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

[all_adream]

I guess that is what I meant. I thought, though, that if I paid $1,000.00 a year (plus tiny interest from keeping it in savings for that year), it would take the $1,000.00 plus the five or ten bucks off the principal/loan total, and so then the amount owing on the total would be reduced by that amount plus whatever else would have accrued during that time, which would then compound as well. In other words, I mean (if I'm making it confused-sounding!) that the next year, instead of paying the entire (made-up for convenience) figure of $10,000.00 plus whatever compound interest on the loan would have accrued in that year, I would have paid the thousandish off the top, and then the next year I would only owe $9,000.00 plus the compound interest. I must have missed something about interest rates in the original, because the only way I can see it making the best sense if if the interest rate on the savings considerably outstrips the interest rate on the loan. You know? There must be something in the original that I need to go back and read again. Thanks for trying, you guys! I'll reply to myself and you when I see whatever point I either missed or still believe to be true! ahahaha!

[all_adream]

I see the part about the income-dependent and not accruing interest and all. I think that looking at an amortisation chart would be helpful, wouldn't it? Then you'll see most clearly, like some people above suggested. I think there are tons of free ones all over the net, so let me find you one and post it, maybe as an independent entry so we can always find it.

[jamethiel]

The thing is, this debt only gets indexed once a year. So if you like, the compound period is a year. So to use your example, with a debt of $10,000 and an indexation rate of 4%, if no payments are made, after the first year, the debt is $10400. The next year, that $10,400 gets indexed. If the indexation rate is still 4%, the debt is then at $10,816.00

The highest interest rate savings account out there at the moment (in Australia) is at 6.51%. The compound period is daily and the interest is paid monthly. So if the person in question is paying $100 a fortnight into a savings account, at the end of one month, they would have $0.32 on top of what they've saved. 2 months would be $1.81 total interest over the period, three months would be $4.50. It's compounded on top of what's paid before, and the person keeps adding to it.

At the end of one year, they'd have $83.13 in extra interest, and at the end of two, they'd have $346.72. This is still well below the yearly indexation just because the debt involved is $10000. By the third and fourth years, the total interest on the savings account is still less than the total indexation on the debt, but on the fifth year? Something interesting happens.

The total debt is $12166.53. The total amount in the savings account, is $15345.81. So in that five years, even with saving $200 a month, the total amount added to the debt is $2166.53 and the total amount of interest earned by the savings account is $2345.81. So because of 1) higher interest rates on the savings account and 2)compounding daily and paying monthly rather than once a year and 3) continually paying money in, the interest from savings outstrips the amount accrued by indexation.

Which is why it does make more financial sense to put it into a savings account. However, paying off debts is almost never a bad thing and finances is as much about emotional sense as anything else.

[all_adream]

Good, thank you: that is succinct, and the only question I would have would have to do with the possible benefits of the extra ten percent on payments over 500, and if doing those in a staggered way would eventually pay off, since 110% of a certain figure being paid off at once could indeed reduce the rest enough to make it worthwhile to do at intervals.

[jamethiel]

Think about it in terms of interest saved = interest gained.
With our example above, it takes 10 weeks (2.5 months) to save $500. The amount of interest you will have earned in that time from the savings account is $3.01. So your payment of $503 becomes a payment of $553.00 (The ATO doesn't count the cents in a HECS debt).

You do this five times a year for the first year. That is... $265 interest. Every fifth year, you get $318, because it takes that long to make an extra payment.

In the first year, you make payments of $2765. Your $10 000 debt becomes $7235 and then $7372 after indexation (I'm using last year's indexation of 1.9%). That's $137.46 of interest lost, so your interest overall for the first year is $127.54.
With indexation and extra interest from the 10% and the interest from savings, it takes you three years and 9 months to repay your debt. Over that time, the interest (Taking into account all of the bonuses from the 10%, all of the interest for the short time you have your money in the savings account) is $693.24

(I've done those calculations if you want to see them)

After three years if you leave the debt alone and assuming indexation is 1.9%, the debt is at $10580. The amount that you have to pay to pay out the debt is $9620. You reach that in your savings account after 40 months, which is 3 years and 4 months. Five months sooner than you repay your debt with the gradual repayment system. The interest earned from your savings account is $1000, take away the $580 of interest lost from indexation and you have $419 of interest. Then you apply the 10% bonus, and all of a sudden the money you have earned through interest becomes $1381.

So. You get to pay your debt off five months sooner and you earn around twice the amount of interest.

[all_adream]

I see how these options get down to whether the original poster has strongest feelings about sooner or about less or about other factors involved, plus the wildcard aspect of maybe winning the pools or getting more or less income somehow unexpectedly. Thanks for all the calculator action!