Ask LH: Is It Worth Paying Off My HELP Debt More Quickly Now?

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

Dear SL,

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.

Cheers Lifehacker

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Comments

    Thanks for the detail in this story. Would be great if LH could keep following this story as the legislation progresses (and possibly changes). I'm in a similar position to the OP, I've got a reasonable sized HELP debt and the ability to pay it off earlier if I choose, but with indexing at CPI and the 5% bonus being less than inspiring, at the moment it makes more sense to me to have that money in investments or using it to start my own business while getting by making the minimal payments. If the indexing or interest rate were to change then it would really be worth revisiting that analysis.

    Is it true if you move to a different country you don't have pay?

      Yes, same if you die.

      ATO collects the money - so no income, no "taxing"...

      It keeps collecting interest however, so you would want to be sure you never wanted to come back.

        Now I just need a Canadian girlfriend to marry and I'm outta $20k debt.

          Don't be a shithead, and cough up!

            He signed up for one thing and then had a shithead govt full of old pricks who went to uni for free try and switch it up for another.

      The golden rule is that you don't have to pay if you don't earn more than the minimum threshold, which is $53k.

      So you can go overseas for 6 months a year, for the other 6 ensure you don't earn more than $53k
      Or you can buy an investment property and ensure it is negatively geared to reduce your income below the threshold.

      But the interest will continue to accrue, and if the new laws come into effect it will accrue very quickly.

      Its worth paying a large chunk of it off before you decide to go overseas for an extended period of time. A HELP debt of $40k will take 5 years to pay off when earning $100K

        Incorrect, things like Fringe Benefits, extra Super Contributions and Rental Losses get added back for HECS purposes.
        https://www.ato.gov.au/rates/help-repayment-thresholds-and-rates/

        Or you can buy an investment property and ensure it is negatively geared to reduce your income below the threshold.

        Just a word of warning for anyone planning on doing this to reduce their compulsory HELP repayments. A negatively geared rental property will reduce your income tax but it won't reduce your compulsory HELP repayments.

        Any rental property losses (e.g from negative gearing) are ignored for the purposes of calculating your compulsory HELP repayments. So even if you earned $75,000 but could reduce your taxable income to nil with a massive rental property loss you'd still be required to pay the compulsory HELP repayment based on $75,000.

        So you can go overseas for 6 months a year, for the other 6 ensure you don't earn more than $53k

        Once again, you'd need to be careful doing this. Australian residents need to include in their Australian tax return any income they earn inside Australia as well as income they earn overseas. If you're earning an income in your six months overseas that will most likely need to be included in your Australian tax return and will be factored into your compulsory HELP repayment calculation.

      Yes, but there is talk of moves to make this more difficult. The most likely such move is to cancel the right of those who have left the country for a sufficient length of time to return; perhaps even to refuse passport renewals.

    Does the debt attract interest right from the start? Or does it only apply once you start earning over the minimum compulsory payment amount?

    So, if I made pre-tax contributions to my super over my working life (to keep my salary under the minimum) to a point that I could earn over $51k annually from my super after retirement, would I then be facing paying off an enormous HELP debt that had been attracting 6% interest over the 40+ years of working? If that was the case, my initial $20k debt would be up to around $220k

      I believe so. At least, mine was gaining interest when I was still earning under the minimum amount.

      I ended up paying off mine in full right before my salary was to go up over the threshold, so I wouldn't have any of my pay taken away. Plus, I believe back then (2ish years ago) the government would also pay like 5% of whatever you voluntarily paid back - not sure if they're still doing this. So, on my $22k debt they paid ~$1k, so I didn't have to pay back the full amount.

      Last edited 27/05/14 3:01 pm

      Its currently indexed each year, on 1 Jan i believe, on any HELP amount you have. If you do one course at uni it will still be indexed

    I have close to $100,000 in Fee-Help debts. So fucked if I know what will happen. It was meant to be interest free when I signed up. The idea that there's 6% interest on that is really worrying the shit out of me. It's still going to be a while until I can start paying off any of that, so it'll be a few years of roughly $6000 interest a year. How will I ever pay this off unless I instantly get a high paying job. Which if I ever do would still be years away.

