Ask LH: Should I Pay Off My HELP Debt?

Dear Lifehacker, I'm free from debt on all accounts except for a student HELP debt. I have sufficient savings to pay out this debt, however given the low interest rate applied to HELP debt is my money better off invested somewhere else, such as in a high interest savings account? I know some people say you can avoid student debts entirely if you move overseas, and I want to consider my options carefully. Thanks, Prudent Ex-Student

Picture by Nina Matthews Photography

Dear PES,

Congratulations on having your finances under control. Your question deserves careful consideration. Firstly, though, it's worth comprehensively busting the myth that going overseas means you don't have a HELP debt (or HECS debt as it used to be known). This widespread belief is based on a fundamental misunderstanding of the difference between the debt itself and the compulsory repayments you have to make against it.

If you have a HELP debt from attending university, once you earn above a set repayment income amount ($47,915 in the 2011-2012 tax year), you have to make repayments on a sliding scale of between 4 and 8 per cent of that total. (Repayment income includes your taxable income and reportable super contributions, incidentally.) These are assessed as part of your taxable income, so if you have a HECS debt it's worth having this taken out by your employer rather than being hit with a big annual bill.

It's true that if you're working overseas and paying tax in that location, you aren't forced to make those compulsory repayments on your HELP debt. That's because of dual-taxation treaties that prevent people being forced to pay tax in multiple locations. However, it isn't true that this means your HELP debt is eliminated or frozen. It still exists, and it will still be indexed, so it will go up each year as existing HELP debts are indexed with a figure based on the Consumer Price Index (CPI). The last indexation figure was 3.0%.

If you were to move overseas and never work in Australia, it's true that you would never be forced to make HELP repayments. That's also true if you never earn more than the threshold amount, though at the current level of $47,195 that implies you'll probably only ever work part-time.

But neither situation means that you don't have a HELP debt. The Australian Taxation Office makes that crystal clear:

If you go overseas, we will continue to maintain your account. Your debt will not be waived. The amount outstanding will continue to be indexed each year until the debt is paid off.

If you die, then HELP debts can be extracted from your estate (though if your assets are less than the total, your relatives won't be hit up for the difference). The bottom line? Moving overseas does not eliminate your debt; it merely stalls compulsory repayments.

To return to the original part of your question: it can indeed be tempting to hold off paying extra on your HELP debt if you think you can earn more than the 3 per cent indexation rate. Presuming that you're already making compulsory repayments, you know the debt is going to disappear eventually anyway. However, you also need to factor in that you receive a bonus on any voluntary repayments you make. In January this year, the government lowered this amount from 10 per cent to 5 per cent, but that's still important to consider.

Without knowing your exact debt level and income, it's hard to give specific advice. But consider this: let's assume that you have a remaining HELP debt of $4,000. Paying this off would cost you $3809.52 (because you get a 5% bonus). If you don't pay it off, it will rise to $4120 at indexation time. If you invested the $3809.52 for 12 months, you'd need an interest rate of 8 per cent simply to reach that total.

That's a short-term view; the longer you can earn interest or see your assets appreciate, the better you'll do. But you'll never escape the compulsory indexing of the HELP debt, and you won't get the 5 per cent bonus, which few investments will match in the shoter-term. Conversely, if you pay off the debt, you can assign the money used for that to your long-term savings and investment goals and see it earning money rather than repaying debt.

Individual circumstances vary, and this is general advice; for specific concerns, you should talk to a financial advisor. But I'd suggest that getting the debt out of the way might make more sense in most cases. If you choose not to ("they're not getting my money any faster than I have to hand it back!"), just make sure you are being taxed at an appropriate rate to handle your compulsory repayments.

Cheers Lifehacker

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Comments

    If you know that you are in your last financial year of repaying your HELP debt, ask your employer to not automatically remove HELP payments each pay. Make sure you instead setup a scheduled auto-payment of the equivalent amount and then bulk payout (less the 5% discount) just before tax time.

    This means that you are earning interest on that money all financial year instead of it sitting in the gov's coffers and also you get the 5% discount that you wouldn't have got for mandatory payments. At tax time, your HELP debt has already been dealt with so happy days.

      Doesn't fee-help come out of your pre-tax income? Wouldn't the benefits of reducing your taxable income still out weight the extra income from a savings account, which are also taxed?

