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.

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?

Related Posts:

• Types Of Super Contributions
  Super is quite a complex topic. However it is a topic which we all need to understand as it has a direct impact on...

Topics: Saving Money |

2 Responses to “Should You Be Paying off Your HECS Debt Early?”

1. louise Says:
   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.

2. Sandy Naidu Says:
   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.

Comments

Name (required)

Mail (will not be published) (required)

Website

« Five Tips To Recession Proof Yourself | Home | Rental Yields Provide Little Comfort To Landlords »