# HECS debt



## pan (14 January 2010)

simple question 

should I pay it off early or wait it I earn over the threshold?


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## ROE (14 January 2010)

pan said:


> simple question
> 
> should I pay it off early or wait it I earn over the threshold?




Pay off the lum sum save you around 10%-15% discount from my memory so if you got money do it ..can you invest that money and get better than 10-15% after tax?


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## pan (14 January 2010)

I believe it is 20% discount. But HECS is an interest free debt.


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## pan (14 January 2010)

ROE said:


> Pay off the lum sum save you around 10%-15% discount from my memory so if you got money do it ..can you invest that money and get better than 10-15% after tax?




can get a between return putting it in super.. does the govt still match dollar for dollar contributions?


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## JimBob (14 January 2010)

pan said:


> I believe it is 20% discount. But HECS is an interest free debt.




It is interest free, but it still goes up with inflation each year.  If you put off paying it off, the debt will still increase each year.


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## prawn_86 (14 January 2010)

pan said:


> simple question
> 
> should I pay it off early or wait it I earn over the threshold?




Obviously it varies from pewrson to person, but i chose to leave mine



ROE said:


> Pay off the lum sum save you around 10%-15% discount from my memory so if you got money do it ..can you invest that money and get better than 10-15% after tax?




The reasoning for leaving mine was the fact that providing i am earning a return > than inflation, i am putting my money to better use than paying off my HECS debt. If i say 2% (extremely low example) more than inflation per year, it takes 5 years without compounding to save that 10% i would have got the discount for


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## Largesse (14 January 2010)

I will get a 100% discount when I move overseas and never pay it back


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## Hyperion (14 January 2010)

Largesse said:


> I will get a 100% discount when I move overseas and never pay it back




Don't feel any obligation to contribute towards your already highly subsidised education?


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## nunthewiser (14 January 2010)

Largesse said:


> I will get a 100% discount when I move overseas and never pay it back





Thats my cash you nicked ya cheeky bugga


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## prawn_86 (14 January 2010)

Hyperion said:


> Don't feel any obligation to contribute towards your already highly subsidised education?




I dont. I believe that if tertiary education was free and more accesible to more people, it wqould add more value back to the economy in the long run anyway via them paying higher taxes due to (generally) increased earnings for those with degrees


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## pan (14 January 2010)

prawn_86 said:


> Obviously it varies from pewrson to person, but i chose to leave mine
> 
> 
> 
> The reasoning for leaving mine was the fact that providing i am earning a return > than inflation, i am putting my money to better use than paying off my HECS debt. If i say 2% (extremely low example) more than inflation per year, it takes 5 years without compounding to save that 10% i would have got the discount for




But then you have to pay a debt off when you start working. I am moving towards paying it off just because when I eventually get a job i'll be debt free.


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## son of baglimit (14 January 2010)

interesting chat - some quick facts.

- yes it rises in line with CPI, every june 1.
- you dont have to think about it unless your 'adjusted' taxable income exceeds the required threshold - $43+ this FY year....from memory.
       (adjusted being adding back those items like salary sacrifice, rental losses, investment losses etc)
- if you NEVER reach that level of income, once you die the debt dies with you. encourage elderly pensioners to do uni courses - never pay the fees.
- if you do pay $500+ voluntarily, or clear the debt, you get 10% added to your payment as thanks.
- if you do want to clear the debt, either do it before the june 1 CPI, or just before you lodge your return, and youll get your salary contributions back, with that 10% bonus still added to help.


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## MITCH027 (14 January 2010)

You get a 25% discount if you pay back HECS before the census date (while at uni). This is significant, but you might not be able to afford it. Not many people are able to make 25% returns pa. This "return" is also tax free

I will have to pay it off in a lump some at some point over the next couple of years as I want to take on a large mortgage in a couple of years... it will significantly improve my borrowing power

PS. if you never make over $43k, you have wasted 4 years at university


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## Ozymandias (14 January 2010)

prawn_86 said:


> The reasoning for leaving mine was the fact that providing i am earning a return > than inflation, i am putting my money to better use than paying off my HECS debt. If i say 2% (extremely low example) more than inflation per year, it takes 5 years without compounding to save that 10% i would have got the discount for




This is the critical factor here, TIME. Repayment of HECS is fairly slow if you stick with the minimum payments, and if you've still got >24 months to go, you'll likely beat the 10% discount with investments. But you need to do the calculations for yourself with a specific investment in mind. Also bear in mind when you do your calculations, that the 10% discount is _post_ tax. Never forget the tax...

