Financial gurus, please

[justginger]

Again, I'm asking advice from the clever financial minds of this board. As (some of) you know, I'm going back to uni this year!

I am going to try to explain how uni and the payment system works here, to get some advice from what others would do.

First, university tuition fees are capped by the Australian government, based on what discipline of study you are doing. For me, medical science is capped at about $27,000/year. This is how much you would pay if you were an overseas student. For citizens/permanent residents (like me), the government pays the vast majority of those fees for you, with your student contribution capped at $4,025/semester (for my discipline). That $8,050/year is what I am expected to pay for my full time studies.

Not only is that a fantastic deal, it gets better. You have the option of not paying that amount upfront, of having a loan from the government to pay FULL tuition, and you will pay it back through taxes when you earn over a threshold amount (I think it's about $50,000/year for 2013). There are incentives for people to either not do that (and pay their contribution up front in full) or pay it back quicker, in large chunks. You receive a 10% discount of the contribution amount if you either pay your full amount by the beginning of the semester (you only have to pay that semester, not the entire year) OR if you pay at least $500 by the beginning of the semester (so your $500 payment counts for $550, your $2000 payment counts for $2200, etc). After that point, any voluntary extra payments you make for $500 or more, you receive a 5% 'bonus' credit, making a $500 payment actually count for $525.

Now, as for having a standing loan amount. Say you pay nothing towards your contribution, so for the first year you have a debt of $8,050 to the Australian Federal Government. If you earn less than $50,000/year (which is possible, since I will be cutting down to part time), you do not HAVE to pay any of it. If you earn more than $50k/year, you will be making compulsory repayments in the form of a tax, on a sliding scale. The scale starts at 4%, and goes up to 8% if you earn over $92k. The amount withheld in taxes are direct repayments towards your standing loan.

Interest? There is none. Technically. However, the standing loan amount is adjusted once/year to account for inflation, according to the official Australian Taxation Office numbers. In the last three years, these amounts have varied between 2-3%. So basically, you're paying 2-3% interest once/year on what you haven't paid off.

Now. That's pretty low interest. The interest on my mortgage at the moment is around 6%. My bank account pays around 4.3%. So, what is the most financially savvy way to work this situation? Pay everything upfront just to get it all out of the way (no one likes messing about with loans) and get my full 10% discount? Pay nothing, keep the money in the mortgage, and then make a massive repayment right before the end of financial year (to avoid being charged 'interest' in the form of indexing)? Pay a bit at the beginning to get my 10% bonus, then make >$500 repayments through the year to get further 5% bonuses?

It would be nice to retain some of my savings for an emergency (without having to go into the mortgage offset account), so that is the only real reason I'm considering holding a debt instead of paying it all at once.

I'd love to hear everyone's opinions. I must fill out the paperwork that determines which way I proceed fairly soon, as classes start at the beginning of March.

 

[perry]

I believe that you would be expecting to make more the $50,000 per year after you graduate with a MD and complete whatever residency and licensing requirement there are in Australia. Thus, I would not count on things being forgiven.

As far as what to do? How much savings do you have. While the "interest" rate is less than your mortgage; it is also true that you expect to be able to sell the house if needed and pay off that mortgage. You cannot directly sell your diploma and pay of its loan.

IF you can afford it - I believe you will be better off long term to pay at least part up front. You are correct in that you need to retain some savings (which is wise). I do not know the full details of your economic situation - nor the expectations on your future and the Australian economy. But, the less debt you have at the end of college the better off you will be. I personally graduated after 5 years of college with something around $850 in college debt and a BS in Mechanical Engineering. My only other debt was a used car loan for several thousand dollars (This was Dec 1985).

Many of my classmates graduated with a minimum of $20,000 in debt, with many over $30,000; and they struggled for years with the payments.

Hope that helps,

Perry

 

[vc10um]

jg...my husband was actually doing some similar calculations on our finances since we'll be purchasing a car, partially on credit, in the next few months.

