A financial advisor has revealed why he isn’t trying to pay off his huge HECS debt faster by making additional payments. While it might make sense to chuck extra cash at your HECS to pay it off sooner, Noah Capozza believes he will be in a better financial position by putting his money elsewhere.
The Melbourne resident has taken that approach with his $60,000 loan, especially after it grew by nearly $2,000 this year due to indexation. The Link Wealth financial advisor told Yahoo Finance he would rather direct his leftover money towards investing.
“The idea behind that is the average rate of return on the share market, which, over the last 100 years, is 9 per cent year-on-year,” he said.
Comparatively, he said the rate of HECS indexation should be in the 2-3 per cent range.
The average HECS debt is $27,600, and your employer has to send a percentage of your salary towards that loan every pay cycle, which is based on how much you earn.
If you’re on the average salary of $102,742 per year, 5.5 per cent of your pay, which is roughly $5,650 per year or $470 per month, would go towards HECS.
If you put no additional money into that loan, it would take nearly 59 months, or close to five years, to pay it off.
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If you put $500 per month on top of your employer’s contributions, that loan would be paid off in a little more than 28 months or two and a third years.
Those two time frames are tricky because they don’t take into account the yearly indexation that hits in June, which can increase the loan by hundreds or even thousands of dollars.
In Capozza’s case, his HECS went up by $1,800 this year alone.
But the average 8-10 per cent rate of return on the share market isn’t guaranteed, something people must weigh up.
Even if your money can be invested in a high-interest savings account, which recently offered returns of about 5 per cent, your money could be growing faster than your HECS debt.
Victoria University found recently that the average amount of time it takes to pay off a HECS debt is 9.9 years. Capozza said money invested instead of repaid should generally grow faster than the HECS debt.
“You can just let it grow and compound over time,” Capozza told Yahoo Finance.
“It could provide you with the opportunity to either pay your HECS off or have other opportunities that will come up later down the track.”
Capozza sees plenty of clients worried about paying off their HECS and whether it will affect their borrowing capacity if they want to buy a home in the future.
But lenders don’t ever look at the size of the debt when assessing your suitability for a loan.
Instead, they watch how much of your salary goes towards it.
“You could have a million dollars, you could have $10. It actually has no difference,” he said.
Instead of seeing Capozza’s $60,000 balance, a bank would only assess him on the $470 leaving his pay every month, if he were on the average salary.
The financial advisor also said diverting your money towards investments could be a better idea as the government has been making huge strides in the HECS department recently.
A poll of more than 1,600 Yahoo Finance readers found 46 per cent of people thought they would never fully pay off their HECS by themselves or without government support.
Last year, the Albanese government changed how indexation worked, so that it would be whatever was lower out of the consumer price index and the wage price index.
It changed the 7.1 per cent indexation rate in 2023 to just 3.2 per cent.
Additionally, Labor promised to wipe 20 per cent of every person’s student loans.
“I dare say that will probably happen every time there’s an election going on, I’m sure they’ll push some sort of agenda to help out with HECS debt,” Capozza said.
But he insisted that anyone who is thinking about where to put their extra cash should speak to a financial expert beforehand to make sure it’s the right direction for them.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.
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