I plan to pay mine off around the 12 month mark, depending on my situation at the time.


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## Ozymandias (14 January 2010)

MITCH027 said:


> You get a 25% discount if you pay back HECS before the census date (while at uni). This is significant, but you might not be able to afford it. Not many people are able to make 25% returns pa.




They don't need to. See my post above for why.



MITCH027 said:


> PS. if you never make over $43k, you have wasted 4 years at university




Now there's a value judgement. Most people who go to uni for say... philosophy, aren't doing it for the money.


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## MITCH027 (14 January 2010)

People who do not go to university for the money won't care what happens with their HECS

The 10% discount is probably not worth making the lump sum payment. 10% return after tax isn't as difficult as 25% is

The 25% discount is more useful. If you start considering compounding interest, etc, it is only fair to then consider the 25% in relative terms also

You save 25% the first semester it is paid. If you hadn't paid this, two semesters later it would've been indexed. Every year after that it gets indexed also. Debt compounds just as investments do (credit cards anybody?)

That being said, not a lot of university students have the capacity to make the entire upfront contribution. Also, having savings available for a rainy day is also important for lots of people. University kids probably want to party also


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## suhm (14 January 2010)

MITCH027 said:


> You get a 25% discount if you pay back HECS before the census date (while at uni). This is significant, but you might not be able to afford it. Not many people are able to make 25% returns pa. This "return" is also tax free
> 
> I will have to pay it off in a lump some at some point over the next couple of years as I want to take on a large mortgage in a couple of years... it will significantly improve my borrowing power
> 
> PS. if you never make over $43k, you have wasted 4 years at university




I have never understood why people pay their hecs fees upfront, it is the cheapest loan you will ever get in your life. 

The discount for upfront payment is only 20% vs 10% if payed as a lump sum later in life and you don't have to pay it if you go overseas.

Just putting your money in high interest savings account has usually given you a return greater than inflation (I think most people here would hope their investment returns could beat inflation) and average weekly wages have also typically increased by more than inflation in the recent past. 

The loan is so cheap I borrowed 10k through os-help which has a 20% surcharge so my HECS debt increased by 12k (10.8k with the discount) instead of using my own money to go study overseas for a year, I would have borrowed more if I could.

Given you are unlikely to start paying off your debt until you start working and it will take you a long time to pay off your debt at the minimum repayments the time value of the money becomes very high. This is especially true the longer you study (I did a 6 year degree and will probably end up paying off the debt in 8-10years) and now that they have increased the fees charged as your loan will spend longer compounding at the inflation rate.


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## suhm (14 January 2010)

also heaven forbid you die, the government doesn't send in the debt collectors looking for their share.  not exactly a scenario I want to entertain though.


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## Hyperion (14 January 2010)

prawn_86 said:


> I dont. I believe that if tertiary education was free and more accesible to more people, it wqould add more value back to the economy in the long run anyway via them paying higher taxes due to (generally) increased earnings for those with degrees





Well if people go overseas after graduating like another poster was suggesting then the Aust gov wouldnt be getting any taxes...


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## Largesse (14 January 2010)

To hyperion,

No for two reasons.
Firstly being when my old man was doing uni, it was all free. 

And secondly, i dont have a second reason.


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## skc (15 January 2010)

You know guys there is a real answer to this question by using some simple calculations. Assume you have $10K HECS debt, and you have $7.5K in cash. Should you take advantage of the 25% discount and pay it off now, or invest the $7.5K?

The debt grows from a base of $10K at say 2% each year on CPI, in 10 years that's $12.2K. with 10% lump sum discount that's $11K.

Your investment grows from a base of $7.5K at say 8% each year (assume term deposit) BEFORE TAX and let's say your marginal tax rate is 30%, it is growing at 5.6% after tax. In 10 years that's 12.9K. So you are better off in this case. 

Repeat calculation with 5 years and you get $11K vs $9.8K. So basically the higher rate of investment return will take time to catch up to debt which is growing at a higher base. So it depends on your future income level and whether you are studying philosophy or medicine.


