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 spent time to try to make this as simple as possible (with a few diagrams, etc.). But I find that doing calculations makes me understand how things work better. So for those who sign up to the no money newsletter I will send a link to download the HELP-HECS calculator – then you can look at what to do based on your own circumstances.

 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 20% discount for fees paid upfront over $500 (up to the whole fees amount)

2. Defer your fees into a HELP-HECS loan (note you can still get 10% discount for voluntary repayments over $500 later)

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 (20% discount): If you can afford to pay upfront you should consider it. A 20% return is a pretty good investment! (Scotts 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 (10% discount) An automatic 10% (5% from 1 January 2012) 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 (13% better off) you might consider:

1. 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.

b. 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 (its better to pay 3% HELP loan interest than 20% credit card interest).

Reasons FOR voluntary repayments to your HELP-HECS

-Getting a 20% or 10% voluntary discount (5% from 1 January 2012) 

- You might probably end up blowing the money on junk anyway wouldn’t you?

Reasons not to repay HELP if:

 - If you have worked out a plan (maybe using one of the reasons above), where you think you might be better off at the end of the day.

If you are happy keep a buffer just in case. (this might not even cost you as you pay 3% HELP interest and earn 5% interest less tax)

Once you get a job

See the What does tax have to do with HELP diagram 

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 attached 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 savings towards your HELP debt

Benefits of not-telling:

+Interest on your savings for a year plus (especially if you have a tax agent)

+Could save cash to make voluntary payment (although note a voluntary payment doesn’t stop a payment due when your tax return is lodged)

Conclusion: So 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 10% discount (5% from 1 January 2012)

 As mentioned, voluntary payments over $500 will attract a 10% (5% from 1 January 2012) 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 $1 650 then you could pay $1 500 before lodging your tax return.  If you lodge your tax return, the full $1 650 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 an extra 5% =  $525  if after 1 Jan 2012) – 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.

Tags: HECS debt, HELP debt, Should I repay my HECS debt, Should I repay my HELP debt

This entry was posted on Tuesday, March 9th, 2010 at 1:19 pm and is filed under Debt, Uni. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.