He took into account all our loans (our mortgage [by far the largest in monetary value, by about 600%], my student loans, his student loans, and the estimated loan on the vehicle) and ran the numbers with the amount of money we have each month set aside to pay off these debts (which is greater than the combined total of minimum payments). In every instance, it made the most sense over time to put any extra money toward the mortgage in order to reduce the total amout of interest paid on the loan.

It is particularly beneficial to pay down the debt which accrues the highest total interest over time. For us, even though the interest rate on our mortgage is better than our student loans or what we anticipate getting for the car, because it's on a much higher principal value, paying down that principal as quickly as possible yields the greatest financial gains by reducing a greater percentage of interest paid over time.

I should also note that, barring a drastic change in circumstances, DH and I intend to be in this home for the next 20+ years and have a 15 year mortgage, so we are clearly intending on paying out the mortgage, not selling the house. That may also be something to take into consideration...if you intend to sell your home at some point, the total amount of interest accrued may be greater on a different component of your debt.

I hope that helps!

ETA: I'm FAR from a financial guru, but I thought hearing some anecdotal evidence might be helpful!

 

[honey22]

I have not paid my HECS/HELP up front. Our advise was to never pay HECS/HELP if you also have a mortgage. You will be better off putting the money onto your mortgage first as it's a higher interest rate.

I had a friend who paid her HELP off first and her accountant near had a heart attack!

Also, the debt is 'safer', for want of a better term. You are under no obligation to pay it back until you earn a certain amount as you pointed out. Depending on your future job, you might also be able to salary sacrifice and that also affects your HELP payments.

It's completely up to you, but we are paying the house off first.

Good luck with your studies!!

I have a science degree, and have almost finished my Lab Medicine Post Grad degree. Hope you enjoy your course

 

[justginger]

I have not paid my HECS/HELP up front. Our advise was to never pay HECS/HELP if you also have a mortgage. You will be better off putting the money onto your mortgage first as it's a higher interest rate.

I had a friend who paid her HELP off first and her accountant near had a heart attack!

Also, the debt is 'safer', for want of a better term. You are under no obligation to pay it back until you earn a certain amount as you pointed out. Depending on your future job, you might also be able to salary sacrifice and that also affects your HELP payments.

It's completely up to you, but we are paying the house off first.

Good luck with your studies!!

I have a science degree, and have almost finished my Lab Medicine Post Grad degree. Hope you enjoy your course

I'm glad to hear from you, honey, since you have knowledge of exactly how this federal government, no interest loan works. I think I will have to do the EXACT sums to see which is most beneficial - my knee jerk reaction is to pay it all upfront to take advantage of the 10% discount. In essence, not doing so is paying 10% interest, which is far more than my mortgage rate. Does that make sense?

 

[iheartscience]

I have not paid my HECS/HELP up front. Our advise was to never pay HECS/HELP if you also have a mortgage. You will be better off putting the money onto your mortgage first as it's a higher interest rate.

I had a friend who paid her HELP off first and her accountant near had a heart attack!

Also, the debt is 'safer', for want of a better term. You are under no obligation to pay it back until you earn a certain amount as you pointed out. Depending on your future job, you might also be able to salary sacrifice and that also affects your HELP payments.

It's completely up to you, but we are paying the house off first.

Good luck with your studies!!

I have a science degree, and have almost finished my Lab Medicine Post Grad degree. Hope you enjoy your course

I'm glad to hear from you, honey, since you have knowledge of exactly how this federal government, no interest loan works. I think I will have to do the EXACT sums to see which is most beneficial - my knee jerk reaction is to pay it all upfront to take advantage of the 10% discount. In essence, not doing so is paying 10% interest, which is far more than my mortgage rate. Does that make sense?

I think this makes sense unless you'll be making less than $50k. (At least from what I understand of how the loans work!) Can you do some realistic calculations and determine how much you'll make once you go back to school?