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## BradK (15 January 2010)

There is a 25% discount upfront... but if you paid upfront, its not really HECS in the sense it is added to your debt. 

The debt lump sum is only 10% now... I paid mine off last July! 

Brad


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## pan (15 January 2010)

I had a quick look over some payment info. Do you receive a discount if you pay off the debt from a previous year or semester? Or is the discount only for future hecs, for example my up and coming semester?


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## dannyjak (15 January 2010)

10% AFTER tax return with NO RISK may be harder to get that you think.

I put in a lump sum into my HECS towards the end of the debt. Best time to do this is in May, before the CPI increase.

Basically dont make extra payments until you are on your last HECS payment for the financial year.

If you have $5000 left, and you know $5000 will come out of your tax return to pay it off, then simply pay appriox $4500 into your debt in May out of your own pocket. You should get a fair chunk of that back in your tax return anyways.

By doing this, you save 10%, and skip the CPI increase.

If you didnt do this, assuming 4% inflation like this year you would be paying $5000 anyways, and still left with $200 debt

By paying $4500, you then become debt free

Hope that makes sense. I didnt account for the tmie value of money from the time you pay in May to the time you do your tax return but I imagine it wouldnt be much. Also didnt take into account opportunity cost of paying 4500 in May as you could potentially invest this somehow and make more money.


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## skc (15 January 2010)

dannyjak said:


> 10% AFTER tax return with NO RISK may be harder to get that you think.
> 
> I put in a lump sum into my HECS towards the end of the debt. Best time to do this is in May, before the CPI increase.
> 
> ...




That's the wrong way to look at it. You need to see it over longer term. It's only a risk free 10% return before tax *for the first year*, but by investing the cash you can earn return year after year.

If this concept doesn't make sense than probably better off paying the loan off.


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## MITCH027 (15 January 2010)

the 10% discount is nearly useless really

think about it - this voluntary contribution is paid from your post-tax take home pay. You have already paid 10%+ tax on it. You getting a 10% discount on it just means you don't pay tax on it

compare this with your compulsory contributions:

this is paid from pre tax

the 25% however is a different story - the (immediate) benefit of it will offset any tax you have already paid on that contribution. This is zero risk. If you think you can outperform that return - remember that you need to put money AT RISK in order to just break even. How confident are you feeling?

Making an extra $300 a month will increase your *borrowing power*. This may help you borrow for investment property, share portfolio, etc

Paying it off is a personal decision. At a psychological level, it may make sense to pay it off (the security of know you are 'debt free')


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## Ozymandias (15 January 2010)

Mitch do you have a HECs debt? Are you making compulsory payments?



MITCH027 said:


> compare this with your compulsory contributions:
> 
> this is paid from pre tax




This is not true. The compulsory payments are on top of your normal tax liability, they're not deductible. Mitch, if you believe otherwise, please provide a link to a document on the ATO website to substantiate this. I'd like this very much as it means I've been overpaying for years!



MITCH027 said:


> the 25% however is a different story - the (immediate) benefit of it will offset any tax you have already paid on that contribution. This is zero risk. If you think you can outperform that return - remember that you need to put money AT RISK in order to just break even. How confident are you feeling?




Very. The average student will go four years from starting study to starting compulsory payments. Given that they probably won't finish paying their debt off for around 4 years, they've got around 8 years to make their 25% after tax. Highly simplified and rough I know, but this illustrates the point that the long time frame beats the discount in most cases.



MITCH027 said:


> Making an extra $300 a month will increase your *borrowing power*. This may help you borrow for investment property, share portfolio, etc




This is a very good point if you're looking to borrow more in the short term!


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## MITCH027 (15 January 2010)

I currently have around $20k in HECS debt

I am not going to pay it off in a lump sum for a couple of years, because as you've said, I am going to need my borrowing power to spike in the short term (in around 3 years). Currently I am making a decent return from trading shares

Absolutely HECS is in addition to general tax. The point I was making however was that HECS is calculated at the same time general income tax is

http://ato.gov.au/individuals/conte...02/008/014/002&mnu=43386&mfp=001/002&st=&cy=1

For example, using the ATO tax calculator:
$100K salary
$8K is HECS
$27.5K in income tax (including levy)
= $64,500 after tax (and your HECS is going down by $8K)

If HECS was post tax, the 8% would've been on $72,500 not $100K

If you had no HECS debt:

$100K salary
$27.5K in income tax (including levy)
=$72,500 after tax

As you can see from this example, HECS is paid pre-tax. This contribution is dollar-for-dollar more efficient than a voluntary contribution which is paid post-tax. The 10% discount is nearly useless as you've paid this from post-tax, you are just getting back what you were taxed. The 25% isn't as useless (but arguably may still be)

Paying off your HECS debt at a $100K salary would allow you to borrow an extra $100K nearly...

