Michelle Maynard, Partner at Carbon Accountants and Business Consultants, discusses the pros and cons of paying off a Higher Education Loan Program debt early: Help me understand my HELP debt!
The Higher Education Loan Program (HELP formerly HECS) assists eligible students with their student contribution or tuition fees. For most of us that have attend University a HELP debt is our reality. In 2017-18 it was estimated that the HELP debt owing is $52 billion and its forecast to increase to $75 billion by 2020-21.
But how much do we understand about the rules and repayments of HELP debts, and is it better to pay it off quickly or let it run its course?
Repayments and thresholds
HELP debt repayments are compulsory once your repayment income reaches the threshold. This tax is withheld predominantly through your employer, however if you have substantial investment income, you may be required to pay quarterly Pay as You Go Instalments (PAYGI) as a prepayment towards your tax bill. Your HELP debt will be taken into consideration when calculating these instalments.
Your repayment income is calculated using the following amounts from your tax return and payment summaries:
- taxable income
- reportable fringe benefits
- total net investment loss (which includes net rental losses)
- reportable super contributions
- any exempt foreign employment income amounts.
The amount you are required to repay is dependent on the total of your repayment income. The amount payable is a percentage of your repayment income.
|Repayment income (RI*)||Repayment rate||Repayment income (RI*)||Repayment rate|
|Below $51,957||Nil||$80,198 – $86,855||6.0%|
|$51,957 – $57,729||2.0%||$86,856 – $91,425||6.5%|
|$57,730 – $64,306||4.0%||$91,426 – $100,613||7.0%|
|$64,307 – $70,881||4.5%||$100,614 – $107,213||7.5%|
|$70,882 – $74,607||5.0%||$107,214 and above||8.0%|
|$74,608 – $80,197||5.5%|
It is important to distinguish between taxable income and repayment income, as they can be quite different.
Example: Repayment income vs taxable income
Christina has a taxable income of $50,420. In her tax return she includes:
- salary of $56,000
- total net investment loss of $11,250
- total reportable fringe benefits of $4,560
- exempt foreign employment income of $2,580
- reportable super contributions of $5,000.
Christina’s repayment income for 2018–19 is $73,810 ($50,420 + $11,250 + $4,560 + $2,580 + $5,000) This would require a repayment of $3,690.50. If the repayment was calculated on her taxable income she would not be required to repay anything. Keep in mind – Christina’s employer would most likely not withhold adequate tax to cover her HELP debt, leaving her with a tax debt.
Is there interest on my HELP debt?
On 1 June each year the value of your HELP balance is indexed to the CPI (Consumer Price Index) which was 1.9% in 2018. Debts must be 11 months old to be indexed. The details of your HELP balance can be found under the Australian Taxation Office tab at the MyGov website.
What if I move overseas?
Did you know that if you move overseas, albeit temporarily or permanently, you may still be required to pay HELP repayments – and it is assessed on your worldwide income? This measure was introduced from 1 July 2017 to combat the large number of Australian Nationals who would obtain HELP funded degrees and then move overseas, not ever repaying the debt.
These new measures apply to anyone, whether an Australian Tax Resident or not, once their worldwide income exceeds the minimum repayment threshold. Even if your income does not exceed the threshold, you are still required to submit your income details to the ATO.
The ATO needs to be notified if you intend to leave Australia for more than 183 days in a 12-month period and applies to all HELP debts (not just those incurred since the legislation was implemented). Fines and penalties apply if you fail to make minimum repayments, if your income exceeds the thresholds, whilst overseas.
So is it worth paying off my HELP debt quicker?
Popular belief is that HELP debt is “the best debt you will ever have” due to its low index rate and the low repayment rate. Most people will prioritise servicing other debts or making other investments before they attend to their HELP debt. I tend to agree this is the best course of action. But of course, every financial situation is different, and your personal circumstances should be assessed in consultation with your financial adviser when making decisions.
If you have other debts, you would save more in interest by tending to these first. If you were debt free, providing you invested or saved the money you would otherwise voluntarily direct to repaying your HELP debt, you would most likely also be in a better position financially than if you directed those funds to paying down your HELP debt.
HELP debt is considered when assessing your borrowing capacity, but not to the extent of other liabilities that also affect your credit rating. If the aim is to obtain a mortgage, or borrow for investment purposes, it would be better to lower or pay out other debt, before HELP debt.
Even with the Government’s lowering the repayment threshold to $45,800 from 1 July 2019, the indexation rate has not yet changed (although the Government did propose in 2014-15 to change this rate to the equivalent to yields on 10-year bonds capped at 6.0 per cent). With these changes, people will be required to start paying their debt off sooner, which should mean that HELP debts are paid off faster.
From January 2017 the Government removed the discounts on upfront payment and the voluntary bonus, thus removing another incentive to pay the debt off quicker.
Michelle partnered with Carbon in 2017, bringing a wealth of experience in accounting and bookkeeping. Her extended suite of services covers everything from tax accounting, planning and estimates, to cloud integration, payroll and SMSF. Michelle started her career as a cadet in the Australian Taxation Office, then as a graduate at PwC. Before joining Carbon, she was a manager at PKF, bringing a wealth of knowledge and experience to the team at Carbon. Michelle specialises in providing tax and accounting advice to SMEs and HNWIs and their family groups, working to achieve the most effective strategies for them, both financially, tax effectively, and to help achieve their desired lifestyle.