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Monthly Archives: February 2014

January 2014 – Further Education; How do you pay for it?


Welcome to the New Year …. and wishing you Healthy, eventful and prosperous times ….

What’s happening in our economy … How are financial markets doing … And a question from one of our readers; “How do I pay for my (or my kids) further education?”

Dear Readers,

Thanks to all of you for accepting our invitation, for accessing our blog, and for your participation and feedback.  Your positive feedback inspires me to explore new ideas and topics. We look forward to more of your active participation.

I am sure you had an interesting holiday break, lots of food and beverages, hectic shopping and swiping of credit cards, lots of travel, fun and frolic, and some interesting get-togethers with friends and family.

One such chat I had made me think of the subject of this month’s blog;
“Higher education is a must these days, or so they say”
“It could take anything between 3 to 10 years to complete University”
“How will I fund my education (or my kids, or grandkids, or family members)?”
“How much will it cost?”
“How do we pay for it?”
“When do we pay for it?”
“How do we decide?”

It was a lively and emotional chat, let me tell you. I have tried to address some aspects of it, but first …..

The Big Picture

Global Overview: We have detailed our views on global monetary situation, compounded by flawed fiscal and monetary ‘remedies’ (more like magic bullets) to ‘solve’ these problems. Please read our October blog, and previous ones, for details – http://tinyurl.com/l4hn9u4

We have reiterated, enough times, our view on the concept of ‘Money and Credit’, and the importance of gold as the basis of money (ultimately, we believe, gold is money). Pl read our August 2012 blog ‘What is Money?’ – http://tinyurl.com/lshbsjs

With the US FED becoming a gigantic ‘money printing enterprise’, and most other major central banks following this lead, attention has turned to the supply, availability, exchange rates, fluidity, etc. of currency and money between banks and institutions, within various economies, and between countries.

And a lot of attention is paid to Gold – The demand and supply situation for gold; It’s price and availability; How much of it is available? Where is it stored? Who does it actually belong to?
There has been talk of higher demand for ‘physical gold’ from some Asian countries, by the public, corporates and governments.
There has been talk of some governments putting restrictions on their citizen’s ability and ease to convert their paper money to gold, to trade in gold, to import and store gold, etc.
Seems a South American government recently repatriated significant amount of its physical gold holdings stored in US vaults, after much difficulty.
We hear recent news of some European government’s request for a substantial part of its physical gold holdings stored in US vaults to be returned back for ‘safe storage’ within their own place.
What is the significance of all this?
Is the unprecedented pace and volume of “money printing” by central banks; and the related inflationary pressure (bubbles) in various asset markets; the ‘competition between nations to devalue their currencies (currency wars), etc. hurting confidence in all “Paper Money” and “Fiat Money” systems, and the US Dollar in particular?
We would like your thoughts on this.

Local Impact: We briefly mentioned the disincentives of the global impact on our economy. Please read our October blog, and previous ones, for details – http://tinyurl.com/l4hn9u4
Our national debt figures are a worry; Unemployment, and the type of new jobs being created, is not rosy.
Asset price inflation (read property bubble – high prices for homes) – fuelled by record low interest rates, and desperate investors (both local and overseas – especially baby boomers) looking for a decent return on investment and safe parking space for their savings – is making it ever harder for first home buyers to enter into the market.
A newly elected government with indications of responsible budgeting and governance is a positive sign of hope.

Topic of the Month:
I had a stimulating conversation with a group of friends over the holiday break on university education expenses, in general, and how to best pay for it, in particular.
There were a wide variety of points, and opinion, made, such as;
“Is there a need for kids to go to university right after school?”
“What are the choices available?”
“Is there pressure – from parents, peers, fear of being left out?”
“How do we pay for it, and who pays for it?”

