It’s tax time, between July 1 and October 31, people are lining up to do their tax returns and hoping they’ll get a refund. I’ve done mine and looking forward to some extra cash in the bank. Generally, I like this time of year because it allows you to reflect on the past year’s spending, earning and giving. It also reminds you of the education debt you may or may not have accumulated for your tertiary studies.
Once upon a time, like 40 years ago, tertiary education was free in Australia. The Whitlam government abolished university fees back in 1974 to provide opportunities for middle class Australians to get an education. Then, in 1989 the Hawke Government introduced the Higher Education Contribution Scheme, which has now changed to HECS-HELP (Higher Education Loan Programme) where the government pays the education institution the fees upfront and then the student once earning above $53,345 (2014/15 F/Y) will begin repaying their loan through the ATO on a sliding scale of 4-8% dependent on their income level.
The HECS-HELP is great but in hindsight I wish I had saved for my education so that now I wouldn’t have an debt currently sitting at around $37,000 (original was $44K) over my head or better still I should have chosen a tighter subject, like medicine for example. At least then I’d be working in the area I studied in and wouldn’t have such a hard time figuring what I can and cannot do.
Unfortunately, I didn’t get the right advice. My parents didn’t tell me that medicine, engineering or even a trade might be a more lucrative choice. They didn’t push and steer in any specific direction, instead they allowed me to make my own choices. The school I went to wasn’t all that encouraging and supportive either when it came to helping me make a career choice.
This is good and bad at the same time. I could have used some more guidance even if I assumed at the time that I knew best. I didn’t.
Anyway, $37k that is getting slowly repaid as my income rises. It’s not pretty when I get a bonus and most of it goes to the ATO to cover my tax bill and HECS-HELP. I wish I could strike lucky on Lotto so I could get rid of it. Once can dream, can’t they?
Generally, Australians can use up to $96,000 on HECS-HELP. They start repaying it once their annual income exceeds a threshold which as at 2014/15 financial year it’s $53,345. It’s a good system but it’s still debt.
Until recently I hadn’t thought about my HECS-HELP debt. That was until I received a statement from the ATO showing that even though there is no interest, the debt indexed annually at the rate of inflation which is between 2-3%. To me, that’s like paying interest so I want to get rid of it sooner. Besides in five years time the law might change and they might want the loan repaid up front. For peace of mind, I’m going to make an attempt to pay off my HECS-HELP debt faster.
So should you pay off your HECS-HELP debt?
That depends on your current financial situation. If you have high interest debt that should be priority. If you have a mortgage, pay it off first. If you have investments making more than the rate of inflation, well you know where your money should be. If you have savings and don’t want to be paying your HECS-HELP over the next 10-20 years, you know what you have to do.
The benefit of paying it off quicker is that the government gives you a 5% discount on any amount repaid over $500. So if you make a voluntary payment of $1000, the government gives you $50 off. It’s not much but if you’re making larger repayments the discount does add up.
What do you think? Would you pay off your HECS-HELP debt sooner or just stick to just the compulsory repayments which are subject to your annual income?