HELP debt – no longer worth paying off?

It is no longer worth paying off your HELP loan, in my opinion. Ok – there I’ve said it.

Paying down a debt is normally a good thing.  But even if you have money sitting around, I think there might be better things to do with it.

 

Before 1 January 2012, you used to get 20% discount by paying upfront (before doing the subject), and 10% discount by making a voluntary payment.

 

But from 1 January 2012 those figures have been reduced to 10% for upfront and 5% by making a voluntary repayment.

 

I think it is just worth making forced repayments (i.e. have your employer withhold from your salary, and then having the payment come out of your tax return.)

 

The case for Voluntary repayment

If you have money just sitting in the bank you may consider it is worth making a voluntary repayment – because if you pay $500 – you will reduce your HELP loan by $525.

 

Also – the 5% is an instant saving, rather than having to wait a year to earn 5% if you have your money in the bank.

It also means you can’t spend the money on something else.

And it means you are paying off a debt (as mentioned earlier), which is a good thing.

 

The case against making a voluntary repayment

If you repay $500 (or $5,000) now, then that is money that you might need later.

If you want to go on a holiday later, by using that money to earn a 5% return, you might be forced to use your credit card. If you can’t repay your credit card by the due date, you’ll pay credit card interest (usually 16-21% per annum).

 

Although I do note that the 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 would still be ahead if you paid your credit card in a few months.

 

Opportunity cost – paying off your HELP loan means you can’t do something else.
You can’t use that money to invest in the sharemarket or save for a property.

These things might have a higher than 5% return (or you could also lose money by investing)

 

If you stay below the threshold

Your HELP loan is only required to be repaid once your reach a threshold (approx $47,196 for the 2012 year or $49,096 for the 2013 year). If you earn below this amount you won’t be paying off your HELP.

 

As the ATO changes their rates each year (and their links) – search HELP repayment thresholds for the rates). You can also click Prior Years on the right hand side of the article to view HELP/HECS repayment thresholds back to 1989.

 

This includes if you go 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).

 

As HELP debts die if you do, this is a loophole that leaves a lot of HELP debts unpaid.

 

If you earn above the threshold you will need to pay back the debt

If you earn above the threshold, then your employer should withhold (based on your telling them you have a HELP debt). Until you lodge your tax return, the debt doesn’t actually reduce your HELP debt, but this is no reason to rush to lodge your return as the government only indexes HELP loans on 1 June each year.

- so this is a reason to lodge before 1 June the next year (e.g. lodge 2012 tax return before 1 June 2013).

 

Late lodgement of tax returns

But if your tax returns are overdue then your employer repayments haven’t hit your HELP debt account.

 

If you are holding back lodging your tax return because you owe money, consider lodging and making a payment arrangement with the ATO. Since the ATO will charge interest from when the tax return was due, you don’t “save money” by delaying lodging your return.

 

HELP repayment income is different to taxable income

And note that it is HELP repayment income (NOT taxable income)

So things like reportable fringe benefits and rental losses get added back (so you can’t negatively gear a property or have work pay for your car to reduce your HELP forced repayments).

HELP repayment thresholds and rates 2012-13

HELP repayment income (HRI*) Repayment rate
Below $49,096 Nil
$49,096-$54,688 4% of HRI
$54,689-$60,279 4.5% of HRI
$60,280-$63,448 5% of HRI
$63,449-$68,202 5.5% of HRI
$68,203-$73,864 6% of HRI
$73,865-$77,751 6.5% of HRI
$77,752-$85,564 7% of HRI
$85,565-$91,177 7.5% of HRI
$91,178 and above 8% of HRI

 

HELP repayment thresholds and rates 2011-12

HELP repayment income (HRI*) Repayment rate
Below $47,196 Nil
$47,196-$52,572 4% of HRI
$52,573-$57,947 4.5% of HRI
$57,948-$60,993 5% of HRI
$60,994-$65,563 5.5% of HRI
$65,564-$71,006 6% of HRI
$71,007-$74,743 6.5% of HRI
$74,744-$82,253 7% of HRI
$82,254-$87,649 7.5% of HRI
$87,650 and above 8% of HRI

 

Posted in Debt, Tax, Uni

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