One of the most common questions I get at LifeSherpa is “Should I pay off my HECS?”. In almost all cases the answer is NO. A slightly more complex variant on this is should I pay my Student contribution or should I defer it and use HECS?
Should I use HECS?
An undergraduate student is faced with a decision every semester as to whether they should pay the Student Contribution (up to $10 958 per year) in full or in part or should they defer it using HECS.
The answer is a little bit more it depends but in many cases a student and their family will be better off over the lifetime by deferring. The “depends” is where the money is coming from and the alternate uses for that money. You might not want your parents to see this!
Parents don’t sacrifice your retirement to avoid HECS
As parents we all want to set our kids up with a good start in life. That’s why we’re keen for them to go to university after all, I guess. But paying the $50 000 or so to completely avoid HECS, not to mention the food, books, travel and beer money it takes to be a real student, can make a big hole in your retirement savings. The same money applied to super contributions could increase your retirement nest egg by over $100 000. Alternatively, applied to reduce your home loan could go a long way towards your goal of having the house paid off by retirement.
Unless you have a fully funded retirement fund and a debt free home or a long way off retirement, you are likely to find that there are big benefits in taking the HECS option. Remember you can borrow for your kid’s uni education but it is pretty difficult to borrow for retirement.
If you are keen to pay, there may be better things to do with the money
Even if you are keen to pay the Student Contribution, you are likely to better off setting the money aside and depositing it to your mortgage offset account or contributing it to super during the uni years and making an additional voluntary HECS repayment later. See HECS strategies for Parents.
If you can do anything that will earn or save you 5% before tax is likely to be a better solution.
Use the Money to Set your kids up for life
An alternative to paying the Student Contribution is to deposit the money in a First Home Saver Account. By doing this your student could have a deposit for a house of $63 000 on graduation, including $5 100 free money from the Government.
These strategies will be more attractive when (if?) the proposed abolition of the discount for paying up front or making voluntary payments is enacted.
In brief, if you have any debts or do not have a fully funded retirement fund or can think of any other way to earn 5% (pre tax) with your money, you should not pay the Student Contribution.
A Student’s View
If you are borrowing any of the money you need to get through uni, then you should take advantage of the very cheap money and easy terms available from the Government through the HECS scheme. That is you should choose to defer your Student Contribution.
If you are working (part time or full time) to fund your education, you may be able to claim your Student Contribution as a tax deduction. This would apply if the course was directly related to your current job – not the one you wish you had! This is one of the few circumstances where it may be better to pay the Student Contribution up front - But only if you have no other debts (such as credit cards).
If you are working and not able to claim a tax deduction, think about how many additional hours you would have to work to pay the Student Contribution. At the minimum wage for an 18 year old of $13.31/hour, you would have to work 15 hours a week just to pay the Student Contribution. Think about the impact this might have on your ability to study and enjoy Uni.
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.