Entries from August 2008 ↓

I couldn’t resist this new Prowl Transformer. Especially seeing as it’s only $20 or so.

I’m meant to be paying off my credit card dammit!

One of the most popular posts on my blog is my semi-rant on HECS debts, in which I urge people to think about the impact that carrying a HECS debt will have on their lives before they start studying.

Most people found my post through entering a question into Google, and through the magic of Google Analytics I’m going to do my best to answer them all here.  I’ve cleaned up the questions a little for clarity.

Also, the answers here are correct to my knowledge.  If I’m wrong then please let me know, I’ll fix up the article.

1. Are HECS the same as HELP debt?

This one’s easy - yes.

2. What is the HECS-HELP interest rate?

The interest rate on a HECS-HELP debt is equal to the Consumer Price Index (CPI) over the year.  CPI is a measure of inflation, so by changing your HECS-HELP debt at the same rate it is pegged at the same amount relative to everything else.

The indexation applied to my HECS debt this year was 2.8%

3. What happens when you finish paying your HECS debt?

You get an effective pay rise of about 6%!  The money that was automatically taken out by your employer via PAYG now goes straight into your bank account.

4. How much does HECS take out of pay?

Here is the repayment schedule for the 2008-2009 year (source):
 

5. If I pull out do I still have to pay HECS?

Yes - any debt you’ve incurred in previous semesters of study you have to pay.  If you’ve just started a new semester and are withdrawing from a particular subject, you have a month or so to withdraw from the course without incurring a debt for it.

6. What is the average age to pay HECS debt back?

This is a really tough question to answer, and a bit of Googling of my own failed to turn up any real data.  It’s pretty easy to calculate your specific scenario though - you can easily calculate your expected debt by the end of your degree, then look at somewhere like Seek to find the average income for the career you head into.  The rest is spreadsheet magic!

7. Am I better off paying off my HECS-HELP debt?

In my opinion, the answer to this is no - with one caveat.  The interest rate on your debt is as low as you’re ever going to see.  It’s even lower than the money you can earn by putting your cash in the bank instead! You’re better off putting your money in an ING account and letting it sit.

The caveat is if you can completely pay off the remainder of your debt.  You get a 10% bonus for making a voluntary repayment.  If you pay off the debt, the return on that money is 10% straight away.  If you don’t pay it off completely, the return on that money must be split across the years your debt remains (as you get no further earnings from that money as you would in a bank).   This reduces the effective interest rate each time, 5% pa over 2 years; 3.3% over 3 years, and so on.

Talk to a financial advisor before you make any decisions though.

8. Am I eligible for HECS for second degree?

From the Government’s site:

Does an existing HELP debt affect my eligibility for HECS-HELP?

No.  An existing HELP debt does not affect your eligibility for HECS-HELP

Looks like you’ll be fine for a second degree.

9. What happens to my HECS debt after leaving the country and returning?

While you’re not earning any taxable income in Australia, you don’t have to make any repayments.  The debt doesn’t go anywhere though - it just sits around increasing at CPI every year.  When you start earning taxable income in Australia again you have to make repayments again.

Almost a year and a half ago I wrote a post on how “owning” the bank can be more profitable than simply putting your money in the bank.  I compared the increase in value you’d get from placing $1000 in an ING Direct Savings Maximiser account with buying the equivalent value of stock in four major Australian banks.  The comparison showed a return on investment of between around 10% per annum and 17% per annum, which was significantly higher than ING’s interest rate of 6%.

That post was written in a time of economic prosperity, and the results reflected the stellar results that stocks had seen in the previous year.  Things dramatically changed in November last year, with the ASX 200 dropping in value dramatically to the present day.  From a high of 6851 in November the index has dropped to a low of 4758 this month (so far), representing a decline of roughly 30% since November.

In light of this economic change does it still make sense to buy stock?

I made the same comparison over the year from 1st August 2007 to 31st July 2008, and the results were the exact opposite of last year’s!

In this year, the banks lost a minimum of $100 of a $1000 investment - that’s a minimum loss of 10%! The worst performing bank, Suncorp Metway*, lost $241 or 24%!

ING, in comparison, made a nice steady gain of $70.

This is a perfect reflection of the risk inherent in buying stock.  You trade potentially higher gains, for a higher risk of losing money.  This risk was definitely realized in the past year.

(Hat tip to HiredGoon of bubblepedia.net.au for getting me thinking about this again.)

* Interestingly, Suncorp Metway was also the worst performing bank in my last comparison.