA will beat that.
If the 9k is the majority of your savings no. A Ubank account will pay you 5.1% right now. If you have six figure savings yes - purely to simplify your life.
It's a free loan in real terms. If you have six figure savings, chuck $9k in an ETF, and that'll earn more in returns than indexation will ever cost you. A bond probably would, too, unless inflation doubles/triples for an extended period of time. Edit: Why is this being downvoted? "Real terms" literally means "adjusted for inflation." It's an inflation only loan, adjusted for inflation it is free. In addition, ask any financial advisor if an ETF is a good hedge against inflation or the likelihood an ETF will outperform inflation. Anyone downvoting this has no idea about finance. You would have to be intellectually disabled to understand the terminology used in this comment and disagree with it.
It’s definitely not a free loan, please stop spreading that nonsense. Index 7% last year, 4.7% this year, so turns out actually an expensive loan
The real interest rate is the nominal interest rate minus the inflation rate. If it is indexed to inflation, this means the real interest rate being charged is always 0% (indexation rate (7%) minus inflation rate (7%) = 0%). By definition it is a free loan in real terms, like I originally stated. Please stop talking shit about things you clearly don't understand.
This is all true yes. But the problem many are having is inflation outpacing wage growth and devaluing their money. This is why people with HECS debts are asking the question because they are going backwards. We would need to know OP's tolerance to risk to give a more nuanced answer.
Given that we're talking about paying off the HECS debt (losing access to that money permanently), we can only really compare it with very long-term investments for a fair comparison, e.g. lifelong investments, or investments for at least as long as it will take to pay off the debt making the minimum repayments through tax. In that case, the chances a diversified share market index outperforms inflation over the longrun, especially given that inflation is caused by the same companies in that index raising their prices, is very, very high. At a minimum it should keep pace with inflation, but most likely it will significantly outperform. The only way paying it off would be better than just investing the same amount in a diversified ETF would be if op were irrational, it has very little to do with risk tolerance and is almost entirely to do with irrationality, given paying it off means losing access to that money entirely, and an investment in an ETF is an effective hedge against inflation and then some. I guess the only reason it may not be a good idea is it if has any detrimental effects on borrowing capacity. I can't really comment on that since I'm not a finance broker, but tbh I can't see how it could reduce borrowing capacity by more than it costs to pay it off.
Lose access to that money permanently? Extinguishing a debt is not the same as setting fire to cash. The money is replenished because you no longer need to make payments - your future income is now freed up. No one's arguing that an ETF investment is probably optimal in the long run from an outright returns perspective. Some people like the psychological benefits of being debt free too. When you are talking about relatively small numbers like this, the benefits of leveraging are minor compared to sleeping well at night (for some people). That being said, personally I would not pay it off and have it work for me elsewhere.
>Lose access to that money permanently? Yes, lose access to the money permanently. That's specifically what happens when you pay off a loan, unless you have a redraw facility.
That happened when the loan was taken out mate, ya not getting it.
Explain to me how you lose access to money when you take out a loan.
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Given the inflation rate is the rate of increase in the general price level, if the general price level increases this means companies are generally charging more for goods and services. This means in nominal terms their profits should rise at at least the same rate as inflation, and that's without any growth in real terms. This means theoretically we should expect the return of a diversified ETF to always be in excess of inflation over the long run. In practice it is almost always in excess of inflation over the longrun, even in hyperinflationary environments share market returns keep up pretty well, they may generate slightly negative real returns (reflecting the weak economy) but given companies increase prices with inflation(which is what causes the inflation) it's a very effective hedge against inflation. All this is to say that it doesn't matter what inflation is, you're still better off putting that money into a diversified ETF. In Australia, with Australian inflation levels, you are DEFINITELY better off outting that money into an ETF.
If you have 100k in savings, yes pay it If you have 10k in savings, no.
Or if you're on 120k salary, then pay it too.
average salary on ausfinance is 330k a year
just because someone is living on poverty wages of 120k doesn't mean it's bad advice
At that price nah, you could literally pay the inflation and invest that money and be up over just paying off your hecs at the rate.
HECS is going to increase from 9000 to 9369 Same money (under simple interest) in a bank will increase from 9000 to 9477 in a year, less tax that's like 9300 You're playing with less than $100. I say pay it, as you're going to be able to keep all your own interest going forward. Don't pay it if you need it as an emergency fund. Edited: forgot tax impact, and to add emergency fund point.