We could probably write a whole book trying to tackle all these issues, which is not our goal at this point in time.
I have limited this exercise to working out few possible ways of funding university fees and related (limited) expenses – Here we go;
Some assumptions;
We limit our costing to university student fees only, not living and travel expenses.
We assume that student is a citizen, permanent resident, and enrolling in an authorised institution.
We work on three amounts (total debt/cost incurred to complete a given course/degree) – $30,000, $60,000 and $120,000 respectively.
We assume (to keep things simple) that funds (loan amount) is withdrawn in full, at the day of drawdown, and will incur periodic monthly repayments (principle & interest) for a maximum period of the term of the loan. HECS debt is an exception (as detailed below).

Scenario 1:
You have enrolled into university and estimated your total fees and charges to be approx. 30k, by the time you have finished study. You have made other arrangements to cover your living expenses.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this using a credit card?
1. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
2. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
3. Your minimum monthly repayments for the first month would be approx. $600.
4. Your obligation would be limited to only paying ‘minimum payment due’ (calculated at 2-3 percent of monthly balance).
5. You could end up repaying upto 163k, over a period of 83 years, if you only repaid the minimum amount.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this by taking a personal or consumer loan?
1. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
2. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
3. Your minimum monthly repayments will be approx. $700 per month (based on a fixed interest rate of 14% p.a. and 5 year term) for the next 5 years.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this by ‘topping up’ your home/property loan (borrowing against equity in your home/property)?
1. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
2. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
3. Your minimum monthly repayments will be approx. $200 per month (based on a fixed interest rate of 7% p.a. and 30 year term) for the next 30 years, or until the debt is paid off.
What If; you applied for HECS loan (A federal Government initiative)?
1. The Government (Taxpayer) will fund your education to the limit of 30k.
2. You do not sign a loan contract, only an obligation to repay in the future.
3. Your loan repayments do not start until you find gainful employment within Australia, and your income/salary does not reach a ‘satisfactory’ level (approx. 50k per year, as per current ceiling – is indexed/increased annually).
“Is there any time limit as to when I need to start working?” = No
“What if I choose not to work at all?” = That’s your choice
“What if my income never crosses 51.3k (or the indexed amount, in the future)?” = No repayments
“What if I live/work overseas?” = No obligation to repay
“Is this a loan?” = It is an obligation to repay based on conditions
“Will I be charged interest?” = No, but your HECS balance is ‘indexed’ (will go up by 2-3% p.a.) to consumer inflation figures as per RBI/Government index (roughly 2 to 3% per year).
“How much will I have to pay back per month?” = Assume your ‘calculable income’ for 2014 is 52k; your HECS ‘repayment rate’ is 4%, per year, of your income; this works out as 4% of 52k, which is approx. $2080 per year, or approx. $174 per month.
Your repayments do not depend on your initial loan amount, or what date you choose to start work, or what date you reach the minimum income threshold (to qualify for repayment deductions from your income); If and when you reach the ‘threshold’, and based on your ‘income band’, you repay a set amount (a percentage of your income divided by 12) per month.

