Uncensored Money: Ask Mel Anything – Student Loans & Funding Big Purchases  

Melissa Browne: Ex-Accountant, Ex-Financial Advisor, Ex-Working Till I Drop, Now Serial Entrepreneur & Author, Financial Wellness Advocate, Living a Life by Design | 27/04/2023

Show Notes

Welcome to the ‘Ask Mel Anything edition’ of Uncensored Money.

In the ‘Ask Mel Anything’ series, Mel answers your questions in the hope you realise you are not alone and that it helps to increase your financial literacy and confidence. In this episode of Ask Mel Anything, Mel answers two timely and topical questions:

• 'I wanted to see what your thoughts are about paying off HECS debt now that inflation is so high. I feel like it used to be thought of as an easy/good deal debt, but now with inflation rising I am wondering whether I should look into paying it off vs using the same money for investing. I have no other debt.'
• 'What’s the best way to fund a big purchase if it’s beyond the value of your savings? Eg an electric car to replace an old vehicle. Extend home loan or other new loan?'

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Transcript

Hey, and welcome to Ask Mel Anything. Today we've got two really topical but different questions. The first one's related to the inflation rates that were released on Wednesday and about HECs & HELP debts as a result of those inflation figures. And the second one is all about how do you fund a big purchase? And you might be surprised by my answer, so let's get stuck into it.

 So the first question is, “Hey Mel. I wanted to see what your thoughts are about paying off HECs debt. Now that inflation is so high, I feel like it used to be thought of as an easy / good deal debt, but now with inflation rising, I'm wondering whether I should look into paying it off versus using this same money for investing. I have no other debt”.

 So I wanna start by saying that I don't believe that HECs or HELP debt, student loan debt is Good Debt. Now, you might be surprised by that because the definition of Good Debt is debt that's used to purchase something that's going to go up in value or give you an income. And you might argue, yes, but isn't education or getting a degree going to give me earning power, going to give me the ability to earn a higher income?

And sure it could, but it's still going to rely on your personal exertion, which is why I pop it back in Okay Debt. It's not Bad Debt, but it's Okay Debt and in the Okay Debt bucket you might remember is also your mortgage. It's also a credit card for a business where you're paying a bit more interest. A business loan would go under Good Debt.

But you know, they're debts that are okay. We're not thrilled with them, but we're gonna get comfortable with them. They're certainly not Bad Debts and I think this is a bit of a lie that we've been sold that, you can just do as many degrees as you want and you can keep studying and you know that. And sure it is interest free. However, those loans are indexed with inflation in Australia and generally that's not a problem. So the average inflation rate in Australia over the last 30 years is around two and a quarter per cent. Now you could get a better return on pretty much everything from investing to paying off your mortgage to starting a business and more.

So it's almost always been worth only paying off the minimum requirement. However what just happened this week on Wednesday is that inflation figures were released and it was decided that the HECs repayment percentage, the HECs indexation percentage for June 2023 is going to be 7.1%, which of course is a lot more than a than two and a quarter per cent now.

I wanna just set the scene by saying that this is a one-off year. Last year in 2022 it was 3.9%. In 2021 it was 0.6%. That's where I said that the average over, if we look at 30 years, is two and a quarter per cent. So I wanna start by saying this is an unusual year. And the average HECs or student loan balance in Australia is about $22,000.

So that means that loan is going to go up by $1,600. So you are going to see so many articles coming out around this 7.1% and asking the question, would you be better at just paying it off? And this is where as always, it depends, and this is where I wanna really caution this by saying this is not personal advice.

This is just looking at what are the different situations where you may look at paying it off quicker or where you may not. So let's start with just say, I only had a year or two to go for my HECs debt. Just say my balance is quite low and remember, we don't start paying off our debts until we're earning more than $48,000, but let's say you do the maths and you go, yep, at the income that I'm earning, I'm gonna pay this debt off with minimum repayments in two years.

So, because you know that you would ask the question, can I get a better rate of return for than 7.1%, or am I better off just getting rid of that debt because I only have a year or two to pay for it? So therefore, it is going to get a big kick. And that might be one of the few situations where you look at paying it off earlier.

So if it was me, I've got a year left to pay on this HECs debt. I don't want it going up by 7.1% in June, so I'm gonna make a voluntary repayment and just get rid of it. So that might be a situation where you decide to pay it off. However, if my debt's sitting at about 15 grand, and I know I'm gonna take about seven years to pay it off, then this is going to be an unusual year.

So the Reserve Bank of Australia, the governor has said that he wants inflation to 3% to 4% and he's gonna keep raising interest rates until that happens, and we've already started to see a lowering of inflation from its peak in December. So most economists are saying that they expect inflation to be at that 3% to 4% at December by the end of the year.

And already retailers are reporting that they're really starting to see the pinch. So that should mean that this time next year we are looking at a possible HECs indexation of around 3%. And that's why we don't wanna be super reactive to our finances. We don't wanna gut react to a headline that says your HECs debt's going up by 7%.

Because this is an isolated year. This is an unusual year. If we average it over the last three years, so we had 7.1%. I'm getting out my calculator. We have 0.6% over those three years. We were looking at 3.5% indexation. I can get a better rate of return on that pretty much everywhere from paying down my mortgage to the share market and more.

So that's where if you've got more than say, 18 months to pay off, you may settle in and be comfortable with, you know what? I appreciate that it's gonna go up a bit more this year, but over the long term, I'm gonna be okay. Now, the only reason that you might think contrarily to that is if you are going for a loan, and this is where you wanna talk to a great broker, because what you may not be aware is that the HECS debt is going to affect the borrowing power of your loan.

