HECS v mortgage

[Duffa]

Ok, I know this has nothing to do with flying but my head is in a tail-spin.
My child has a HECS/HELP debt of $11,000.
Annual salary $100,000
A mortgage at 5.1% with more than $50,000 in an offset account.

HECS debt going up by indexation of 7.1% on June 1st

Pay off the HECS from the mortgage offset account?

They need after-tax money to pay off the mortgage but is the HECS debt pre or post tax?

Please help...... My sleep tonight, depends on it HAHAHAHA

D

 

[Forg]

HECS is similarly post-tax according to Mr Google.

IMHO pay the higher-rate thing off before the lower-rate thing. If they’ve got nearly 5x the total HECS owing in the offset account, I’d be tempted to just get rid of that debt & be done with it … my opinion, not informed financial advice.

 

[justinbrett]

HECS is definitely post tax (thankfully been many years since I've had to worry about that)

I'm no financial advisor - but don't confuse interest with indexation.

11K out of your mortgage now will compound for years and years, costing far more than 11K

HECS doesn't have to be paid back at once, only the minimum rate - and it's indexed with inflation. So even though it's going up by 7%, the purchasing power of that money pre and post is the same (at least theoretically).

Do the sums carefully - but I reckon you find the 5% on the mortgage will give a better result than the HECS.

 

[mrsterryn]

Not financial advice at all
I think with having only the drawdown as a debt to pile money into would be less stressful than having the annoying HECS
For $11,000 I would want it gone. Drawn down can have money go in and sit until needed taking off interest . Then used if needed

 

[UP4014]

Get rid of the HECS.

 

[daft009]

How quick could S/he save the $11k again if it was used to pay off HECS debt?

 

[dajop]

If the debt was much larger, the bet in paying off now would be that inflation (as reflected by the indexation) would remain higher than interest.

However as the HECS debt is close to being repaid (with $7000 payment due this year anyway ) it seems to make sense to pay off now in full.

 

[CaptainCurtis]

However as the HECS debt is close to being repaid (with $7000 payment due this year anyway ) it seems to make sense to pay off now in full.

This is the answer. HECS is very sneaky in that indexation takes place before weekly/fortnightly/monthly contributions through payroll are allocated to the debt (which only happens when you lodge your tax return). Pay off the HECS debt now, and lodge the tax return in July to get a refund for excess tax paid.

 

[There'sOnlyOneJimmy]

This is the answer. HECS is very sneaky in that indexation takes place before weekly/fortnightly/monthly contributions through payroll are allocated to the debt (which only happens when you lodge your tax return). Pay off the HECS debt now, and lodge the tax return in July to get a refund for excess tax paid.

If I recall correctly, the indexation bump happens on 1 JUNE, so if there’s going to be a voluntary payment made, it should be done before then.

 

[justinbrett]

The thing to remember is that inflation is likely to be back down to 3% within a year or so; whereas interest could well increase further and almost certainly be more than inflation. If that occurs (interest stays the same), you'd break even next year, and be worse off thereafter.

Then again, as much as 7% sounds scary, it's only $770, so this is hardly life or death

 

[Duffa]

If she leaves the debt in HECS it will rise by 7.1% on June 1st
If she pays it out of the offset account the mortgage owing will rise by 5.1% over the next 12 months.
She could pay back the offset account over the next few months I suppose, and certainly within 12. So probably better off paying HECS.

 

[Duffa]

Then again, as much as 7% sounds scary, it's only $770, so this is hardly life or death

I beg your pardon!
That is a very large amount of smashed avocado Saturday breakfasts !!!

 

[dajop]

The thing to remember is that inflation is likely to be back down to 3% within a year or so; whereas interest could well increase further and almost certainly be more than inflation. If that occurs (interest stays the same), you'd break even next year, and be worse off thereafter.

Then again, as much as 7% sounds scary, it's only $770, so this is hardly life or death

But we’re not talking a multi year strategy here, at most it’s what 18 months? Someone on $100k is going to have to pay off $7000 over the course of the year anyway.

 

[bussyboy]

However as the HECS debt is close to being repaid (with $7000 payment due this year anyway ) it seems to make sense to pay off now in full.

THIS.

Presuming the employer knows the HELP debt exists, the wages during the course of the year would have had 7% extra tax withheld each pay anyway - this will then effectively form part of any refund due from the 2023 tax return; put the tax refund back into offset account in a few months time.

 

[justinbrett]

But we’re not talking a multi year strategy here, at most it’s what 18 months? Someone on $100k is going to have to pay off $7000 over the course of the year anyway.

Only if the 11K goes straight back in to the home loan on top of normal repayments.

Otherwise that 11K deficit will easily blow out to more than the $770 savings over the life of the loan.

THIS.

Presuming the employer knows the HELP debt exists, the wages during the course of the year would have had 7% extra tax withheld each pay anyway - this will then effectively form part of any refund due from the 2023 tax return; put the tax refund back into offset account in a few months time.

Yep, but even if the 7K is paid back, the $4000 if not replaced will cost more than the $770 saving in about 3.5 years, assuming interest rates stay at 5%.

 

[dajop]

Only if the 11K goes straight back in to the home loan on top of normal repayments.

Otherwise that 11K deficit will easily blow out to more than the $770 savings over the life of the loan.



Yep, but even if the 7K is paid back, the $4000 if not replaced will cost more than the $770 saving in about 3.5 years, assuming interest rates stay at 5%.

Basically what you saying if the OP's child has a low level of financial discipline (and HELP repayments are being deducted by employer) then don't repay early. Of course if their salary is going straight into the offset account, and they are have a high degree of financial discipline, then that $4000 is going to be recouped in 7 months anyway, with lower deductions, therefore higher salary going into the account.

If they don't have HELP repayments being deducted by their employer, then it's very clear ... as they will have to take $7K from their offset account come December (if self filing) and another $4.7K a year later to pay their tax bill, so then that potentially becomes $11.7K missing from their offset account longer term.

 

[Quickstatus]

It's possible to predict the debt indexation factor applied by the ATO on 1 June by the year on year CPI to end of March - published end of April.

 

[justinbrett]

Basically what you saying if the OP's child has a low level of financial discipline (and HELP repayments are being deducted by employer) then don't repay early. Of course if their salary is going straight into the offset account, and they are have a high degree of financial discipline, then that $4000 is going to be recouped in 7 months anyway, with lower deductions, therefore higher salary going into the account.

If they don't have HELP repayments being deducted by their employer, then it's very clear ... as they will have to take $7K from their offset account come December (if self filing) and another $4.7K a year later to pay their tax bill, so then that potentially becomes $11.7K missing from their offset account longer term.

Yes, there's definitely a way to do this smart that involves paying off the HECS debt now.

But you're are effectively getting a loan to pay off another, and the loan has real interest rates that could well go up - that will be compounded for years to come, while the other is only indexed.

Once the money is taken from the home loan to pay off the HECS, withholding will cease for the next FY, so would be easy to carry on like normal and spend the extra pay whilst making minimum repayments on the home loan. Sure, that damage is minimised if the extra 4K is returned as a priority, but if it's not, the results will be worse than just paying the minimum HECS repayments through tax.

 

[dajop]

Yes so as I said if they are financially disciplined then it makes sense to pay now. id salary is being paid directly into the offset account that $4k is going to be returned to the account within 7 months. I’d suggest anyone with $50k in their offset account has a degree of financial discipline.

 

[blackcat20]

I've been trying to make a similar decision, with a $5k balance remaining. The frustration being that an amount for the last financial year has already been taken from my pay, but wont be reconciled until after indexation.