    My Plan was to still spend the next few years after I'm done traveling, working and getting experience to help me hopefully get the career path I want. The degree was just one step.

    I really didn't want to do this, but my only option basically is to ask my parents to simply pay all of it or some of it off for me asap. They luckily have some money and can do this... i think..

    If they can't, I don't see how this can't balloon into a massive unplayable amount. What does anyone else doing my course do? My friends there certainly don't have moderately well off parents like mine. Sure, Law is meant to give you a high wage, but everyone I know who has recently graduated is not earning much.

      $100k! Holy crap you must be one of those guys in those newspaper articles! How did you manage that?

      Good luck.

        Law, since they changed it to post grad, the cost went through the roof.

      Seems like you need to get your priorities in order? How about you put your travel plans on hold until you pay off your debts? Seriously, there's a ridiculous entitlement issue with some people where they begrudge paying off their HECS or HELP because they 'can't afford' to. Yet they'll happily splash out money on overseas travel, cars, etc. You don't want to pay for a university education? Don't go then.

        BS. Screamface is entitled to a university education. He is not obligated to pay the money. He has his priorities just right. He isn't even legally obligated to repay, never mind morally.

          How is he legally not obligated to pay? I'm intrigued.

            Part of the idea was that a degree is in part a gamble. On average people with degrees do better, or this traditionally has been the case. The fact that not everyone does, means there is a payment threshold. Over a certain wage you are required to start paying back.

            If you don't earn over that wage, you don't have to pay. This interest will simply mean everyone that doesn't earn quite significantly higher than the now lowered threshold will instead of slowly paying back for their education. They'll slowly be accumulating debt for the rest of their lives.

          While I highly disagree with the government's changes to HELP fees, no one is "entitled" to a university education. You're entitled to basic primary and secondary education, but higher education is and should be a privilege that you pay for with hard work, effort, and yes, money.

        My life shouldn't be indentured servitude just because I wanted a better education. When I signed up to the debt, it was under one scenario. The fact the government may change it to basically entrap myself and others is the problem. What about all my female friends from Uni, how can they ever have kids now?

        It doesn't matter how I spend my money, the deal was that I had a loan of X amount and I start paying it off when I earn over a specific threshold. What else I do and how else I spend my money is my business.

        I undertook the further education to give myself a better life. Not to service a never ending loan. It's not that I wasn't going to or wouldn't have been been able to pay off what I agreed to. The fact that the government may change the rules and people like me will now have the rest of our lives greatly affected by it.

        Lets say when I graduate, I give up going over seas and volunteering. Give up on trying to get the extra skills and experience I wanted to get into the career I wanted. Even with my flashy expensive degree, it'll be hard to get a job where I can really repay my debt quickly. It'll take years to build up to a high paying position. However what if I simply never manage to get a high paying job?

        Now this ever expanding debt will lessen the quality of my life and the quality of the family I hope to start one days lives. It was a lot before and hopefully was manageable. Now the chances of that are going to go out the window.

        As I said, I am lucky, my parents have some money. I will probably be fine, but what if I can't get help to pay it off from my folks? What about the majority of people who don't have that option?

        This is me screwed as an existing student, this will only get worse if these measures go ahead and why would anyone sign up to this? Surely the government should be encouraging people to get educated and learn skills. Not to punish and cripple the rest of the lives of those who have tried. Then work as hard as possible to ensure no one will sign up to a never ending supply of debt. Then what future does this country have when there's no investment in the people?

          Does it affect your credit rating?

          If not, then your nightmare scenario probably won't happen.

          Last edited 27/05/14 7:55 pm

            The reality is that you just forget about it and watch every month as up to 8% of your pay goes towards it. It doesn't affect your credit rating, no one is ever going to come knocking on your door asking for it and they don't collect it when you die (like you'd care).

