Should you repay your HELP-HECS loan or not?

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:

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 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.

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  • http://www.regretnothing.com.au Tom

    Interesting post, I’ve often thought about the benefits of paying HECS off up front as opposed to just leaving it for later. That said whenever I’ve been studying I’ve been so broke that the exercise was purely academic anyway…

  • Scott

    Hi Tom

    Thanks -yeah the 20% upfront discount generally comes when you have no money (I don’t think anybody ever said uni full time and working was easy!).

    And the 10% discount (only when you pay $500 or more) means that if you actually had $500 – there are probably better things you could be using the money for (saving for a house, or to start investing).

    Scott

  • Kristian

    I just paid my HECS debt off today.

    My outstanding debt was approx $19k but the payout amount was approx 17k.
    I calculated that this financial year my compulsoray repayments are about 9k, so my “real outstanding balance” is about $10k which would likely be paid off next financial year anyway through compulsorary repayments.

    In my case If I paid off my loan I would save approx 10% on the whole amount (1.8k) which when you compare to the amount I would be forced to pay in the next year provides an approx 20% pa after tax return on investment. I also avoid indexation which I have not accounted for in this calculation.

    Whether it is woth paying off or not really is a trade off between alternative investment options and the effective return on investment from paying off the debt through voluntary repayments. A good thing to remember though is that the bonus from paying off the debt is a “risk free” return and also an “after tax return”.

  • Scott

    Hi Kristian

    Appreciate your comment. Congratulations on being HECS-HELP free!

    Looks like you have used the “last year payment” strategy I mention in the article to get the benefit for your last 2 years paying HECS-HELP.

    Paying approx 17k to cancel a $19k debt (saving 1.8k) is a good investment. Instant 10% return on investment. (I disagree with saying the amount saved 1.8k vs amount you’d have to pay next year 10k means its a 20% return on investment – you paid as 1 lump sum: 8,100 instead of 9,000 this year (10% ROI) and 9,000 instead of 10,000 next year (10% ROI)).

    Definitely agree with your comment re: trade off between different investments.
    I thought I’d unpack that a bit more…

    1.You would almost definitely be ahead of keeping it the bank at 6% (although not AMAZINGLY better off, say $750 on your numbers as a complete guess)

    But I’m just playing devils advocate –
    2. if you just paid the compulsory $9,000 when you lodged your tax return this year (maybe your employer withheld this?) and kept the $17,000 (or $8,000) and bought a unit worth $170k (maybe your parents lend you some deposit money or you got 5% loan 3 years ago when they still offered them) that rose to $210k after 5 years – you’d be better off with the house.

    Or (probably more commonly)
    3. go to Europe next year and spend 12k on your credit card -and it takes you 5 months to pay it back – you might have been better NOT paying the HELP.

    But of course paying off your HECS (or any loan) is a fantastic feeling.

    Scott

  • dash

    Just got off the phone with the ATO, they said telling your employer that you don’t have a HELP debt means you could be penalized/fined. Especially if you are holding off mandatory repayments to make a bulk voluntary repayment later. Thoughts?

    Thanks for the article BTW.

    And FYI the 10% bonus drops to 5% after 1 January 2012. :(

  • http://www.nomoney.com.au Scott

    Thanks Dash

    Agree that it is correct to tell the ATO you have a HELP debt when you complete your TFN declaration form (when you get a new job).

    I more meant for people who had an existing job (say through high school) who had already completed the TFN declaration form. But I agree that the correct thing to do is to advise your employer (who might start taking extra tax out).

    Yes – I was aware the voluntary repayment has dropped to 5% – just hadn’t had time to write about it!!
    Cheers
    Scott

  • Elias

    My understanding is that voluntary repayments are not tax deductable.
    Compulsory payments are made before tax, so a lot of what you pay to the debt is money you would have otherwise paid in tax. If your earning up to $80K per annum, 30% of y our debt would have otherwise been paid in tax
    If you owe $5000, to pay that off with your compulsory contributions you will pay $5000 out of your Gross Salary, this means that $3500 is what actually comes out of your pocket and the other $1500 would have been taxed at 30% (which you wouldn’t have seen anyway).
    Whereas if you paid $4500 after tax ($5000 – 10%), you would have paid an extra $1000 out of your pocket. Which works out that it’s cost you over 20% more.
    Any accountants out there can check the sanity of my example please.
    In my opinion, it’s far better to make only the compulsory minimum tax free payments and invest your money elsewhere.

  • Katrina

    What is the position if an individual has a HECS debt but then moves abroad for several years? Do you have to repay whilst abroad? Can the ATO chase for funds if you have no Australian income? What happens to your debt if you permanently emmigrate? Would value your wisdom. Thanks

  • http://www.nomoney.com.au Scott

    Hi Elias

    Compulsory HELP payments are not before tax payments.

    Your employer takes extra from your salary by taking extra PAYG withholding to help cover your HELP repayment.

    So employee earning $80k no HELP debt – employer withholds say $18,750 (to cover tax and medicare)

    If you had a help debt your employer would withhold $18,750 tax PLUS an extra 7% (per ATO’s HELP thresholds 2012) so an extra $5,600.

    You are still taxed on the full $80,000.

    But yes – given the 10% prior to 1 January 2012, and now the 5% from 1 January 2012 voluntary payment – you might be better investing elsewhere.

    Scott

  • http://www.nomoney.com.au Scott

    Hi Katrina

    If you have a HECS/HELP debt and move abroad then the ATO will advise customs, who will then stop you the next time you enter the country.

    no – just kidding.

    I believe the position is the same as if earned under the threshold, that you don’t have to pay it back. If you permanently move overseas the debt would just sit there just in case you ever came back (and cease if you passed away).

    But note that Australian tax resident pay tax on worldwide income – so if you worked overseas for a year (or maybe 2) you could still be a ‘Australian tax resident’ and need to include your worldwide income and then have to pay a HELP repayment.

    But it appears an Australian foreign resident (i.e. someone who emigrated overseas) would be able to leave without paying back the debt.
    Scott

  • Bdog

    The advice in this column is a bit simplistic, lucky it’s free.

    I was planning on paying off my entire $12,000ish HELP debt prior to 1 June to save 10% + the 1 June indexation (around 3%). Now I realise they changed the rules YET AGAIN so that, post 1 January, I am now only eligible for a 5% reduction for voluntary repayments. Worst timing ever.

    Now the benefit to me of a voluntary repayment is negligible – I save 5% upfront and around 3%pa indexation. As a basic calculation if I split the 5% over say 3 years, that’s 1.66% + 3% (indexation) = approx 4.66%pa. I can get a better return elsewhere. I haven’t factored tax implications into this however.

    I think I’ll just keep my debt and invest elsewhere. I’ll take as much money in loans from the government as I can at an effective rate of around 4.66%pa. One long term option that springs to mind is pre-tax contributions to my super (salary sacrifice).

  • T

    The question about whether to make voluntary repayments is changing. The government announced in May 2013 budget it plans to remove upfront and voluntary repayment discounts entirely, which if passed as legislation means there is less financially incentive to pay upfront or through voluntary repayments. The ATO website says that if the legislation passes there will be no discounts AFTER 31 December 2013, this update is dated 15 July 2013. Yet to find definitely answer as to whether this legislation passed parliament.

  • scottkay

    Hi yes help 5% voluntary discount if you pay more than 500 ends 31 dec. Search repaying help debt 2013-14 for ato site that states 31 dec 2013 Scott

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