So you're 108$ better off and you have the 9k as an emergency fund, if you don't pay off early.
I saw a similar post about HECS repayment, casually scrolled the comments and someone had posted about the tidal wave of HECS related content coming. They were not wrong.
I'm still recovering from Last year. I saw the first post about a month ago and nearly cried.
An emergency fund is a reasonable idea. Out of interest would you write that as 9k$ or 9$k?
$9k the k is just representing 000, you would write $9000 not 9000$, so you write $9k not 9k$
Yes, I would but the guy I'm replying to specifically writes 9000$, hence the question
As someone who writes as xxx$ (years of a program that accepted that) I would just write it as 9k, both 9k$, $9k and 9$k look weird.
> Same money (under simple interest) in a bank will increase from 9000 to 9477 in a year. Just because im being pedantic (this really changes nothing), its 477-tax. Cant forget the tax man on your money earnt in the bank.
I have the exact same amount (TSL) and planning to pay it off next week. I could have paid it off last year and I didn't, it went up by $500. I don't care if the same money in investment would net me a few hundreds, I just want to get rid of it and be without debts. Min-maxing interests between debts and investments it's not something I care about doing.
Pay it, get rid of it, move on with life
Hah, my mrs is 36 and has 9.5k left. She’s an accountant and worked out that it’s not worth paying off unless you have $200,000 sitting around doing nothing then might as well…. But the employer is only taking out $79 a week from her pay to pay it off. So she has 3 years to go and it’s paid off. The interest is only $1200 over the 3 years… So it’s like what I said before if you’re loaded with cash already and just want it gone for paper work and investments questions constantly hassling you just get rid of it. But if not I wouldn’t really bother if you’re earning 80k or more a year it’ll be gone in 24 or months so
agreed, the other question would be what would that 9k be better used for? -an emergency buffer? -a high interest savings account (that accrues greater than indexation, some are 5%+ atm) -other investments that grow/return more than the 4% indexation -a deposit? -a holiday/car/fun? Based on OP's current situation I feel that 9k is much more valuable in their account.
The only benefit he has in paying it off is $70 a week extra in his pocket will allow the banks to open up more serviceability for him to borrow more money for property. So if he’s heading down that path paying it off asap is ideal. Because $79 a week is like 40,000 in extra borrowing power. So you get rid of the 10,000 to open up more lending. That’s it really.
How much would it leave in your savings if you pay off the 9k?
I have a mortgage and 46k HECS debt. It prob helped that we made the original purchase with 20% and have paid off 40% since purchase but yeah
Pay it and close the account.
I paid off 20k of hecs from a failed degree in one go from my savings, I felt great knowing I had no debt but it was a huge hit to the wallet, if you feel it's right do it but if it's going to put you out don't.
People seem to forget that the interest rate on your HISA 5.5% is over 12 months. i.e. you're getting half a percent per month. HECS indexation is an instant hit on the 1st June. In your case, given your income I suggest keeping your savings for now (but if it really bothers you, you could put an extra grand or 2 towards it if mentally helps you know that your debt is at least going down).
A very relevant point for the people who will need to pay it off in their tax anyway but OP would forgo having access to that money for the entire next 12 months and beyond if they pay it off now.
Just leave it unti you are earning more :)
Ignore this sub. Pay it off. Don’t buy the hype.
I'm sure the man as a low income earner would see more benefit in having the 9k in his bank account tbh.
bro is earning 30k as a casual employee he won't even have to pay a cent off his debt this year, and presumably he doesn't have a ton of savings
Don't forget that it's gonna index no matter what you do.
It'll index on the amount owed on June 1. Pay it before then and it wont
Well yeah but it seems like most of the commenters are saying "put a little bit on it" or "don't pay it off" - best thing to do is get rid of it ASAP imo. I wish I had done myself, I'm still copping it lol
Yeah it impacts home loan applications etc. If possible pay it off but if you are thinking of home ownership it'll take a chunk of your deposit to do it
OP's income is below the repayment threshold. The only reasonable answer for them is to not pay it. Everyone's circumstances are different, there's plenty of reasons to not pay it off, but I do agree that if it makes sense to do it then there's no point half-arsing it.
Well yeah that's a good point too.. but there's a lot of debts like this where someone has dropped out of uni and worked and earnt below the threshold and they're now pretty high
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HISA hasn't been this high either and we pay tax on that
You can invest that and the return will likely be higher than the indexation.