        Nope, it comes out of post-tax income

          Pretty sure it comes out of your pre-tax (taxable) income.

            FEE-HELP is different to HECS-HELP. FEE-HELP is tax deductible - but not many Australian students qualify for FEE-HELP, i.e. most students are Commonwealth supported HECS-HELP students where the government pay a huge chunk of your uni fees for you (that is why you do not get further tax deductions for the portion you do pay). For FEE-HELP students, you pay the full course price for Australian students - but can then claim repayments as tax deductible items.
            If like most students you are on HECS-HELP your repayments do not reduce your taxable income, so no, it does not "come out of your pre-tax (taxable) income".

    If you have any other debts (car loan, credit card, home loan, etc) it usually makes sense to service them first. The HECS/HELP indexation rate is lower than anything else I can think of.

    If you plan to invest the money rather than paying off the debt, make sure you factor in the tax you'll end up paying on your profits. Angus omitted that in the 12 month investment example.

    Personally I saved my money and got a home loan, rather than paying off my HECS/HELP. Any spare money is going into the home loan as the interest rate is much higher. My student loan should be paid off very soon (11 years after it started).

      Well put sir.

        Exactly. Always service the loans with the highest costs (interest rate plus fees) first and you will be better off. In order of most expensive to least: loans from Loan Sharks, loans from Pawn Brokers, credit cards (with no free interest period), Personal Loan, Low rate Credit Cards (with Interest Free period), Car Loan, Home Loan, Help Debt.

        Of course if you have loans with the first two you are probably beyond help.

    You also need to consider time value of money which is VERY often forgotten by EVERYONE.

    so when you repay off your HELP debt which is now 5%discount, you can invest the money you saved when you pay off the HELP debt and invest that. Remember the discount is INSTANT. So its NOT a good example to say if you pay off HELP debt today you get 5% off but instead if you had invested that money over a year at 6%. to compare it correctly, you should also make sure that the 5% discount is also invested at the same interest rate for a year at 6^ - hopefully this makes sense to you.

    ALSO, when your investing that money instead of paying HELP debt, you need to consider BOTH AFTER TAX return AND REAL Return (accounting for inflation). Example:
    HELP = 5% discount
    Investing on high interest savings account of say 6%, net tax lets just say its 30% tax bracket = 4.2% and then you need to less inflation !! which is 2 - 3% in australia so your real return is only 2.2% to 3.2%.

    To be honest, as the posts said above, theres too many variables....

    I'm with teaman, Be aware of when your compulsory repayments will finish the debt off.

    Also take note that your repayments through the year are not applied to the loan balance until you do your tax return. (ie. if you're statement from last june showed $5k, and your tax return submitted in july tells you you paid off $3k this year, you will hold a balance of $2k until next june when indexation occurs again. regardless of the fact that $3k may come out in you PAYG tax payments during the year.)
    Knowing this, in your last year, regardless whether your employer makes compulsory payments for you or not. make your full payment before indexation occurs on 1 june, getting a 5% discount ON LAST YEAR'S BALANCE and dodging the yearly indexation which is ALSO CALCULATED ON LAST YEAR'S BALANCE. This gives you an instant 8% discount on a figure that is too high. any excess payments made will be returned in your tax return a couple of months later.

    In a sense, your HELP debt is frozen. Because this debt's interest rate is only CPI, it means in very basic terms if you have a HELP debt equivalent to 2000 loaves of bread in the year 1999, then if you don't make any repayments whatsoever for fifty years you will still have a 2000-loaf debt in the year 2049. So, if you're thinking about *worth* and *value* of your debt, as opposed to just the actual number amount, your debt won't increase if you ignore it.

    Also, when I was in high school (1998) and it was still called HECS, we had a talker come to the school and teach us the technicalities of HECS. Maybe along with the name change, this has also changed, but I do remember that upon death your HECS debt is completely wiped clean and *not* taken from your estate.

    From the Act incorporating latest amendments at Chapter 4:
    "137‑20 HELP debt discharged by death
    Upon the death of a person who owes a *HELP debt to the Commonwealth, the debt is taken to have been paid.
    Note: HELP debts are not provable in bankruptcy: see subsection 82(3AB) of the Bankruptcy Act 1966."

    Unless I'm reading this wrong your estate will not be charged the remainder of your HELP debt.