As I've mentioned, its a very personal decision whether or not to pay this back. If you are not confident in your investment skills (making 25% + indexation each year), the better option would be taking the 25% discount right? Better than potentially losing money...

PS. I am not making $100K
PS. I am not paying it off in a lump sum at least for a couple of years. I need to increase my borrowing power in the short term
PS. You actually do "feel" HECS coming out of your salary. Its not a minute amount, especially as your salary increases
PS. Its still a personal decision, based on personal circumstances. Non-monetary factors may be more important (peace of mind, good citizens who love the government, etc)


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## suhm (15 January 2010)

72.5k vs 64.5k of after tax money looks like hecs is paid from post tax pay to me.


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## MITCH027 (16 January 2010)

Its not "pre tax" in the sense how "pre tax" is treated in salary packaging arrangements but it is definitely not "post tax". In salary packaging arrangements, you still get hit with FBT anyway...

Continuing on from the previous example:

$100K salary
$8K is HECS
$27.5K in income tax (including levy)
=$64.5K

say you now make a $10K lump sum voluntary contribution
the real value of this towards your HECS debt would be $11K

But you have already paid tax on the $10k you put towards your voluntary contribution

Therefore the post tax equivalent of the $10K would be $15,503 ($10,000 divided by 0.645 - your take home pay before taking out income tax, levy and HECS)

The tax position of the $15,503 is now the same as $8,000 above

So now you've contributed a 'pre-tax' amount of $15,503 to reduce your HECS debt by $11,000

In terms of compulsory payments, you put forward a 'pre-tax of $8,000 to reduce your HECS debt by $8,000

Which is more efficient?

All I'm saying is that the 10% discount is basically useless - the 25% discount actually has arguably value. In terms of the the value of the 25%, it's dependent on how much money (and how quickly) you make after incurring the debt - if you think you are going to be on $43k for 10 years, this would make more sense than if you are going to be on $100k the first year out of uni (not my case unfortunately!)


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## Ozymandias (16 January 2010)

Ok, so we're on the same page, just using different terminology:

The minimum payment that you must make is calculated from your gross (pre tax) income. But it is paid from your net (post tax) income, as per Mitch's example above.


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## sptrawler (1 November 2015)

Ozymandias said:


> Ok, so we're on the same page, just using different terminology:
> 
> The minimum payment that you must make is calculated from your gross (pre tax) income. But it is paid from your net (post tax) income, as per Mitch's example above.




I know it is an old thread, but it is a current issue, that evolves from it.

Don't get too stressed apparently the HECS debt has blown out to $70billion, but hey everyone is ok with that, just keep enrolling for useless courses.


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## Tisme (2 November 2015)

sptrawler said:


> I know it is an old thread, but it is a current issue, that evolves from it.
> 
> Don't get too stressed apparently the HECS debt has blown out to $70billion, but hey everyone is ok with that, just keep enrolling for useless courses.





Until the govt takes the lead and stops promoting and paying people because of higher education diploma outcomes, rather than on merit  and relevance the situation will continue.

The fiefdoms within the public sectors feed themselves on the taxpayer purse with the admission tickets the degrees and personal development courses that mismatch the menial and trivial tasks they are employed to carry out.....tasks a 15 yearold could do, albeit with some flare and innovation thrown in.


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## pixel (2 November 2015)

Tisme said:


> Until the govt takes the lead and stops promoting and paying people because of higher education diploma outcomes, rather than on merit  and relevance the situation will continue.
> 
> The fiefdoms within the public sectors feed themselves on the taxpayer purse with the admission tickets the degrees and personal development courses that mismatch the menial and trivial tasks they are employed to carry out.....tasks a 15 yearold could do, albeit with some flare and innovation thrown in.




