With the five per cent bonus on voluntary HECS-HELP payments over $500 to end at the end of the year, should Australians pay off their university debt?
The current HECS-HELP payment system allows students to defer their student contribution and repay it later through the taxation system. It was traditionally thought that not paying the debt off early could be a viable option over time but it may now be time to reconsider.
It was announced that from 1 January 2017, the Australian Government will remove the upfront HECS-HELP discount of 10 per cent for eligible students that pay their student contributions upfront and the voluntary HELP repayment bonus of five per cent.
Currently, and until 31 December 2016, if you make a voluntary HELP repayment of $500 or more, you get a 5% bonus. If your HELP debt balance is less than $500 and you make a voluntary repayment to payout the debt, you will get a 5% bonus.
Those with HELP loans don’t have to pay off any loan until they can actually afford to and/or their taxable income exceeds certain thresholds. The loan is indexed annually to inflation. But, if you have savings that you are thinking of using towards a voluntary repayment, you may want to first consider paying off a debt with higher interest, such as a credit card or car loan. You may also want to consider any opportunity cost of paying off the debt versus a greater return on your money (although paying off debt has a certainty whereas investments may not).
For those lucky enough to have a parent or someone who is willing to repay this debt in advance, they may be able to enter into an arrangement to repay the capital over time. Even if a low level of interest is also repaid, the discount could still ensure a savings over time.
The removal of the upfront discount will affect students who can afford to pay upfront and choose to do so. It will not affect students who fund their university studies through a HECS-HELP deferred loan.
The bonus for voluntary repayments will only affect people who can afford to make voluntary repayments above what are required when annual tax returns are assessed.
If you want to make a voluntary repayment, you need your payment reference number (PRN). If you don't know your PRN, you need to get it by 23 December 2016. Voluntary repayments are in addition to compulsory repayments and are not refundable.
Please contact your adviser at WLM to review what is best for you or more information can be found from the ATO at: https://www.ato.gov.au/Individuals/Study-and-training-support-loans/Voluntary-repayments/