8 REASONS WHY HECS IS NOT A REGULAR LOAN - PART 2
HECS is not like any other loan – so don’t panic too much.
In part 1 we looked at the basics of HECS and its close cousins FEE-HELP and VET FEE-HELP. In this part 2, I deal with the features of HECS that mean it’s not like any other loan and why it’s more like an income tax surcharge.
To some extent it is like a loan. The Government keeps calling it a Debt. But most importantly it reduces the amount of your income available for living, saving and investing. To this extent it feels like a loan.
Here's why HECS not like a loan
1. You only ever have to pay it off if your income exceeds the threshold
Payments are only required when your income exceeds the threshold. In 2014 this is $51 309. At this income, you would pay 4% in extra tax. The percentages increases gradually to 8% at $95 287
This means that if you earn $51 500 you would normally pay $9 057 in tax, but if you have an outstanding HECS balance you must pay an additional $2 060. This will be collected with your normal tax.
The amount paid is credited against your outstanding balance.
2. If you die it dies with you
Because payments are required only when your income exceeds the threshold, the balance is in effect cancelled when you die. In the year you die, you will still make the payment based on your income (including anything earned by your estate after your death). The unpaid amount is not deducted from your assets before they pass to your heirs.
3. The payments you make depend on your income not on the outstanding balance
The amount you pay each year is dependent only on your income not on the outstanding balance. The more you earn the more you pay. The only exception to this is in the last year when your balance falls to zero. If the amount calculated by applying the relevant percentage to your income exceeds the balance you only have to amount to make the balance zero.
4. There is no interest
No interest is charged on your HECS balance. However, it is adjusted each year on June 1 to preserve its value in real terms. This means it is increased by the rate of inflation. The Reserve Bank targets inflation to be in a range of 2-3% on average over the economic cycle. This is obviously much less than the rate charged on commercial loans such as mortgages or credit cards.
5. It doesn’t count as a loan when you go to borrow money
When a bank assesses the credit of a potential borrower, they are concerned about how much income you have, how much you owe other people and what other commitments you have each month which might reduce the amount of your income that could be used to service the loan.
The amount of any potential loan will be reduced by the balance outstanding on other loans.
With HECS, the bank is only concerned about the impact of the HECS payment on your net income, not on the outstanding balance.
6. You don’t need to get your parents to guarantee it
Your HECS balance is completely unsecured. That is the Government doesn’t require a mortgage nor do they require you to have your parents guarantee the balance. A bank lending in the same circumstances would look for additional security like a parental guarantee.
7. It survives bankruptcy
Bankruptcy is one of the options available if someone is unable to pay their debts and it all gets too much. This is not an option to be taken lightly. When someone is declared bankrupt, all of their assets (other than tools, a cheap car and some household effects) are taken to pay the debts and the balance is wiped clean. Where the bankrupt earns more than about $50,000 annually, they have to give the balance to their creditors for a period. It’s a pretty drastic step and can adversely affect the rest of your life. Family support, court fines, Centrelink debts and HECS must still be paid.
However, being bankrupt doesn't prevent you taking out a new HECS debt - it might even be a good time to consider going to Uni!
In part 3, I cover off when you should take advantage of HECS and when it makes sense to pay it off.
Vince Scully | LifeSherpa
With over 25 years in Financial Services from consulting to management, Vince Scully is the go-to guy for wealth management and financial advice. Vince founded the Calliva Group; a fund manager, product issuer, advisor and lender to Government and private clients. Vince is an advisor to the Wealth Management Industry, and prior to his role as CEO at Calliva, a senior member of Macquarie bank’s infrastructure team.