 

[justginger]

I have not paid my HECS/HELP up front. Our advise was to never pay HECS/HELP if you also have a mortgage. You will be better off putting the money onto your mortgage first as it's a higher interest rate.

I had a friend who paid her HELP off first and her accountant near had a heart attack!

Also, the debt is 'safer', for want of a better term. You are under no obligation to pay it back until you earn a certain amount as you pointed out. Depending on your future job, you might also be able to salary sacrifice and that also affects your HELP payments.

It's completely up to you, but we are paying the house off first.

Good luck with your studies!!

I have a science degree, and have almost finished my Lab Medicine Post Grad degree. Hope you enjoy your course

I'm glad to hear from you, honey, since you have knowledge of exactly how this federal government, no interest loan works. I think I will have to do the EXACT sums to see which is most beneficial - my knee jerk reaction is to pay it all upfront to take advantage of the 10% discount. In essence, not doing so is paying 10% interest, which is far more than my mortgage rate. Does that make sense?

I think this makes sense unless you'll be making less than $50k. (At least from what I understand of how the loans work!) Can you do some realistic calculations and determine how much you'll make once you go back to school?

Well, I think I will be making less than $50k for the next 2-3 years while I am studying full-time and only working part-time. So for the duration of the course, I will likely be below the threshold of mandatory repayments. However, they will still be "adjusting" the loan yearly, by that variable amount (between 2-3% in recent history). So my debt will be increasing, and I will have missed out on the 10% discount of paying upfront. BUT, perhaps with mortgage interest that compounds monthly (versus this schooling stuff compounding yearly), it would be a better option to be left there instead?

WHY does this have to be so difficult?! I highly doubt that none of the 18 year olds who are going straight to college give it this much thought!

 

[vc10um]

I have not paid my HECS/HELP up front. Our advise was to never pay HECS/HELP if you also have a mortgage. You will be better off putting the money onto your mortgage first as it's a higher interest rate.

I had a friend who paid her HELP off first and her accountant near had a heart attack!

Also, the debt is 'safer', for want of a better term. You are under no obligation to pay it back until you earn a certain amount as you pointed out. Depending on your future job, you might also be able to salary sacrifice and that also affects your HELP payments.

It's completely up to you, but we are paying the house off first.

Good luck with your studies!!

I have a science degree, and have almost finished my Lab Medicine Post Grad degree. Hope you enjoy your course

I'm glad to hear from you, honey, since you have knowledge of exactly how this federal government, no interest loan works. I think I will have to do the EXACT sums to see which is most beneficial - my knee jerk reaction is to pay it all upfront to take advantage of the 10% discount. In essence, not doing so is paying 10% interest, which is far more than my mortgage rate. Does that make sense?

I think this makes sense unless you'll be making less than $50k. (At least from what I understand of how the loans work!) Can you do some realistic calculations and determine how much you'll make once you go back to school?

Well, I think I will be making less than $50k for the next 2-3 years while I am studying full-time and only working part-time. So for the duration of the course, I will likely be below the threshold of mandatory repayments. However, they will still be "adjusting" the loan yearly, by that variable amount (between 2-3% in recent history). So my debt will be increasing, and I will have missed out on the 10% discount of paying upfront. BUT, perhaps with mortgage interest that compounds monthly (versus this schooling stuff compounding yearly), it would be a better option to be left there instead?

WHY does this have to be so difficult?! I highly doubt that none of the 18 year olds who are going straight to college give it this much thought!

I'm sure they don't, but they probably don't have mortgages, either!

Just remember, a 10% discount is only $800 per year of schooling. It may suck to pass up "free" money, but I would bet that the difference in interest on your mortgage would be greater than that amount if you put some of the school money as an extra payment toward your mortgage principal. But, that only works if you don't have a pre-payment penalty on your mortgage...

 

[justginger]

I have not paid my HECS/HELP up front. Our advise was to never pay HECS/HELP if you also have a mortgage. You will be better off putting the money onto your mortgage first as it's a higher interest rate.