            So really, while it is an awful system, you can rest assured that it isn't the life changing debt that you think it is. All it is is a little out of your pay each month. And when you are earning $100k+ and finally paying the maximum 8% (if you live within your means) you won't miss it.

            For context, I am earning $60k as a grad mech eng and the $225pm that goes out is annoying but not life changing.

      Wow and I thought my HELP debt was hefty.

      Well in your case I guess at least you can take solace in the notion that it isn't like a regular debt in the sense that you don't have to make repayments under the threshold and that you don't technically have to actually pay it back. You're going to have an income reduced by the appropriate percentage for a very long time though.

      OH MY GOD! It just twigged. FEE HELP is for full fee paying students.

      Mate! I hope you studied your passion.

        @jacross: FEE-HELP is for all postgraduate study.

        IIRC a domestic student still pays a reduced rate than our international peers.

        It does help to explain how @screamface got to $100,000 in HECS debt.

          I've got FEE HELP.

          I can't get a clear idea if I will get this interest or not. No one can and so everyone in my course I've spoken to is worried as hell.

      Tony Abbott clearly wants you to never afford a house or car with the interest you'll pay on that.

      Seriously?

      A Bachelor of Laws costs about $40,000 in HECS fees. To have racked up $100,000 of HECS fees, you must've either done about 10 years of arts degrees before you got into Law, or done some postgraduate study.

      6% of $100,000 is $6,000 per annum. Are you really asking us to believe this is a crippling debt for someone with a postgraduate law degree?

      Say you don't get a great paying job for 5 years, that means your HECS debt has ballooned out to a whopping $133,000. Hardly a crippling debt for someone with an average pay rate of $55,000 to $95,000 in their 5th year of work (payscale.com)

        Juris Doctor. If you do it at a good university it's in the 100k range. I think even at the lower end it's still 80k.

        Having a bachelors already meant I really didn't have an option. My undergrad is already paid off though.

        Law graduates don't earn as much as you think and not everyone who does a law degree becomes a working lawyer or can cut it in the profession. A lot of people can't handle it and leave after a year or so. In fact things are getting so bad in the industry a lot of people are telling graduates to focus on getting jobs else where.

        Last edited 27/05/14 7:40 pm

    I heard that my neibouring fast food chain had their "pricing limits" removed, therefore they can charge me 10x for a burger if they wanted to. My response:
    a) go to the competing burger place down the road,
    b) start my own burger place at a competitive price,
    c) relish in the fact I can eat a more prestigious, burger place.
    I wonder if my future choice of uni studies will be like this ... or is it the end of higher education as commonly predicted.

      The UK introduced fee competition. The idea is that you could choose the price point right for you. Guess what happened? Every university raised their price to the same level (£9000). So no price competition. And its costings the government more than they expected (they pay upfront, and then recoup through the tax system like here). Exactly the same will happen here.

      It does make me wonder if Universities raised their costs would they in turn be worst off due to the lack of students who couldn't attend the university? The table would turn if you could do an online university course from Harvard (via edx.org for example) and apply to get the fees on HELP. Everyone would do online courses.
      Maybe a university degree might actually mean something more if they are priced beyond the reach of most people.

      Last edited 27/05/14 1:14 pm

    Therein lies the problem. People don't want to pay off their debt...somehow accruing 100k in student debt or wanting to avoid their 20k loan and skipping town.

    The government needs to find a way to make people pay what they owe rather than giving them these loop holes that makes everyone else pay more

      There are two ways they are looking at closing these loopholes.

      1. To call it a tax and take it out of any estate that a person may have when they die. So if you stay under the cap until the day you die, but somehow have money left over after your death, the government gets paid first.

      2. To work with other governments to gain access to your foreign tax records, and invoice foreign residents based on the amount they earn abroad. Thanks to the counter-terrorism money laundering initiatives and anti-tax-evasion initiatives, this is becoming a real possibility.

