Paying A High Price To Be Free Of Debt

Sun Herald

Sunday September 21, 2003

LINDA GOUGH. Linda Gough is an executive vicepresident with BTFunds Management. This information doesn't account for your investment objectives, particular needs orfinancial situation. These should be considered before investing and we recommend you consu

WHILE the Federal Government's planned changes to higher education face a tough passage through the Senate, former tertiary students still face the problem of how to wipe the debt of the higher education contribution scheme (HECS).

For many people, it is a tough task. The average age to pay off a HECS debt is estimated to be 39.3 years for females and 33.8 for males, says the National Centre for Social and Economic Modelling at the University of Canberra. And 38 per cent of males and almost 80 per cent of females still have a HECS debt at age 35.

It's difficult to know what sort of advice to give people in this predicament. If they pay their HECS up front they are spared the annual indexation rate, which can increase the debt. But for many young people, this is not an option and they will be left with an unmanageable debt at a time when they are struggling to pay rent and save for a home or car. So, should these new graduates make extra repayments on their HECS debt to pay it off sooner and receive the 15 per cent voluntary repayment bonus, or keep paying by instalments?

Let's take a woman who has just finished tertiary education with a $15,000 HECS debt. She is earning $38,000 a year and is keen to save for an apartment. Should she pay out the HECS loan first or take advantage of the Government 's $7000 first home owner's grant and buy a property?

While the $7000 is attractive, be careful you are not paying more for property to take advantage of the government grant, says Marisa Broome , principal of wealthadvice .

If you still have a HECS debt, she said, you are probably on a low income, making it difficult to meet mortgage repayments. ``For something as large as a mortgage, you need to have the borrowing capacity," she said. ``In this instance, I don't think she should be worrying about buying a home because the area where she could afford to buy is not going to give her sufficient capital growth.

``Say she can afford to borrow $150,000. She is not going to get as much growth as if she spent $500,000. And that is why you buy property: to provide a home and to give you that growth.

``In this case, I'd get rid of the debt first. If you borrow money for a house and you only have a 10 per cent deposit, the banks will charge mortgage insurance which can be very expensive. If that's the case, you are better off making voluntary repayments then saving up for a bigger deposit," Broome said.

© 2003 Sun Herald

Back to News Index | Back to Home