Student loan advice

[vass]

The only debt I carry is my HECS/HELP debt (Australian student loans.) Mine is much larger than the average of $15,000, because I was at uni for three years longer than the norm for my course, and had to repeat a lot of classes due to disability issues which still affect me.

Australian student loans are government-owned, and are adjusted according to the consumer price index, but otherwise do not attract interest. No repayments are needed until the debtor reaches the repayment threshold, currently $44,912. I make nothing like $44K. I really don't make a lot of money at all.

If you make a voluntary repayment of $500 or more, you get a bonus of 10% on it, i.e for $500 the government wipes out $550 of your debt.

I don't like being in debt, even debt as benign as HECS/HELP. It hurts my pride.

If I saved as much extra as I could manage per month (on top of my normal savings) in a 5% savings account, then repaid that year's savings, including interest, and kept doing that every year until the debt was gone, it would take me 20 years (not accounting for inflation, because I have no idea how to do that, and I can't find a website that will give me a guideline. Any suggestions? At any rate, I hope and trust that it's less than 5% p.a.)

If I saved the same amount per month in a 5% savings account, then didn't repay it until I reached the target amount (again, without accounting for inflation) and then repaid it in full, it would take me 15 years.

Obviously, I'm hoping that I'll earn a higher annual income over the next 15-20 years, and be able to reach my goals sooner and form some new ones. But I want to start now.

The other thing to consider is that if I reach the repayment threshold, it will take me 15 years to repay my debt if I pay the minimum every year. And I don't know when (if ever) I'll reach that minimum threshold.

I guess what I'm looking for is support to do the smart thing and put the money in savings so I can repay it faster, not repay it five years slower just because it's psychologically more satisfying to see the numbers go down instead of seeing them actually go up through indexing.

Comments

[willful_zephyr]

My wife taught me about the Time Value of Money. With inflation, $40k in 20 years is less money than $40k now. So, if you owe money now, you will owe less in 20 years even if you make no payments on it - assuming net inflation over that time.

So, if you have a loan that is accruing interest at a rate less than inflation, you want to take as long as you possibly can to pay it off. This holds true if you have investment options that make a higher rate of return than the interest on the loan - the money will be more productive in the investment than in paying down the loan.

[martyna]

I agree. That what I have been taught -at uni-, too.
(Though, emotionally, I'd like to pay off the loan as soon as possible, too.)

[willful_zephyr]

I try not to think too hard on our low-interest debts (student loans and mortgage), just make the payment. Some day they'll send me a note that we're done.