Should I pay my HECS

Hi all I know the general consensus is not to pay HECS but thought I would run this by the helpful people on this forum.

We have two investments paying fixed p&i on both with roughly two years left on their fixed period, paying 3.99%

One has a variable I.o split which we used to purchase the second property with so all funds are tax deductible. Currently the offset account has 80k of the 100k balance so only paying interest on 20k.

We won’t service for anymore credit for a while until either debt is reduced or income is increased. So there is no plans to purchase for at least 2 years.

Currently hecs repayments are around $6500 per year so although the interest rates are very low the cash flow change is not insignificant.

We have no other debt and overall LVR is 68% so my thinking was if I pay it down now then yeah we will pay interest on an extra $30k which will be around $1500 per year which will be fully deductible but we would improve cashflow by $6500 per year.

Or am I being a fool and I should keep the cash in the offset or even into some LIC’s?

Thanks!

 

Honestly I don't think anyone should pay off HELP debt now.

I paid off $20k worth a couple of years ago before the 5% voluntary repayment bonus ended (effectively a free $1k) but even then it was dicey.

Say inflation is 2%, that's a ridiculously low rate. For me, it will never make sense not to pay off my mortgage now instead (3.7%). As for my remaining HELP debt (Orwellian acronym) I will just slowly watch it dissipate over the next few FYs (paying off a similar amount to you).

Yes, you may be an investor, but I still doubt the sums will change enough. Plus, you lose flexibility when you pay off HELP (unlike an offset account where you can move cash in and out as needed).

Cheers

 

Yeah I think you are right.

Thanks.

 

HECS is the cheapest loan you'll ever enjoy, it's not worth paying off for most people.

However it does have a significant impact on serviceability. It's often worth paying it off to qualify for a loan.

Keep in mind that it's an all or nothing proposition. There's no benefit in only paying some of it off.

 

I recall paying mine off when a significant discount was on offer - if I recall correctly 50% in the late 90s. Could be totally wrong - long time ago.

As I read you’re not planning another purchase in the next two years, as you won’t service for credit. But does paying off the debt improve your serviceability as you free up $6.5K pa? Depending on your marginal tax rate, you’d need to earn another ~$10K before tax to get $6.5K in the hand.

 

The impact on serviceability is also on my mind. Was thinking I could possibly pay hecs, go back to the bank and borrow back at least what I just paid in hecs then put that into some LIC’s The extra $6500 in cash flow would easily cover the interest on the borrowing.

Obviously wild need to check this over with my broker to make sure I’d service but think I would.

 

Right, but it is a great feeling to not have the HELP debt hanging around and as you said increases cash flow. If over the next 2 years you do offset the remaining 20k you could always pay down some of the HELP debt if you wanted and just get rid of it a bit quicker. It makes sense to leave it to last to pay but eventually it still has to be paid.

 

Correct me if i'm wrong im not the sharpest bottle on tax stuff, but doesnt the HECS debt contribute to reducing your taxable income? I'm paying mine off too every month out of my paycheck (Standard) and i feel like i recall my accountant saying something like its better to not pay it off because its reducing taxable income and provides a nice little boost come tax time. I still get taxed heavily PAYG every month, but its seriously worth it when i get my tax return...

 

Depends:

Debt Avalanche vs. Debt Snowball: Which Is Best For You?

Not paying hecs is the best if you have a higher use of your funds. No different to borrowing at 5% interest to invest in 50% return funds.

However the psychological rush of paying off that loan is awesome.

I still have a hecs debt. Cheapest loan you'll ever get. That stated, if you are not investing, or are feeling like you're working for nothing, it may be rewarding to pay it off and get that bigger pay check. Motivation for the next financial hurdle.

 

Yeah but your better off saving it for a future opportunity. It may not be present yet but using a huge potential deposit to pay off an inflation loan makes little sense.

The only time IMO anyone should ever pay off a a HECS Loan is if it’s a fairly low amount and they need the servicing boost.

 

Mathematically yes.
Fortunately humans are 3 dimensional beings with an emotional component.

Not having a cheat day gets you ripped faster. However that cheat day may keep you going well after you would have given up.

Then to keep saving, and with the extra income boost.

Gotta figure out what motivates you to push further.

 

Most people should not have a “cheat day”
As they simply haven’t eaten and trained to earn it. Those who train and eat properly actually require a cheat day to help them get ripped.

But I get the analogy

 

And some people hate gym all together. They prefer to only have healthy eating habits, or do nothing at all. Most just don't know any better.

Others get bored take breaks, or prefer to mix it up with a little boxing, rock climbing, or BJJ.

A few choose to become extreme athletes, or get over excited and build a gym, or a gym empire. Others start to teach, one-on-one, or via mass media. Whilst the students like to learn from different teachers.

And the rest realise they make more selling gym suppliments, workout wear, or get ripped quick schemes, so they hang out on work out websites and promote their wares.

My fav is when people buy-and-hold, I mean, buy ab machines from the tv-ads, and expect to have a Swartzenneger body in 6 weeks.

The question is, how far can one take this analogy.

 

HECS debts are forgiven at death. Since most people don't know when they are going to die your estate may lose out if you paid off your debt and suddenly died soon after!

 

My cat will be devastated, the wife can look after herself though.

 

The HECS debt doesn't reduce the taxable income.
Perhaps your accountant is suggesting if you don't pay it each pay you will have a large lump sum to find when you get your notice of assessment. If you pay too much each pay you will get a refund - but why give the ATO an interest free loan.

 

Many years ago my flatmates brother was a priest. He also held a PHD from the early 90s and has a reasonable HECS debt as well.

As a priest, he didn't receive a salary, simply a living allowance. He'll never pay a cent of the HECS debt off.

 

Praise the Lord.

 

Did they ever make that new law about taxing people who study here and then go and work overseas and never repay hecs?
If they did it would likely to be impractical to enforce.

 

The ATO indicates it now applies. I only found out as my son asked me. Why TF he couldn't look it up himself is beyond my comprehension.

Overseas repayments

Smarter people than me would know but do they use reciprocal taxation agreements to try and claw some of the dosh back?