I had a friend who paid her HELP off first and her accountant near had a heart attack!

Also, the debt is 'safer', for want of a better term. You are under no obligation to pay it back until you earn a certain amount as you pointed out. Depending on your future job, you might also be able to salary sacrifice and that also affects your HELP payments.

It's completely up to you, but we are paying the house off first.

Good luck with your studies!!

I have a science degree, and have almost finished my Lab Medicine Post Grad degree. Hope you enjoy your course

I'm glad to hear from you, honey, since you have knowledge of exactly how this federal government, no interest loan works. I think I will have to do the EXACT sums to see which is most beneficial - my knee jerk reaction is to pay it all upfront to take advantage of the 10% discount. In essence, not doing so is paying 10% interest, which is far more than my mortgage rate. Does that make sense?

I think this makes sense unless you'll be making less than $50k. (At least from what I understand of how the loans work!) Can you do some realistic calculations and determine how much you'll make once you go back to school?

Well, I think I will be making less than $50k for the next 2-3 years while I am studying full-time and only working part-time. So for the duration of the course, I will likely be below the threshold of mandatory repayments. However, they will still be "adjusting" the loan yearly, by that variable amount (between 2-3% in recent history). So my debt will be increasing, and I will have missed out on the 10% discount of paying upfront. BUT, perhaps with mortgage interest that compounds monthly (versus this schooling stuff compounding yearly), it would be a better option to be left there instead?

WHY does this have to be so difficult?! I highly doubt that none of the 18 year olds who are going straight to college give it this much thought!

I'm sure they don't, but they probably don't have mortgages, either!

Just remember, a 10% discount is only $800 per year of schooling. It may suck to pass up "free" money, but I would bet that the difference in interest on your mortgage would be greater than that amount if you put some of the school money as an extra payment toward your mortgage principal. But, that only works if you don't have a pre-payment penalty on your mortgage...

Nope, no penalties. We've been paying double repayments for the last three years - starting to really see it pay off as the house should be our's by the time I'm 35.

I've been thinking of COMPOUNDING interest on the mortgage - I can't figure out the sums for a loan that is compounded monthly. It's too advanced, I've stuck with working on yearly interest figures. So for the first year, I'd put in an extra $7300 that would otherwise have gone to upfront tuition. That saves me $438 in mortgage interest the first year. Then the second year, I do the same thing, which at this point means that I've had $14,600 of missed mortgage payments, costing me $876 interest for that year. Then the third year (which may only be an extra semester), I will have missed out on $21,900 of mortgage payments in favor of tuition, costing me $1314 for that year. n summary, I will roughly pay an extra $2628 in interest on my mortgage if I choose to pay my entire school fees up front.

However, if I were pay up front, I would receive $2400 in benefits by way of 10% payment bonus over three years. Plus I won't have my fees 'adjusted' by approximately 3% per year (saving me $240 the first year, $480 the second year, and $720 the third year). So the benefit of paying up front is $2400 + $1440 = $3840. Even if the 'adjustment' for those years is on the lower end at 2%, that would be savings of $160 + $320 + $480 = $960. $960 + $2400 in 10% bonus credit = $3360 of savings by paying up front.

Have I done those calculations correctly? Is it actually then better for me to pay upfront? Or does the MONTHLY compounding interest sway the numbers enough to make not paying a more financially savvy choice?

 

[smitcompton]

Hi Ginger,

A savings cushion is a wonderful stress reliever while you go to school. Priceless! From your previous posts I am assuming you will still be on track to have your house paid off in 7 yrs or so. If this true, I would not concern myself with the mortgage-just continue with what you are doing.

I would pay $500.00 up front at the beginning of each term and an additional payment of 500.00 during the term. I am also assuming you have $10,000 or so in a money cushion(not to be confused with diamond cushion). As the interest on the account will come to $450.00 per yr, it provides the finds for one of the 500.00 payments.

