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Reassessing HECS Debt Repayment Strategies: Investing Vs. Paying Off Loans
Australians with Higher Education Contribution Scheme (HECS) debts are being encouraged to reconsider their approach to repayments. Rather than simply funneling extra cash into repaying these loans, experts suggest that investing might yield better financial returns. Noah Capozza, a financial adviser at Link Wealth, is one such advocate for this strategy, sharing insights on how he approached his own $60,000 HECS debt.
The Case for Investing Over Repayment
Capozza argues that while directly paying down HECS may seem prudent, particularly to avoid accumulating debt, investing in shares could prove to be more beneficial. He highlights the historical average return of the stock market at about 9 per cent annually, in contrast to the 2-3 per cent likely rate of indexation applied to HECS debts each year.
For many graduates, merely making the minimum repayment can result in significant debt increases. The average HECS liability is currently about $27,600, and for individuals earning the median salary of $102,742, a typical repayment is roughly 5.5 per cent of their income – translating to around $470 monthly. Without any additional payments, it would take almost five years to settle the debt, but even this timeline is subject to the annual indexation due each July, which may further inflate the total owed.
In Capozza’s case, indexation recently added $1,800 to his debt. Thus, he reasoned that investing his funds, rather than aggressively paying down his HECS, could yield a higher return over time.
Potential Gains from Investment
For those considering the strategy of investing an additional $500 monthly instead of directing that money toward HECS repayment, projections based on a 9 per cent return indicate substantial growth. Over five years, this could accumulate to approximately $37,712, and extending that period to ten years could see the portfolio grow to around $96,757. This figure considers only the compound gains and does not include dividends, offering the flexibility to withdraw funds when needed.
Moreover, directing money toward a share portfolio ensures that funds are not permanently lost to loan repayments, providing opportunities for later financial decisions, such as addressing HECS or other investments.
Understanding Loan Assessments
Concerns about HECS debts impacting future borrowing capacity for home loans are common among graduates. However, Capozza reassures that lenders typically evaluate only the percentage of income allocated toward HECS repayments, not the total debt. Thus, a larger loan amount like Capozza’s $60,000 is less relevant than the $470 deducted monthly from his salary.
Recent Government Changes
Policymaking regarding HECS has also been evolving. Recent reforms from the Albanese government adjusted the indexation mechanism, tying it to either the consumer price index or wage price index, thus reducing the rate from an anticipated 7 per cent in 2023 to only 3.4 per cent. Additionally, there are proposals for a 20 per cent loan reduction for all borrowers, suggesting a potential future easing of the HECS burden.
Seeking Professional Advice
Capozza underscores the importance of consulting a financial expert to navigate this decision-making process. While the allure of investing is strong, individual circumstances can greatly vary, and an expert’s guidance can help tailor strategies to one’s financial objectives.
Conclusion
As Australians grapple with HECS debts, re-evaluating repayment strategies in favour of investment may present a viable option. By potentially harnessing higher returns from the share market, individuals can position themselves for better financial futures, all while managing their student loan obligations. Those considering this approach are encouraged to seek professional advice to ensure their strategies align with personal circumstances and financial goals.
Disclaimer: The content represents general advice and is not personalised; individuals should assess their unique financial situations and seek appropriate professional guidance where necessary.
