HECS

Hello,

This is not financial advice, I'm just bringing this up because I 
can't find anyone else to discuss it with.

I'm wondering if anyone else has done the math about repaying their 
HECS/PELS debt. For the last few years I've thought it to be 
completely useless to pay off the debt and instead I should save the 
money and earn interest on it.

Common sense says that you are better off saving your money in an 
diversified fund earing 7% interest p/a than repaying a loan that 
increases by only 3% p/a. But, the govenment threw a spanner in the 
works by offering to pay an additional 15% to any repayment over $500.

I wrote a little program to work out which is better and here are the 
results. This program doesn't take into account the compulsory 
repayments.

Lets say I have a $25000 debt. Indexation is at 3% but interest can 
be earned at 7% in a diversified fund. I aim to repay off my debt in 
perhaps 10 years.

The repayments required per annumn is $2845
However, due to the 15% bonus I only need to pay $2474

If I were to put the same amount ($2474) per year into an investment 
I would be able to aquire $34185 over the 10 years.

Over 10 years, the HECS debt would have indexed up to $32619. Now, 
taking the 15% bonus into account I would have to pay a lump sum of 
$28364.

Summarising:
The $34185 I managed to aquire over the 10 years, was much more than 
the indexation of my HECS debt, which now only requires a $28364 lump 
sum payment. That just saved me $6000 dollars.

Doing some more maths shows that for ANY HECS/PELS debt assuming an 
indexation of 3% and a diversified fund performing at 7% p/a saves 
you 20% over a 10 year period.

I haven't seen much advice on the internet about the merits of 
investing instead of paying off your HECS debt. I should also take 
into account that the 15% rebate might not last forever, and that the 
Howard Govenment might introduce competitive interest rates.

Anyway it's just food for thought.




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