Because obviously your take-home pay, so the amount that you receive in your bank account, is lower than it would be if you didn't have that HECs debt because of that HECs compulsory repayment that's taken out of your wage, that means that if that wasn't there, you would be able to borrow more. Now, that's why I'm such a fan of speaking to a mortgage broker before you are ready because just say, I was thinking of buying a home in 12 months time and I spoke to a mortgage broker and they went, yep, you're perfect. Keep going. Save this deposit and you'll be fine. But just say they looked at it and went, yeah, I know you've got three years to go on your mortgage. However, you are gonna be able to borrow more if you pay off that HECs debt, and the two of you might sit down together and go, you know what? It's going to be better to pay mortgage insurance and have a lower deposit than it is to have a HECs debt, because otherwise I'm not gonna be able to borrow the amount that I need in order to get into that apartment or to that house in the suburb with that I can afford to hold onto long term. So can you see that there are many situations and it depends on your personal situation, but a good rule of thumb is if it's less than 18 months, then sure you may consider it.

If that HEC step for a longer term, then just get comfortable with the fact that this is an unusual year. Cause we didn't see headlines two years ago when it was 0.6%, right? No one was screaming then this is an unusual year and that's where I do think the government really needed to come in and say, you know what? We know this is an unusual year, like we're gonna cap it at 5%, but that's not how this works. It was also an unusual year when it was 0.6%. So as far as the government's concerned, it swings and roundabouts. And the average amount you should pay over the life of your HECs debt should average at about two and a quarter per cent.

You were gonna get a better rate of return anywhere else than that, even at 3%, which is what the maths was that I worked out for the last three years, including this big year. And of course, if you're going for a mortgage, speak to a mortgage broker so you can decide if that's something that you should be looking at paying off earlier.

Now the second question is, what's the best way to fund a big purchase if it's beyond the value of your savings? Example, an electric car to replace an old vehicle, extend home loan or other new loan, interest free loans up to 15 K available us in the ACT.

So essentially if we are talking like replacing a fridge or replacing something, that's what your buffer account is for. And you should have three months worth of expenses in there. And just say your fridge died or something happened. First of all, I'd be looking at my insurance to say, is that somewhere I should go to? Cause that's what that's for. So for things like replacing fridges and washing machines, et cetera, that's what your buffer account is for. If you go to a store and they've got interest-free, I'm not a fan of that because generally if there's interest-free, it means that you could go to them and say, how much less will you pay if I pay you upfront? Cause then the store gets their money up upfront. So that means there's a deal to be had.

However, when it comes to replacing vehicles, most of us don't have dollars sitting there in order to just shell out for a car. Of course, if you do and you look at the opportunity cost of that, you might decide that's the way to go. But I'm a realist in that a car loan, let's just be real now, is Bad Debt. It's for an asset that's going to go down in value. The only way that it's not Bad Debt is if you can get a tax deduction for that because it's sitting in a business so I can get the GST off it and I can get a taxed action for all the running costs. I've kept a log book and I'm claiming a hundred per cent or close to, but even then, when I was accountant, I saw way too many people borrowing more than they expected, like paying 60 or 70 grand for a car just to get the tax deduction, which was freaking madness. So please, do not get a loan just for a tax deduction.

So the best place, I think is to shop around and work out where the cheapest money is. So what I would always do, is if you're buying it from a car yard, I would ask them for a quote. And you want the quote to be, so just say you are getting a chattel mortgage or a lease. Generally if you're in business, you're getting a chattel mortgage cause you're getting the GST back or a hire purchase.

So if I'm getting that's just a type of loan and is four years with a standard balloon payment, and what you wanna say is, I want it in writing. I want a standard balloon payment, and I want you to tell me what that is. I want it four years and I want to know what the repayment is. You're not interested in interest, you're not interested in anything. You're just interested in that. And then I would take that to my bank and I would say to them, I'm not interested in what the interest rate is. I want you to tell me, this is the amount I'm borrowing. It's four years. This is the balloon I want at the end. That just means after four years, what's the lump sum I have to pay out at the end? And then I want to know what the monthly repayment is.

Then I would take that to a mortgage broker and I'd ask them the same question cause you can't compare interest rates cause it's just a sneaky thing where there's so many fees and charges and everything in that it, the interest rate is never true.

And what you wanna compare is the repayment when everything else is exactly the same. And then obviously you go with what's cheaper.

If you have a mortgage or if you've got a home and you've got very little mortgage on it and you've got an investment property and if you had the ability to use those funds to borrow it, to invest in shares or a business or an investment property, that's where I would prefer that money to go.

However, if you've done all that and you've still got equity. You might choose to get either a secured personal loan or a mortgage, a second mortgage in order to buy that car. However, the caveat is if you do that, you have to have it as a separate loan and then figure out what repayment do I have to make to pay that off in four years and then freaking do it.

If you do not have the discipline to do that, if you pay that over 30 years, you're paying five times that car, which is freaking ridiculous. So that is the only caveat for you to do it. Generally, my preference is a hire purchase or a chattel mortgage over four years with a standard balloon. And that's what you are comparing across different dealers.

So I hope you found that useful. I know that the chat about inflation and HECs etc, is the thing that is very topical at the moment. If you've got questions as always, conflict me a DM [email protected], remembering there's an E on the end of Browne. But otherwise I hope you enjoyed that.

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