Scenario 2:
You have enrolled into university and estimated your total fees and charges to be approx. 60k, by the time you have finished study. You have made other arrangements to cover your living expenses.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this using a credit card?
1. A huge amount to put on you plastic, but if you are willing, and the bank too …..
2. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
3. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
4. Your minimum monthly repayments for the first month would be approx. $1200 or more.
5. Your obligation would be limited to only paying ‘minimum payment due’ (calculated at 2-3 percent of monthly balance).
6. You could end up repaying upto 320k, over a period of 102 years, if you only repaid the minimum amount.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this by taking a personal or consumer loan?
1. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
2. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
3. Your minimum monthly repayments will be approx. $1400 per month (based on a fixed interest rate of 14% p.a. and 5 year term) for the next 5 years.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this by ‘topping up’ your home/property loan (borrowing against equity in your home/property)?
1. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
2. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
3. Your minimum monthly repayments will be approx. $400 per month (based on a fixed interest rate of 7% p.a. and 30 year term) for the next 30 years, or until the debt is paid off.
What If; you applied for HECS loan (A federal Government initiative)?
1. The Government (Taxpayer) will fund your education to the limit of 60k.
2. You do not sign a loan contract, only an obligation to repay in the future.
3. Your loan repayments do not start until you find gainful employment within Australia, and your income/salary does not reach a ‘satisfactory’ level (approx. 51k per year, as per current ceiling – is indexed/increased annually).
“Is there any time limit as to when I need to start working?” = No
“What if I choose not to work at all?” = That’s your choice
“What if my income never crosses 51.3k (or the indexed amount, in the future)?” = No repayments
“What if I live/work overseas?” = No obligation to repay
“Is this a loan?” = It is an obligation to repay based on conditions
“Will I be charged interest?” = No, but your HECS balance is ‘indexed’ (will go up by 2-3% p.a.) to consumer inflation figures as per RBI/Government index (roughly 2 to 3% per year).
“How much will I have to pay back per month?” = Assume your ‘calculable income’ for 2014 is 65k (let us assume you got a better paying job for the 60k you spent on your degree); your HECS ‘repayment rate’ is 5%, per year, of your income; this works out as 5% of 65k, which is approx. $3250 per year, or approx. $271 per month.
Your repayments do not depend on your initial loan amount, or what date you choose to start work, or what date you reach the minimum income threshold (to qualify for repayment deductions from your income); If and when you reach the ‘threshold’, and based on your ‘income band’, you repay a set amount (a percentage of your income divided by 12) per month.

Scenario 3:
You have enrolled into university and estimated your total fees and charges to be approx. 120k, by the time you have finished study. You have made other arrangements to cover your living expenses.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this using a credit card?
Forget it, very unlikely and not practical.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this by taking a personal or consumer loan?
1. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
2. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
3. Your minimum monthly repayments will be approx. $2800 per month (based on a fixed interest rate of 14% p.a. and 5 year term) for the next 5 years.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this by ‘topping up’ your home/property loan (borrowing against equity in your home/property)?
1. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
2. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
3. Your minimum monthly repayments will be approx. $800 per month (based on a fixed interest rate of 7% p.a. and 30 year term) for the next 30 years, or until the debt is paid off.
What If; you applied for HECS loan (A federal Government initiative)?
1. The Government (Taxpayer) will fund your education to the limit of 120k.
2. You do not sign a loan contract, only an obligation to repay in the future.
3. Your loan repayments do not start until you find gainful employment within Australia, and your income/salary does not reach a ‘satisfactory’ level (approx. 51k per year, as per current ceiling – is indexed/increased annually).
“Is there any time limit as to when I need to start working?” = No
“What if I choose not to work at all?” = That’s your choice
“What if my income never crosses 51.3k (or the indexed amount, in the future)?” = No repayments
“What if I live/work overseas?” = No obligation to repay
“Is this a loan?” = It is an obligation to repay based on conditions
“Will I be charged interest?” = No, but your HECS balance is ‘indexed’ (will go up by 2-3% p.a.) to consumer inflation figures as per RBI/Government index (roughly 2 to 3% per year).
“How much will I have to pay back per month?” = Assume your ‘calculable income’ for 2014 is 100k (let us assume you got a better paying job for the 120k you spent on your degree); your HECS ‘repayment rate’ is 8%, per year, of your income; this works out as 8% of 100k, which is approx. $8000 per year, or approx. $667 per month.
Your repayments do not depend on your initial loan amount, or what date you choose to start work, or what date you reach the minimum income threshold (to qualify for repayment deductions from your income); If and when you reach the ‘threshold’, and based on your ‘income band’, you repay a set amount (a percentage of your income divided by 12) per month.

Now, dear readers, you tell me ….. which one would you chose and why?

I will leave the forum open to you now.
What are your thoughts on all of this?
What is your experience?
Come, join the discussion, and share your ideas and experiences.
I look forward to your opinion, counter argument, response, constructive criticism, feedback, etc.

Looking forward to hearing from you

Hari

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Posted by on February 7, 2014 in Uncategorized

 

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