If you get a job during the summer break you can put aside funds for the second yr of school. As the second yr of school approaches, I would pay more toward my school costs as I am nearer my goal and there is less time for a potential financial disaster to occur. I would pay 2,000 per term at that point and have a total of 25% of my debt paid upon graduation.

I would not do all or nothing. As you get nearer graduation you can bump up the payments. You are very goal oriented, so I see the reduction of some of this debt as a goal you can reach. Do not make yourself concerned with finances while going to school. Enjoy it.

Great program you have there. Good Luck

Annette

 

[justginger]

Hi Ginger,

A savings cushion is a wonderful stress reliever while you go to school. Priceless! From your previous posts I am assuming you will still be on track to have your house paid off in 7 yrs or so. If this true, I would not concern myself with the mortgage-just continue with what you are doing.

I would pay $500.00 up front at the beginning of each term and an additional payment of 500.00 during the term. I am also assuming you have $10,000 or so in a money cushion(not to be confused with diamond cushion). As the interest on the account will come to $450.00 per yr, it provides the finds for one of the 500.00 payments.

If you get a job during the summer break you can put aside funds for the second yr of school. As the second yr of school approaches, I would pay more toward my school costs as I am nearer my goal and there is less time for a potential financial disaster to occur. I would pay 2,000 per term at that point and have a total of 25% of my debt paid upon graduation.

I would not do all or nothing. As you get nearer graduation you can bump up the payments. You are very goal oriented, so I see the reduction of some of this debt as a goal you can reach. Do not make yourself concerned with finances while going to school. Enjoy it.

Great program you have there. Good Luck

Annette

Good things to think of there. Yes, I have more than $10k in cushioning, and we do plan on continuing on with the double mortgage repayments (though of course that can be scaled right back if necessary - if we dropped back to minimum repayments we'd have an extra $2000/month to use for necessities). I am continuing to work part-time, probably 25 hours/week, maybe a bit more. On top of that I'll be able to jump up to full time during the uni holidays (which over summer is a full three months, like in the States, plus a few weeks here and there throughout the year).

Perhaps it is something to consider - having emergency funds is worth sacrificing potential savings of (relatively) small amounts. Then again, I know I've got financially stable parents to call upon if need be, a car to sell, and even jewelry to sell, and decent insurance. Regardless, it appears that there isn't a SIGNIFICANT amount of savings one way or another, we're talking in amounts of ~$1000. Not that I think it's a piddly amount - it's just that when compared to the overall cost, it is not a significant loss in the long run.

Thankfully I will be getting this money back eventually. When I graduate, I'll be receiving yearly raises for the next 10 years (versus currently sitting at the top pay bracket possible with my American degree). Good thing because I am NOT looking forward to being a 'mature age student.'

 

[smitcompton]

Hi Ginger,

I understand you will have more money available to you than I thought. In this case I would split the excess cash between savings and school tuition. I am in the camp of always trying to keep capital (savings account), and or adding to it, and paying expenses out of income. That is how wealth is formed. Never lose the capital. Income is a way to wealth, but wealth is accumulated capital.

Yes, I do think you are zeroing in on small amounts. Capital preservation is more important. You can do both. If you were to rely on your parents and something happened, you will miss out on telling your children how you did this all on your own. That is wonderful to throw in their face.

You are to be commended. You are doing great. I really admire you, no joke. You are rare.


Annette

 

[Echidna]

Justginger, in the Australian system as it stands, I cannot see any reason to pay upfront (or even incremental payments) unless you have no other debt. Mt accountant agrees with me. The interest rate is the lowest you will ever be offered, especially when you figure in that your salary increases should also match the inflation "interest rate". The mortgage is a much better place to stash the money, especially if you have a 100% offset account.

