Pay off HECS or save with Bankwest

[Cherry Pro]

Hi All

I'm asking this question on behalf of my 19 year old who's doing an Engineering degree and works part time.

2 questions really...

1. He's saved about 10 k and I would like to see him enter the property market. His earnings are on average about $200 per week during uni terms and go up to about $400 per week during the holidays so it will be quite hard to get a loan of say $200 k on those earnings ...any ideas how we can help there ?

2. Is he better off paying off some part of his HECS debt as opposed to having the money sitting in a Bankwest Saver account earning interest at
4.25% pa ?

Many thanks

 

[auror]

Have you considered that, if your son pays his HECS upfront, he gets a 20% discount. It's a much better rate of return than a Bankwest Saver account of 4.25% (which he might have to pay tax on, depending on his taxable income).

I paid upfront for all my studies (back then it was 25% discount) and I'm happy about the enforced discipline. I still graduated with enough for part of a house deposit so it can be done. However I didn't buy until after I had a stable full-time job - I'd be concerned about your son entering the property market at such a young age. What if the demands of uni are such that he needs to stop his part-time work during semester? Is your son interested in property investing too, or is this more your idea than his? (Not trying to cause offence, but just working out what you mean by the sentence "I would like to see him enter the property market.")

 

[fmx_rider]

my 19 year old who's doing an Engineering degree

Probably explains why he's not spending his $200 a week down the pub chasing girls....



I agree with auror - he already has a lot on his plate with uni, work and no doubt have a lot on his mind like travel, career, car etc. IMHO he is better off without the added stress of property, especially since it is likely to be flat for a while. I'd be saving 50% (for future car or house deposit or travel) and paying 50% to HECS to get the discount.

4.25% in bank is similar to HECS CPI indexing + gov discount...much the same. Reducing HECS now will increase cashflow later when he gets a proper job and has to pay HECS back at 7-8% rate.

 

[auror]

fmx_rider has another point - your son might want to travel after graduating but before he starts work, do an exchange year at another uni overseas... anything can happen over the next 4-5 years while he is still 19!

In comparison if he waits till he graduates & starts a full time job, his future is more certain.

It's admirable that your son is saving enough to potentially invest in property. At 19 he is fairly young though and has room to grow and learn about PI. eg. at 19 I had decided to save towards my future house. However between 19 and 23 (the time when I actually bought) I think I learnt heaps more about property (thanks SS!) and had matured a bit.

 

[auror]

Oh, useful link here:
http://www.smh.com.au/news/money/best-to-wait-before-hecs/2008/05/03/1209235213606.html

 

[Cherry Pro]

Thanks ...thanks ..

Auror...he's not keen on property (more me telling him that's the way to go !!!) he's more inclined towards shares and we've started buying small parcels of shares.

FMX-rider .. he's mad on cars but very sensible and quite disciplined with his spending. Says his first car will be a Porsche (???) but for now he shares my little Toyota which he so detests.

Will look at him contributiing to HECS along with saving some in FHO a/c towards end of this financial year.

 

[auror]

Ah yes, contributing $5k to the fhog account will definitely be the way to go as he'll get $850 of govt contribution each year. Downside is that he has to buy a property in 4 years time otherwise it gets swept to super (?? I think)

 

[fmx_rider]

Small parcels of shares is a good place to start. I started buying shares back when I was at uni. If he changes his mind at any point he can just sell then go backpacking.

I wanted a Porsche for my first car too...but when your 18/19 and need a car to get around, well it won't be a Porsche. I think he will want his own 'regular car' long before he can afford a Porsche.

Regarding the link Auror posted. I tend to disagree with it's view that it is 'interest free'. The CPI inflation cost is essentially like interest.
QUOTE:"But doesn't the debt grow over time? Yes, it rises with inflation. That's not as scary as it sounds, even though inflation is running at four per cent, which would mean a $20,000 debt would have blown out to $24,333 in five years."

So in 5 years due to 4% CPI adjustments, they now have to pay an extra 21% in 'inflation' interest. Then consider if half that HECS amount ($10,000) was paid off early ($38 a week over 5 years) getting the 20% bonus...a gain of $2000. So after 5 years instead of owing $24,333 they now only owe about $12,000 ($20,000-$10,000-(20%*10,000)+(10,000*4%)...$13,000 is a decent saving from future cashflow.

 

[steveadl]

Cherry, paying off the HECS debt will make no difference to his servicability etc now. I'd continue the saving and get into property sooner. There will be many years (and entire career in fact) to pay off the HECS debt down the track. Better for him to get his foot into the property market now. You've been doing the rounds of Western Sydney - perhaps you could find him a nice little neutral/positive unit for under $200k so it doesn't require much $$ input from him at all and he can continue to save as well.

 

[j_p]

You can also pay lump sums to your HECS/HELP debt after finishing, any payment of over $500 gives you a bonus of 10%
ie. $500 will pay $550 off