HECs, HELP, FEE-HELP, student loans

Once and For All… Should You Pay Off Your HELP Debt Early?

It’s the question on many recent debt-laden graduates lips; should I try and repay my student loan debt (hereafter referred to as HELP) as quickly as possible, or should I just stick to making compulsory repayments for what feels like the rest of my life?

To answer it, let’s look at the pros and cons of both.

First up, is HELP the best loan you’ll ever have?

It would be remiss of us not to kick things off by pointing out that as things currently stand your HELP debt could be the best loan you’ll ever have. Think about it.

You’re automatically accepted for the loan, you don’t have to repay any of it until you can actually afford to, and instead of charging you interest the government indexes the loan annually to inflation, currently a paltry 1.5 per cent per annum.

The only other place you’ll get terms that good is at your parents’ house.

If you think of a mortgage as a ball and chain, then a HELP debt is equivalent to wearing one of those colourful friendship bracelets you find in Bryon Bay market stalls around your ankle for a few years. You’ll quickly forget it’s there.

How compulsory repayments work

Say you earned $57,000 in the 2014/15 financial year and had a HELP debt of $30,000.

The government requires you to pay four per cent of your income, or around $2,300 a year, to service this debt (which in most cases your employer will automatically withhold over the course of the year).

In 2015, the indexation rate for HELP debts was set at 2.1 per cent, meaning that your $30,000 debt increased by around $630 on 1 June.

But thanks to the compulsory repayments, your overall HELP debt still decreased by around $1,670, and you probably didn’t even notice the money was gone.

As you earn more, your compulsory repayment percentage increases, meaning you pay the debt off quicker but there’s a bigger financial impact on your hip pocket.

What about the voluntary repayment discount?

It’s possible to make voluntary repayments to pay off your HELP debt faster, and the government offers a five per cent bonus on voluntary repayments above the value of $500 as an incentive.

But there are a few things to consider before using your hard-earned savings to repay your HELP debt.

Firstly, if you have other debts that incur a higher rate of interest, for example a credit card or car loan, it makes sense to focus your efforts on repaying these first.

And secondly, don’t forget about the opportunity cost you’re missing out on by repaying your debt.

For example, could you earn a greater return on your money than the 5 per cent discount you’ll receive on the voluntary HELP repayment?

I’m ready to make a voluntary repayment… what now?

If you’re debt free and have some cash set aside, you can pay off your debt faster by taking advantage of the voluntary repayment discount.

  • Sign up for a MyGov account and link it to the ATO to check your outstanding HELP balance and find out your Payment Reference Number (PRN).
  • If you’d like to pay off your balance in full, you only need to make a payment equivalent to the discounted amount.
    • For example, if your HELP balance is $5,000, you only need to make a payment of $4,761, and the ATO will contribute the remainder ($5,000 divided by 1.05, rounded down to the nearest dollar equals a discount of $239).
    • If you’re only repaying part of your outstanding debt, remember only payments above $500 qualify for a voluntary repayment bonus, and also voluntary repayments do not exempt you from making compulsory repayments.
  • It makes sense to make any voluntary repayments before 1 June in a given tax year, as that is the date that indexation is applied to your debt.
  • If your employer has been withholding compulsory repayments throughout the year and you pay off your HELP debt in full, the ATO will refund the difference once you complete your tax return (assuming you don’t owe tax for other reasons).

Visit the ATO’s website for more information on voluntary repayments, including a voluntary repayment calculator and details on how to make a payment.

Oh, and one more thing…

The government has got its eye tertiary education.

This year’s federal budget closed an existing loophole; Aussie grads living and working overseas will soon be required to repay their student loans if they earn above the compulsory repayment threshold.

But there could even be more serious changes on the cards, such as the deregulation of university fees or shifting the indexation of HELP loans to a different (more significant) benchmark.

These changes would likely see the cost of a standard degree skyrocket, and make paying off student loans a much tougher proposition.

The bottom line

From a purely financial standpoint, if you can earn a better return on your savings than the HELP indexation rate, you’re probably better off letting the loan whittle away through compulsory repayments each year.

But if it’s hanging over you and there’s peace of mind to be gained by paying it off early, well, you can’t put a price on that. Over to you.

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