    I have a HELP debt (which was a HECS debt then) from my engineering degree completed in 1993, when we all still remembered that education should be free. Since then I've gone into music full time. I've never earned the threshold for obligatory payments and don't ever expect to. Should I be worried about this "debt" that will keep on growing?

      Phwoar, that is impressive! So long without hitting the cap!

      If you don't intend to ever hit the cap then it won't affect you - just look at the ever increasing balance as one big joke :D

      No.

      The maximum the government will take from you (until they change the laws again) is 8% of your income. It generally comes out of your pay before you see it. It starts at 4% of your income when you earn $53,000.

      Yes, your debt is going to become bigger and bigger, so you may never pay off your debt if you leave it too long to start paying - but if you've lived on less than $50,000 for the past 20 years, are you really going to notice a 4% extra tax on your wages when you start earning more than $53,000?

      The idea of the thresholds is you are always better off in absolute terms as you earn more. The government will take 34.5% of your income when you earn more than $37,000 (32.5%+2% medicare), then they'll take an additional 4% of your income when you hit $53,000 to pay back your debt.

      So, if you decide to start wanting to work for the man, you will pay 4% to 8% more 'tax' than someone who never went to university. But would you earn the same amount, or get the same job if you had never gone to uni?

        Yes that's what I've always thought. My only worry is the paranoid one that the debt might get me sent to a debtor work camp in a nightmare dystopic future.

        I'm self-employed and in a business partnership with my musician wife, which averages out our collective income, so even if we earn $100K I still won't hit the threshold.

        If I was to get a "job" again, I doubt my 20 year-old engineering degree will carry any weight.

    What's the stop someone claiming the interest they pay on their HELP as the costs of an investment? You could argue that your wages are a result (provided you work in the industry your degree relates to) of your investment and are therefore a deduction

      Reading the FEE-HELP booklet as part of signing up for the course, it says that compulsory repayments that occur once your income reaches the threshold and voluntary repayments are NOT tax deductible (like work-related or investment deductions).

      If you are doing any FEE-HELP courses whilst working, you could potentially ask the company to pay for you - they may attract FBT.

      When I was an undergrad, upfront fee payments made by the student WERE tax deductible (not sure the current situation for under/postgrad though)

      Speak to a good tax accountant. There are rules, and the government/ATO have precedents.

      Generally if you are doing a course and it directly relates to your work, you can deduct the fee. So, if you opt not to put it on FEE-HELP, you may be able to deduct it in the year you do the course.

      If you got a private loan to pay for your course fees, you should be able to deduct that either as a lump-sum or as you repay the loan (speak to your tax accountant).

      If you get a FEE-HELP loan, it's a special low-interest loan provided by the government, so I wouldn't be surprised if the ATO has special rulings to ensure they take as much as they give ;)

    It's bullshit. When I signed up to FEE-HELP, I signed up to interest free. How is it even legal that they can now charge interest on it?

      Because they make the laws.

      This is called 'sovereign risk' in the business world. It's not an uncommon problem for large corporates working with small countries.

    Could we have a source for the bond rate of 5.5%? My own research places it a lot lower.

      Bond Rate, not cash rate.

      http://australiangovernmentbonds.gov.au/etbs/list-of-etbs/

    Welcome to what 'young people' across the world realised years ago!
    The mining boom shielded us from the harsh reality of how screwed the global economy is
    http://www.theguardian.com/society/2011/jan/09/young-people-generation-under-strain

    I guess you can be proud when you tell your grandkids you managed to survive in the most ridiculous housing market on the planet, if you have any lol
    Welcome to Austerity, the land down under :P

    'Young people' is such a condescending term though, used only by 'old people'

    The coupon rate is different to the yield (cost of debt). The coupon rate just indicates the proportion of face value that is paid in semi-annual coupons (which is quoted p.a.). The yield takes into account the price that the bond is selling for as well as the coupons. The yield is only equal to the coupon rate when the price and face value are equal.

    The current yield on 10-year Australian government bonds is about 2.9%.

    http://www.rba.gov.au/statistics/tables/xls/f02hist.xls

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