Scrooge Scrags Students

Newcastle Herald

Thursday December 16, 2004

Noel Whittaker

IF you are looking for something to spend your money on around Christmas, the best return on your funds might be to make a payment towards somebody's HECS (Higher Education Contribution Scheme) debt.

Yes, as its contribution to the season of joy and goodwill, the Federal Government has decided to revamp the entire tertiary education funding system, which of course means less goodies for the long-suffering students.

I figure both the Government and our dog Simba the ridgeback have been taking lessons from the same book.

If Simba wants to get into a forbidden place such as our bedroom, he'll first put his nose just inside the door. Then he'll sink down with his nose on his front paws and inch forward every couple of minutes till he's flat out on the carpet.

They used this technique when they introduced HECS for those of you who don't have children, that is a fancy name for unpaid university fees.

First, the government of the day floated the idea that free university education was discriminatory because it meant that the poor people's taxes were paying for the rich kids' university degrees.

Accordingly they brought in a system that allowed students to put their university fees on credit and pay them off out of their future earnings.

They sweetened the offer by allowing a 25 per cent discount for those who could find the money to pay the fees up front, or a 15 per cent discount for those who made lump sum reductions in their debt along the way.

Actually it wasn't really a 15 per cent discount because when you read the fine print you discover that the discount is applied to the sum paid.

This reduces it to 13 per cent.

If you had a HECS debt of $1000 and made a lump sum payment of $850, you may well assume that the debt would be liquidated after the application of the 15 per cent discount.

But in practice the discount of 15 per cent is applied to the amount of $850 you paid, so your discount ends up being $127, not $150.

That's government accounting for you!

But that's all water under the bridge now the spin doctors have got into the act and the term HECS will not be used after December 31.

From that date the deferred payment arrangements previously available under HECS will be available through the new Higher Education Loan Program (HELP), and students who can't pay their fees upfront can defer them through HECS-HELP.

I am not making this up.

Of course, with the new terminology came the opportunity to tighten the screws a bit more, so after December 31 the bonus for voluntary repayments of $500 or more will be reduced to 10 per cent, while the discount for up-front payments will be reduced from 25 per cent to 20 per cent.

Graduates regularly ask if the best use of their spare money is to reduce their HECS debt.

There is no single answer that fits all because HECS loans are indexed in line with the consumer price index, which means the effective interest rate is about 2 per cent.

If you had personal loans or credit card loans that were charging high interest rates, you would favour repaying these over paying back the low-interest HECS loan.

However, if you don't, remember that any money invested in reducing a HECS debt between now and December 31 will earn an effective return of 13 per cent after tax.

That's hard to beat.

If you are working and paying off your HECS debt by instalments, make sure you advise your pay office when the debt is fully paid off. Otherwise they will continue to take out the repayments and you will have to go to the trouble of getting a refund from the Australian Taxation Office.

Noel Whittaker is joint managing director of Whittaker Macnaught Pty Ltd, AFSL number 246519. His email is noelwhit@gil.com.au. This advice is general in nature and readers should take their own expert advice before making financial decisions.

© 2004 Newcastle Herald

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