A burning question for many young Aussies is whether to pay off their HECS debt or to start investing and growing their wealth. This article will outline some of the considerations that should be taken into account before making this decision.
What is HECS?
HECS or the Higher Education Contribution Scheme refers to the Commonwealth Government scheme that assists eligible students to pay their tertiary education fees upfront using a loan. These loans are available to all public universities and some private higher education providers. The loan must be repaid once individuals are receiving an income of or above $46,620 p.a., however, it is also possible to make voluntary payments prior to reaching this income threshold.
To be eligible for a HECS debt you must:
- be studying in a Commonwealth supported place;
- be an Australian citizen; or
- be a New Zealand Special Category Visa holder who meets the long-term residency requirements; or
- be a permanent humanitarian visa holder;
- be enrolled in each unit at your university by the census date;
- meet the relevant HECS-HELP residency requirements; and
- submit a valid Request for Commonwealth support and HECS-HELP form by the census date (or earlier administrative date) to your university.
The repayment threshold rates are outlined below which stipulate the repayments which must be made at different income levels.
|2020-2021 Repayment Threshold||Repayment % Rate|
|$46,620 – $53,826||1.0%|
|$53,827 – $57,055||2.0%|
|$57,056 – $60,479||2.5%|
|$60,480 – $64,108||3.0%|
|$64,109 – $67,954||3.5%|
|$67,955 – $72,031||4.0%|
|$72,032 – $76,354||4.5%|
|$76,355 – $80,935||5.0%|
|$80,936 – $85,792||5.5%|
|$85,793 – $90,939||6.0%|
|$90,940 – $96,396||6.5%|
|$96,397 – $102,179||7.0%|
|$102,180 – $108,309||7.5%|
|$108,310 – $114,707||8.0%|
|$114,708 – $121,698||8.5%|
|$121,699 – $128,999||9.0%|
|$129,000 – $136,739||9.5%|
|$136,740 and above||10.0%|
The table above outlines the repayments required for different repayment incomes (RI). This level of income is different to your taxable income as it takes into account:
- your taxable income for an income year, plus
- your total net investment losses, plus
- any total reportable fringe benefit amounts shown on your Income Statement; plus
- reportable super contributions; and
- any exempt foreign employment income from the current income year
The main benefit of having a HECS debt is that is it cheap. HECS loans, unlike other forms of debt, incur no interest. However, the amount owed does increase over time as it is indexed to inflation which is measured by the consumer price index (CPI). To read more about inflation, click here.
Should I pay it back or invest?
There are some key considerations that should be taken into account when making this choice. It is a good idea to model what position you would be in if you were to pay off your HECS debt compared to investing your spare cash. This involves looking at the interest rates associated with particular loans. Interest rates of more than 5% are usually seen as ‘bad debts’ that should be paid off sooner rather than later. To read more about whether to invest or pay down your debt, click here.
If you compare this to a diversified investment portfolio that has historically returned 6-8% p.a. over the past 10 years, it appears that this is a more favourable option to generate higher returns. However, it must be noted that investing in the stock market is a risky activity and that past performance is not necessarily indicative of future performance. To read more about the benefits of regularly investing, click here.
The tax implications of this choice also need to be considered. If you choose to invest your cash and you generate a return, this will trigger a CGT event and you will have to pay tax on any capital gains you receive. Whereas, paying off debt is a tax-free exercise that may help to reduce the financial stress often associated with debt. To read more about CGT, click here. Therefore, this highlights the importance of considering the different factors prior to making this choice.
Another factor in making this decision is the upfront discount which was reinstated in January 2021. This provides students with a 10% discount if they make upfront payments of $500 or more for units of study with a census date on or after January 1, 2021. However, this does not extend to individuals paying off existing debt and is only available for current students.
In making this decision it is also important to factor in your current income levels and expenditure. This is where a budgeting plan can be useful as it will allow you to understand how much cash you have leftover once you have covered your cost of living and any other financial requirements you may have. If you would like to receive a budgeting excel template, click here.
Before making any financial decisions it is important to consider your individual needs and financial objectives as well as your income and assets and any expenses or other debts you may be financing. If you require assistance in structuring your current levels of debt or would like to begin your investment journey, please click here to organise a complimentary 20-minute discussion with an EPG Wealth adviser.
This information is purely factual in nature. Please do not rely on this information to make any financial decisions as this information has not been tailored to your personal. circumstances. If you would like financial product advice or services please let me know and I will set up an appointment for you. Any advice in this email is of a general nature only and has not been tailored to your personal objectives, financial situation and needs. Before acting on this advice, you should consider whether it is appropriate having regards to your personal objectives, financial situation and needs. Before making a decision to acquire a financial product, you should obtain and read a Product Disclosure Statement (PDS) relating to that product, it is important for you to consider these matters and to seek appropriate advice. The material contained in this email is based on information received in good faith from third party sources, and on our understanding of legislation and Government press releases at the date of publication, which are believed to be reliable and accurate. Past performance is not a reliable guide to future returns. Members of the IOOF group of companies (IOOF Group), associated employees or agents may have an interest in or receive monetary or other benefits from the financial products and services mentioned in this email. The Licensee is part of the IOOF Group, and we may recommend financial products issued by companies within the IOOF Group.
<a href=”https://www.freepik.com/photos/business”>Business photo created by cookie_studio – www.freepik.com</a>