Hey Lifehacker, As a recent university graduate I was a bit miffed by the Federal Government's proposed Budget changes to the indexation of HELP fees from CPI (around 2% per annum) to the Treasury Bond Rate (around 5.5% per annum) from 2016.
Previously there has been a sound financial basis for not paying off the debt above the minimum amount as it was a very low interest rate; however with the impending changes, should I now prioritise paying off this debt sooner? And if so, should I aim to pay it off prior to 2016 or only when the new rate become applicable? And what are the political risks in paying off this debt -- is this a policy that is likely to be reversed by any future governments? Thanks, Student Lone
Student picture from Shutterstock
So here's the first point: we don't yet know whether the proposed changes to HELP will go through in the form the government wishes. It doesn't currently have control of the Senate, so it can't push the legislation through immediately, and it will only be able to pass legislation through the Senate after its composition changes in July by negotiating with the Palmer United Party and other independents. None of them appear in favour of the changes in their current form, so some negotiation is going to be in order. That doesn't mean you should presume they won't happen, but they won't be happening immediately.
Assuming the change does go through eventually, the rate at which HELP increases will increase dramatically from the 2.6 per cent that applies in this financial year. The figure will be pegged to the treasury bond rate, but can't go higher than 6%. At the same time, the income at which compulsory repayments will be required to start will drop (to $50,638 from 1 July 2016).
You have no choice about whether to make those minimum payments; they're taken out as part of your tax (and that should happen automatically if you have told your current employer you have a HELP debt). The question is whether it's worth making extra repayments. Those currently attract a 5% bonus on the payment amount if you pay back more than $500 at a time, though whether that will continue long-term remains unclear. (Ideally you would make those payments before 1 June, incidentally, which is when indexation is applied to your debt.)
An interest rate of 6% (assuming the maximum), while much higher than CPI, is still a lower interest rate than applies to many other kinds of loans and credit cards. So depending what other debts you have, making extra repayments on HELP still might not be as effective as other tactics on a very basic analysis.
The most important aspect of the higher interest rate is how it relates to minimum payment thresholds and discount amounts. For instance, a 5% discount will be outweighed fairly heavily if the annual indexation amount is 6%. Since the discount only applies to the repayment amount but the indexation applies to the debt, you won't get ahead very quickly under those circumstances. (That was true even of CPI indexing, but the differences will be exacerbated under the new scheme.)
The real difficulty with this higher rate is that it makes it much more likely that your debt will snowball if your minimum repayment percentage is low. Compulsory repayment rates vary between 4% and 8% of your effective taxable income (the more you earn, the bigger percentage you must repay). If your total HELP debt was roughly the same as your income, you were repaying 4.5% but it was being indexed at 6%, the amount you'd owe at the end of the financial year would have gone up.
As a recent graduate, the size of your HELP debt is at least already fixed, and probably not the same as your annual income. Future students may have a much larger sum to repay, since the government also proposes to allow universities to set whatever course fees they like from 2016, with no cap in place. (Current students are supposed to be exempt from this until 2020, though the details are hazy.)
That will almost certainly mean a dramatically higher HELP debt for many students, and that might make the question of extra repayments academic for some graduates: merely keeping up with the existing payments and avoiding an ongoing blowout might be challenging enough.
As I said, we don't yet know the final form of HELP changes. If the proposed alterations did happen, I would definitely recommend that anyone with a debt make sure that indexation didn't mean their debt was larger overall after compulsory repayments came out and indexation was applied. To pay off debt -- even slowly -- you need that number to become smaller over time.
Whether additional payments beyond that make sense will depend very much on your individual circumstances and goals, and I think it's too early to call a definitive strategy. For some people, clearing the debt will be a sensible strategy. Others might be happy with the minimum enforced payment and prefer to save extra cash to invest elsewhere. (It takes a long time to save a house deposit, so starting early helps.)
Predicting the political future is difficult, but I think it's safe to assume that the HELP system will remain in some form -- neither of the major parties is going to return to the pre-1980s approach of making university free for suitably qualified students. Just how much you have to repay and how quickly may vary, but it's essentially impossible to imagine that a future government would cancel those debts or dramatically lower the rates.
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