Whether you SHOULD repay your HELP-HECS loan and the best ways to reduce your HELP-HECS loan:
This article is 2/2 of HELP-HECS. See http://nomoney.com.au/hecs101/ for part 1.
I have taken time to try and make this as simple as possible (with a few diagrams etc.).
A simple diagram of how HELP-HECS works (explained in part 1) is attached Are you Eligible for HELP diagram.
When you start uni you can either:
1. Get a 10% discount on fees paid upfront over $500 (up to the full fee amount)
2. Defer your fees into a HELP-HECS loan (note, you can still get 5% discount for voluntary repayments over $500 at a later date)
The Big Question: should I voluntarily repay my HELP loan?
The answer depends on your circumstances (of course!). But the discounts are appealing.
Pay Upfront (10% discount): If you can afford to pay upfront you should consider it. A 10% return is a decent investment. (Scott’s note: My parents paid my HECS upfront, although I paid them 10% of my salary in board. We worked out they paid $5,000 more in uni fees than I paid them in board. Thanks Mum!)
Make a $500+ Voluntary Payment (5% discount): An automatic 5% return on your money isn’t bad…but there might be better plans for your money. Instead of repaying a HELP loan that only charges 3% interest (8% better off) you might consider:
Save for a home – buying a home means your deposit of 20% will control 100% of the house. If the home increases in value you can gain large percentage returns on your initial cash deposit.
If you don’t expect to own a home for 4-5 years, start a First Home Saver Account – they pay 17% plus bank interest.
Leave a buffer – if you are planning an overseas trip, it might be cheaper to leave the money as savings, rather than repay HELP and put the trip on your credit card (it’s better to pay 3% HELP loan interest than 20% credit card interest).
Reasons FOR voluntary repayments to your HELP-HECS:
- Getting a 10% upfront or 5% voluntary discount
- You might end up blowing the money on junk anyway?
Reasons NOT to repay HELP:
- If you have worked out a plan (maybe using one of the reasons above) that leads in the direction you think you might be better off at the end of the day.
- Leaving the money as savings might not even cost you, as you pay 3% HELP interest and earn 5% interest less tax.
Once you get a job:
Tips on paying HELP back:
1. If you have a job, consider whether or NOT to tell your employer about your HELP debt
If you tell your employer that you have a HELP debt (item 7 on the Tax File Declaration form that your employer gets you to fill out), then your employer will withhold extra from your salary to help cover the HELP repayment (so you don’t have tax to pay when you lodge your tax return.)
Benefits of telling:
+ Forced saving towards your HELP debt
Benefits of not telling:
+ Interest on your savings for a year plus (especially if you have a tax agent)
+ Might save cash to make voluntary payment (although note, a voluntary payment doesn’t stop a payment due when your tax return is lodged)
Conclusion: Although the extra money that your employer would withhold is a good form of ‘forced saving’, you may choose not to tell your employer if you are disciplined enough to save the extra money yourself. If you set up a transfer to a high interest account, you may be better off.
2. Last Year Payment – Take advantage of the 5% discount
As mentioned, voluntary payments over $500 will attract a 5% discount. (Note that, when you lodge your tax return and have to pay HELP, this is NOT a voluntary repayment).
So one strategy, particularly if lodging this year’s tax return will bring HELP to $0, is to pay the amount BEFORE you lodge your tax return. For example, if you owe $1,575 then you could pay $1,500 (with the 5% discount applied) before lodging your tax return. If you lodge your tax return, the full $1,575 will be added to your tax (and reduced from the loan).
Note, this ONLY works when your voluntary repayment will bring your HELP debt to zero.
Say you have a HELP debt of $10,000 and make a voluntary repayment of $500 (reducing your HELP debt by $525), you will still be required to pay the same additional HELP in your tax return (assuming you are over the income threshold of approx $40k). The voluntary repayment doesn’t reduce the actual payment required in your tax return.
However, if your tax return calculates your HELP repayment as $3,000 (and you know this is the full balance of your HELP debt), then you could call the ATO and make a repayment of $2,858 ($3,000 divided by 1.05 being 5% discount) and save $142.