      Per the ATO, a deceased estate still has to pay finalise outstanding tax returns -- and those could include HELP repayments.

        Yes, but as you pointed out, there is a 'difference between the debt itself and the compulsory repayments you have to make against it'. So, the 'HELP debts' itself cannot 'be extracted from your estate', only the compulsory repayment in the period before death. See http://www.google.com.au/url?sa=t&rct=j&q=HELP+australian+government+loan+do+I+need+to+repay+estate+die&source=web&cd=1&ved=0CHUQFjAA&url=http%3A%2F%2Fstudyassist.gov.au%2Fsites%2FStudyAssist%2FHelpfulResources%2FDocuments%2F2012%2520-%2520Info%2520for%2520CSS%2520booklet.pdf&ei=PwDkT8O_GeHhmAWlwaSECw&usg=AFQjCNGMg1RmDqPTw7fdnDI64Ur6bM_etg, numbered p 35 (p 44 of the pdf).

    As long as wages growth is greater than CPI (that is, real wages are rising) you are better off delaying/paying the minimum amount of your HECS debt. This is because relative to your wage, your HECS's debt decreases in size over time. A smart government would have indexed the HECS debt to income growth not CPI.

    Just did a quick check of the stats from the ABS and average CPI growth over the last 10 years was 2.9%, average weekly earnings growth was 4.7%. This means that relative to your wage, your HECS debt has decreased by an average of 1.8% per year over the last 10 years.

    However, the 5% early payment discount will reduce this benefit of delaying payment somewhat.

      Also, its easier to pay the debt down at 30, when I have a better paying job, then when I've just finished Uni.

        That's not really correct because the repayment schedule increases with your wage, ie it is progressive just like income tax rates. (Schedule here http://www.ato.gov.au/individuals/content.aspx?doc=/content/8356.htm).

        But you could argue that it’s either not progressive enough or too progressive. 4% on low income and 9% on $90k+ is prob about right I would think. Maybe they could increase the income threshold at the low end and help out struggling graduates or interns.

    something else to consider is that your debt is indexed on the 1st of June and not 1st of July. don't get caught up.

    I'm not sure the article is entirely correct regards to if you die. From the Information for Commonwealth supported students 2012:

    "7.13 What happens to my debt if I die? Your estate has to pay any outstanding compulsory repayment relating to the period before your death, but the remainder of your accumulated HELP debt is cancelled."

    I could be interpreting it wrong, but to my understanding your estate only has to pay outstanding compulsory repayments, and then the rest of your debt is cancelled (the article seems to indicate that the entire debt can be taken out of your estate.)

    That said, dying isn't exactly a good way to get out of a debt, unless you intend to move overseas and stay out of Australia for the rest of your life.

      That sounds right to me....you'd hear about this in the news every time a student died if parents were being forced to cough up $20K+ to the government in student fees. Most students coming out of uni have very few assets of great worth, so it'd be a pretty hot topic if thats how the system worked.

    If you have the money there and don't plan to use it for anything then sure, maybe its worth paying it out. Personally as someone that is two or three years out of university though I have other things I would rather put the money towards and I'm sure I'm not the same. Having gone into full time work a car was one thing I went and purchased and now I'm looking to save money to buy my first place.

    While I'll no doubt cary the HECS (now HELP) debt for some time, the repayments and interest rate are low enough that I'm not too fussed. Maybe if the payout bonus was 10% I'd be more interested, but at 5% even that isn't that appealing to me. In the long run that 5% (ignoring inflation for a second) only comes out at about a weeks salary in savings for someone on 80K with a 25K loan anyway.

    The other thing is my salary has somewhat steadily increased in the past few years. Straight out of uni many students aren't rolling in cash. As someone noted above, many people will find that in five or ten years they will be earning more and thus paying off the loan then *may* be easier than it is for most people just coming out of university.

    But yeah, if you have no big purchases in sight and are financially sound, I don't think it could hurt to nock off the loan now and move forward with a clean slate. You could always pay half invest half or whatever too if you want to cover your bases.

    If you just want to maximise your wealth, it is only rational to pay it off early if the amount you have to pay back today is less than the present value of your expected repayments. Loosely speaking, if you anticipate working overseas for a lengthy period or the debt being paid off over a long period of time, it is better to delay repayment as long as possible, but you should do your own calculations and assume an appropriate rate of return on investments.

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