Student loans: Should I repay my HECS debt or HELP debt early

Is it worth repaying your HECS debt or HELP debt early or is your money better spent elsewhere? Here are some of the issues to consider – especially with interest rates at record lows.

They say there’s no such thing as a free lunch and that is certainly true when it comes to a university education in Australia. You will have to pay up but the government does offer a range of student loans to help cover some of the costs of studying in the form of HECS-HELP.

How does the HECS-HELP loan program work?

Students are able to access these loans provided they meet all of the eligibility requirements. Generally you are eligible for HECS-HELP if you are enrolled in a higher education unit of study as a Commonwealth- supported student, and, you meet citizenship and residency requirements.

However, some current and past students don’t know how much they owe and don’t understand how and when to repay the loan.

When do I have to repay my loan?

The first thing you need to understand is that all calculations are based on what is called your “repayment income” as defined by the Australian Tax Office and is calculated using a particular formula.

You have to start repaying the HECS-HELP loan when your repayment income reaches the minimum threshold amount (called the HECS threshold or HELP threshold), which for 2019-2020 is $45,881. The amount you must repay is set as a percentage of repayment income.

The table below shows how much you’d have to pay based on various income amounts. The full set of HECS-HELP loan thresholds and rates for 2019-2020 can be found here.

Financial Year Repayment income Rate Repayment amount (per year)
2019-20 $ 50,000 1% $ 500
2019-20 $ 80,000 5.5% $ 4,400
2019-20 $ 105,000 7.5% $ 7,875
Source: Viva Financial Planning based on ATO website.

If you are working, your employer can take repayments out of your wages. It’s a good idea to let your employer know (in writing) that you have a student loan – they will estimate a repayment amount based on salary, or you can make voluntary contributions. To do this, complete a new Tax File Number (TFN) declaration form, and you need to complete a new form each time you start a new job. It helps avoid bill shock at tax time, if these amounts haven’t been taken out throughout the year.

How do I know how much I have to repay?

The tax office calculates your annual compulsory repayment and this is included on your income tax notice of assessment. If you’d like to estimate your own repayment amount, take a look at ths tax office calculator. You can also find out how much you owe on myGov, however the details may not be up to date.

It is worth noting that the government may legislate changes to student loans and existing repayment arrangements from time to time. For example, as at 1 January 2020, there were changes to HELP loan limits and from 1 July 2019, all study and training loans are covered by one set of thresholds and rates.

 

Source: Gorodenkoff (Shutterstock)

The comparison table below shows some of the Savings Accounts on Canstar’s database for a regular saver in NSW with links to the providers’ websites. The results shown are based on an investment of $100,000 in a personal savings account and are sorted by Star Rating (highest to lowest), then provider name (alphabetically). For more information and to confirm whether a particular product will be suitable for you, check upfront with your provider and read the Product Disclosure Statement before making a decision.

Should I pay back my loan early?

There’s really no “one-size-fits-all” answer – it depends on your income, your expenses, your circumstances, and what’s most important to you.

As with any other debt, your HECS-HELP loan will be compounding over time, although this is still at a very low rate compared to most other forms of credit. While there is no interest payable on your HELP debt, indexation is applied in line with changes to cost of living. In 2019 the indexation factor was 1.8%.

Advantages to early repayment

Making voluntary contributions will definitely help pay down the loan faster. Also from 1 January 2020, any voluntary repayments will be a credit to your HELP balance – this can be re-borrowed in the future, up to the current HELP loan limit.

Although you can repay your student loan sooner, there are now no tax benefits associated with paying down your loan any earlier – discounts for early and voluntary repayments were discontinued from January 2017.

Other factors to consider

  • Early on in your career, you may have other priorities such as saving for a car, travelling, or saving for a home loan deposit.
  • A car loan, credit card, home loan or any other debt usually has higher interest rates and compounds more quickly over time than your student loan. So, if your situation is that you have other debts, you should consider paying these off first.
  • Paying off any higher-interest loans more quickly is also better for your credit rating.

 

Source: The Faces (Shutterstock)

Does it make more sense to pay my HECS early now as rates on savings are so low?

This all depends on your priorities but some of the factors to consider include:

  • Last year’s HECS-HELP was indexed at 1.8% and it is unlikely that a regular savings account will be paying more than that right now. Do your numbers – can you earn more than that?
  • Will you need savings for other things eg a house deposit – in that case you may want to still work towards that goal even if the interest you are earning is not high.

Options for your savings

If you are considering savings there are a number of options available:

    • For first home buyers, the government’s First Home Super Saver Scheme means you can earn a higher rate of interest on money saved into your super, and you can withdraw some super savings to pay for your home.
    • Some banks offer higher short-term variable interest rates. To qualify, you’ll usually need to meet particular terms and conditions (such as a minimum monthly deposit and not making withdrawals in a certain period).
    • There are many longer-term savings options available, with expected interest rates which are higher than the low bank rates currently on offer. However, please be aware that higher potential returns usually come with higher risks and that past performance is not a reliable indicator of future performance when it comes to investment products.

About Elizabeth Hatton

Elizabeth Hatton is a director and financial planner at Viva Financial Planning. She has worked in the financial services industry since 2008 and has a special interest in tax planning, and sustainable and ethical investments.

 

 

 

Main image source: Rawpixel.com (Shutterstock)

 

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