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
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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.
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