Money Matters

Paying off a different kind of debt

Last Tuesday, the RBA’s 25bp rate cut brought the official cash rate down to 2.75%, the lowest it has been in fifty-three years (via The Australian). I usually make a voluntary repayment into the fixed portion of my loan whenever RBA makes such a mortgagee-friendly announcement. But with 1st of June fast approaching, I thought I’d attend to another kind of debt, the student loan.

Prior to the economic blip of 2008 and the mortgage in 2009, a less mustbethrifty me decided to do a degree for the fun of it. A couple of years later, I ended up sixteen grand poorer; for the last oh so many years, I’ve been paying for it through my tax return*.

The debt has gotten to the stage where I’ll probably clear it with the next tax return. If I want to save some money, however, I should cough up before the 1st of June, when the amount owing increases by 3% to match the rate of inflation.

Ordinarily, 3% isn’t something to get excited over, since the standard variable home loan rate is presently flitting between 6 and 7%. But, unlike the banks, the government isn’t in the business of making money from lending money; it likes to have its money back as soon as possible, and it does this by encouraging debtors to make lump-sum voluntary repayments: every HECS/HELP debt voluntary repayment of $500 or more attracts a 5% bonus (via ATO). 

Hence, if I pay off my student debt before the 1st of June, not only will I avoid the 3% indexation, I’ll only have to pay 95% of the amount owed. That’s a 8% saving, which trumps the home loan interest rates**. So this year,  instead of delaying my student debt repayment for as long as possible and offsetting the amount in the home loan, I’m gonna pay upfront now. And maybe I’ll finally get some money back on this year’s tax return. 😀

 *Most employers pay your student HECS/HELP debt for you, but I prefer to hold onto the money in the home-loan offset account for as long as possible. Call it borrowing from Father Government twice over. 😉

**Credit cards and many personal loans usually have interest rates that are higher than 8%, so pay these off first before attempting to pay off your student loan.

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