Having said that, we have paid ahead in two circumstances: my husband was being taxed at 8% repayments due to his earnings. We calculated that he would have "paid out" his loan by Dec 2010, but that would not be officially recognised until June 30 2011 (when tax time catches up and we get a refund). In that case, we paid the remaining amount in June 2010, then put in tax forms to stop the tax and take the cash flow instead. I hope that makes sense!

In the second circumstance, I'm currently completing a Masters and I'm paying for upfront. This is a purely emotional decision because we have the spare cash and I'm studying for fun. It's probably not the "smartest" move, but it is tax deductable, so I stage the Sem 2 payment for June 30 so I can claim both semesters as soon as possible. I still have an undergrad debt that I'm not concerned about. It should be paid off in 3 years or so.

 

[justginger]

Justginger, in the Australian system as it stands, I cannot see any reason to pay upfront (or even incremental payments) unless you have no other debt. Mt accountant agrees with me. The interest rate is the lowest you will ever be offered, especially when you figure in that your salary increases should also match the inflation "interest rate". The mortgage is a much better place to stash the money, especially if you have a 100% offset account.

Having said that, we have paid ahead in two circumstances: my husband was being taxed at 8% repayments due to his earnings. We calculated that he would have "paid out" his loan by Dec 2010, but that would not be officially recognised until June 30 2011 (when tax time catches up and we get a refund). In that case, we paid the remaining amount in June 2010, then put in tax forms to stop the tax and take the cash flow instead. I hope that makes sense!

In the second circumstance, I'm currently completing a Masters and I'm paying for upfront. This is a purely emotional decision because we have the spare cash and I'm studying for fun. It's probably not the "smartest" move, but it is tax deductable, so I stage the Sem 2 payment for June 30 so I can claim both semesters as soon as possible. I still have an undergrad debt that I'm not concerned about. It should be paid off in 3 years or so.

Can you tell me where I made a calculation error in my figures above? Because, thanks to the 10% early payment bonus which is about 4% more than my mortgage interest rate, my numbers illustrate a ~$1000 savings in paying upfront every semester, over the course of 3 years.

 

[Echidna]

Justginger, in the Australian system as it stands, I cannot see any reason to pay upfront (or even incremental payments) unless you have no other debt. Mt accountant agrees with me. The interest rate is the lowest you will ever be offered, especially when you figure in that your salary increases should also match the inflation "interest rate". The mortgage is a much better place to stash the money, especially if you have a 100% offset account.

Having said that, we have paid ahead in two circumstances: my husband was being taxed at 8% repayments due to his earnings. We calculated that he would have "paid out" his loan by Dec 2010, but that would not be officially recognised until June 30 2011 (when tax time catches up and we get a refund). In that case, we paid the remaining amount in June 2010, then put in tax forms to stop the tax and take the cash flow instead. I hope that makes sense!

In the second circumstance, I'm currently completing a Masters and I'm paying for upfront. This is a purely emotional decision because we have the spare cash and I'm studying for fun. It's probably not the "smartest" move, but it is tax deductable, so I stage the Sem 2 payment for June 30 so I can claim both semesters as soon as possible. I still have an undergrad debt that I'm not concerned about. It should be paid off in 3 years or so.

Can you tell me where I made a calculation error in my figures above? Because, thanks to the 10% early payment bonus which is about 4% more than my mortgage interest rate, my numbers illustrate a ~$1000 savings in paying upfront every semester, over the course of 3 years.

Sorry, I did not see that you had added figures- I should have read further! Let me go back and have a look...

I don't think you've made an error anywhere that I can see. We made our choice because when we ran our calculations (all numbers just for example), an $8000 lump sum repayment at Year 5 of a $300 000 loan would save $17 678 of interest and cut over a year off the term of a loan (compared to the basic 10% discount of about $800 + change in the indexing). I believe this is down to the compounding and term, but I'm no maths expert! I also vaguely remember something about present and future values from maths class, but that was a long time ago... I'm sure you've run these calculations already though, so it might depend on your circumstance and preferences