It is no longer worth paying off your HELP debt, in my opinion. Ok – there I’ve said it.
It goes against my usual philosophy – paying down a debt is normally a good thing. But, even if you have money sitting around, I think there are usually better things to do with your money.
What has changed?
Before 1 January 2012, you used to get a 20% discount for paying upfront (before doing the subject) and a 10% discount for making a voluntary payment (anytime after you do the subject but before you lodge your tax return).
But from 1 January 2012 you only get a 10% discount for paying upfront and 5% discount for making a voluntary repayment.
I think now you might as well just pay the required repayment when you lodge your tax return.
Make sure you tell your employer that you have a HELP debt, otherwise your employer won’t withhold enough tax (i.e. PAYG withheld) from your salary and you’ll have to pay the HELP debt as part of your tax return.
As another tip – if you have paid off your HELP debt, you may wish to tell your employer that you no longer have a debt so they will stop withholding extra tax.
The case FOR making a voluntary repayment:
1. Instant 5% return
If you have money just sitting in the bank, you may consider it is worth making a voluntary repayment. If you pay $500 – you will actually reduce your HELP debt by $525.
Also, the 5% is an instant saving, rather than having to wait a year to earn 5% interest if you have your money in the bank.
2. Forced Savings
It means you can’t spend the money on something else.
Pay down debt
And it means you are paying off a debt (as mentioned earlier), which is a good thing.
The case AGAINST making a voluntary repayment:
1. You might have credit card debt later on
If you repay $500 (or $5,000) of your HELP debt now, then that is money you might need later.
If you want to go on a holiday but you have used your money to pay down your HELP debt and earn the instant 5% return, you might be forced to use your credit card to pay for the holiday instead. If you can’t repay your credit card by the due date, you’ll pay credit card interest (usually 16-21% per annum; higher than the instant 5% return you earned by paying down your HELP debt).
I do note that credit card interest is an annual percentage (i.e. if you repay your credit card a month later you are only paying 21% annual rate/12 months = 1.75% a month) so you might still be ahead if you paid your credit card off before you received 3 months of interest charges.
2. Opportunity cost -money could be better invested elsewhere
Paying off your HELP debt means you can’t do something else with your money.
You can’t use that money to invest in the share market or save for a property.
These things might have a higher than 5% return (or you could also money by investing).
Other things to consider
If you stay below the threshold…
Your HELP debt is only required to be repaid once you reach a threshold ($47,196 in 2012 tax year). If you earn below this amount you don’t need to pay off your HELP.
Leave your debt behind
If you move overseas and become a non-resident for tax purposes (if you stay a tax resident, then you show income earned worldwide, so might be above the threshold) then you leave your HELP debt behind.
As HELP debts die with you, this is a loophole that leaves a lot of HELP debts unpaid.