Repaying the minimum on your HELP debt might seem attractive. But could paying it back sooner be the smarter option? Here’s what you need to know in order to decide.
Getting ahead financially is hard enough without adding voluntary HELP repayments into the mix. However, before you decide to ‘set and forget’ your HELP debt, it’s worth researching the implications of repaying some of it early. Below, we’ve laid out the crucial info about HELP repayments so you can make an informed decision.
The compulsory repayment system
Don’t worry about making HELP repayments as soon as you graduate: you’re only required to start paying the money back when your income reaches a certain threshold (currently $45,881 per year) and it is deducted from your pay automatically. The amount you need to repay is calculated as a portion of your income before tax: the figure begins at 1% and increases to 10% for those earning more than about $135,000 per year. The idea of this tiered system is to make repaying HELP easier for people who are earning less.
But what about interest?
Those of us with a credit card or personal loan understand that interest on common debts can really add up. However, unlike other popular forms of debt, HELP debts do not attract interest over time – in other words, the government does not charge you extra money for holding the debt. Instead, HELP debts are simply indexed to inflation, which means the amount you owe is recalculated once a year in line with the current cost of living, generally going up between 2% and 3% each year. That makes a HELP debt a much ‘better’ debt to hold than a credit card debt, which could accumulate 20% or more per year in interest. So why do some people decide to pay back their HELP debts sooner?
The end of incentives for voluntary repayments
Until recently, the government ran a scheme to make voluntary HELP repayments more attractive: for any repayment you made voluntarily over $500, the tax office would chip in a bonus 5% of the repayment amount. However, this scheme, known as the ‘Voluntary Repayment Bonus’, ended in 2017, and the government now offers no incentives to those considering early repayments.
Why voluntary repayments are worth considering
Given these governmental changes, it may seem like there is little reason to repay your HELP debt early. But doing so can make a difference in certain scenarios.
Firstly, paying back your HELP debt early could help you secure a home loan. Banks are now looking more closely at a variety of debts that individuals may hold before offering them a home loan. In the past, HELP debts were not factored in to a bank’s decision about whether or not to offer a home loan. But providers are becoming stricter in the wake of the recent royal commission, so clearing your HELP debt could make a difference.
Secondly, getting rid of your HELP debt as soon as possible can help you breathe easier as you take on more adult responsibilities. If you are planning a family and have a mortgage to pay, getting rid of your HELP debt sooner rather than later can give you more income and more financial freedom when it really matters.
It’s up to you
Whether or not you decide to make voluntary HELP-debt repayments depends on your current financial responsibilities and your priorities for the future. Remember: what suits one person may not work for another!