*WHAT??? Pay and promote people on merit and ability? What a dangerously revolutionary idea!*

With all the laws against discrimination etc, surely that's got to be unconstitutional. Who would want to enroll in fine arts, social studies, personal development, creative writing? Without a guaranteed career in the Public Service, graduates in those subjects would be forced to join the dole queues or, worse, be degraded to serve at fast food outlets or supermarket check-outs. The Greens can only offer a limited number of well-paid positions that match those qualifications. As a result, none of their HECS debts will ever be repaid, and the GST will have to be raised to 20% at least to compensate for the resulting Budget Black Hole.


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## prawn_86 (2 November 2015)

Trust me,having lived in the US for nearly 3 years now, the HECS system is the envy of petty much every ordinary American I speak with. I would rather 'subsidise' a few unused courses and degrees, than have a for profit system where only the wealthy can afford to get a 'good' (perceived) education and everything is judged on what uni you went to rather than the content of what you studied.

Australia has it very good when it comes to education and if you want to continue to grow as a society, reducing education is not the answer


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## pixel (2 November 2015)

prawn_86 said:


> Trust me,having lived in the US for nearly 3 years now, the HECS system is the envy of petty much every ordinary American I speak with. I would rather 'subsidise' a few unused courses and degrees, than have a for profit system where only the wealthy can afford to get a 'good' (perceived) education and everything is judged on what uni you went to rather than the content of what you studied.
> 
> Australia has it very good when it comes to education and if you want to continue to grow as a society, reducing education is not the answer




No argument there, Prawn 
The issue - and my bugbear - is not the availability of subsidised education. It's the folly of valuing a degree, no matter in which subject, higher than personal ability. An illiterate graduate with an arts degree is still illiterate and should NOT be in the running for a job that a smart tradie could fill much better. It's also not the *content of what you studied* that matters, but the proficiency that you gained and its relevance for the job. An engineering graduate with a "pass" grade may have studied the right thing; but a good welder may be far better suited where quality control matters.

All too often, it's not WHAT you know, but WHOM you know that determines a promotion; especially for the leading jobs: middle and upper management, directorship - our School Tie and Old Boys Club criteria make Australia much closer to the US.


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## SirRumpole (2 November 2015)

The government should finance courses that have short supplies of graduates or a likely to have shortages in the near future, the rest should be subject to a pro rata financing based on the employment rate of current graduates.

eg if there is 80% employment of accounting graduates then the government should fund 80% of the course and the student 20%.

 Government financing of courses like surfing or macrame is absurd, but it happens.


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## Tisme (2 November 2015)

prawn_86 said:


> Trust me,having lived in the US for nearly 3 years now, the HECS system is the envy of petty much every ordinary American I speak with. I would rather 'subsidise' a few unused courses and degrees, than have a for profit system where only the wealthy can afford to get a 'good' (perceived) education and everything is judged on what uni you went to rather than the content of what you studied.
> 
> Australia has it very good when it comes to education and if you want to continue to grow as a society, reducing education is not the answer




It seems the pressure, shame and fear of failure is solved by mass shooting one's peers over there.

I'm with Pixel on the useless degrees. Even the self esteem one would have traditionally derived, by showing off a pic of oneself with a mortar board hat and scroll in hand, has little consequence now foreigners who can't even speak english graduate with honours after paying for the course in cold cash  

Ever wondered where those medical students who pass on a 60% proficiency wind up?


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## doctorj (10 November 2015)

pixel said:


> An illiterate graduate with an arts degree is still illiterate and should NOT be in the running for a job that a smart tradie could fill much better.






pixel said:


> It's also not the content of what you studied[/B] that matters, but the proficiency that you gained and its *relevance for the job*.



Arts degrees get a bad rap.  Some counterpoints...

The founder of Slack has a degree in philosophy.  One of their early key employees studied theatre.  Slack was last worth USD 2.8 billion.
Howard Shultz, the CEO of Starbucks has a degree in Communications
Susan Wojcicki, the CEO of Youtube has a degree in History and Literature
Jack Ma, the founder of Alibaba, has a self-made fortune of more than $25 billion with his degree in English
Peter Thiel has a degree in Philosophy and was a founder of Paypal, one of the first investors in Facebook and has made an absolute fortune investing in other well known companies like LinkedIn, TransferWise, Yelp, Palantir

I think a regulation education with a high relevance to a specific job produces a person with a relatively lower standard deviation of outcomes compared to someone that studies a soft subject.


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