HELP (Higher Education Loan Programme – used to be known as HECS) is a government scheme which provides a loan to students to fund the cost of tuition of Commonwealth Supported university places, many people know this as HECS. The cost of your tuition is calculated and you have a loan account established for you. Unlike a standard bank loan there is no set interest rate on the debt, instead the value of the debt rises with the Consumer Price Index. The current indexation rate is 1.5% for 2016, this compares very favourably with bank loans. Repayments on the loan are not required until you reach a minimum level of income, currently $54,869 (for 2016-17). When your income is above the minimum threshold your repayments are based upon a proportion of your wage (starting at 4%) and increase as your wage reaches higher income levels (to a maximum of 8%, for incomes over $101,900). These thresholds change on a yearly basis. If you choose to repay your some of your HECS early, repayments of over $500 are eligible for a 10% discount, however this discount is due to be removed from 1 January 2017. More details about the HELP scheme are available at the Study Assist website.
If you have cash available should you pay make a voluntary repayment or do something else with the money? Well the answer on that depends upon when you do it and your particular circumstances.
We’ve looked at a scenario where someone has $10,000 in their transaction account and is wondering whether they should use that to repay their $10,000 off their HELP debt, their mortgage, their credit card or put it into a high interest savings account.
Before 31 December 2016
The 10% reduction on debt means that with a $9,000 outlay from your bank account you could wipe out $10,000 worth of debt, leaving you with $1000 in your bank account, essentially you are in front by $1000 by making the repayment off your HELP debt due to the discount. Alternatively you could look to pay off your home loan, assuming you paid $10,000 off your home loan you would save approximately $325 interest over the next year assuming an interest rate of 4.75%. Alternatively you could repay $10,000 off your credit card and save approximately $1750 over the next year in interest. Finally you could decide to put your money in a term deposit or high interest savings account and earn around $300 before tax.
Based on the calculations above, the discount on your HELP debt is pretty attractive, you struggle to do better than that unless you have high interest lending such as credit cards. A good rule of thumb is that if your interest rate is above 11.5% then saving on your interest outweighs the benefit of the discount available on your voluntary HELP debt repayment.
After 1 January 2017
The loss of the discount makes a big difference to the economics of repaying the HELP debt. Once the discount has disappeared you can make a reasonably straightforward comparison between the interest rate you are paying on your home loan, credit card and the HELP debt. As with the previous example credit card debts are usually the ones with the highest interst rate so it makes sense to pay these first (around 19%), next usually comes personal loans (around 13%), home loans (around 5%) and lastly your HELP debt (around 1.5%).
The HELP debt is one of the cheapest forms of debt around, it was designed that way. Once the discounts have gone you will have very little incentive to repay it early and unless you are a high income earner with a high tax rate it may even make sense to earn a modest rate of interest in an high income savings account rather than repaying the debt.
To qualify for the discount your payment must be processed before 31 December 2016, given the Christmas period and the public holidays, you should plan for this well in advance. If you are trying to access the discount, aim to have it all done and dusted by the middle of December.
If your cash flow is very tight, you might want to think twice about repayment of your HELP debt, even if you would benefit from the discount. Many debts such as home loans and even credit cards have the option to redraw on them if you find you need access to those funds again. HELP doesn’t have a redraw facility, so if you have decided you are going to repay the debt make quite sure that you are not going to need that money in the near future.
If you are getting close to paying off your HELP debt in full then it might be wise to give some thought to what you are going to do with your surplus cash. You might find that your fortnightly net pay goes up when your repayment obligations have finished and/or you get a large tax return because your employer has withheld more than was required to repay your debt. In these instances it is really easy (and tempting) to absorb this new income and adjust your spending up. A much more constructive use for the funds is to think about how you might be able to make real headway in your financial independence and security whether its through increasing the payments off your other debt, increasing the savings to your home deposit or putting a little more into super? Whatever you decide to do, make it a conscious choice.
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