HELP with HECS – to pay to not to pay?
by Hamish McDouall, 27/09/07

For those of you with an outstanding HELP debt (or HECS debt, as they were previously known prior to 1 June 2006), or with children with outstanding HELP debts you might be interested to read this article.

I have always been under the impression that your HELP debt should be the last debt you ever repay, given that it is an ‘interest free’ debt that you may never have to be repay. And whilst this certainly sounds attractive, when I recently ran through the numbers I was surprised to find that in actual fact paying off your HELP debt early can provide a return of 13.75%.

Whilst HELP debts are interest free they are indexed annually - for this year the CPI rate is 3.4%. So in reality, they are really just a low interest rate loan at 3.4% Obviously the Government felt it would be much more politically acceptable to charge an ‘index’ rate rather than an interest rate.

But, even still you won’t find a 3.4% interest loan anywhere else so why pay it off?

Well, the answer lies behind the 10% discount that voluntary repayments attract.

Lets go through the numbers. Suppose I have a $5,500 outstanding HELP debt and am considering repaying it early. If I made a voluntary $5,000 repayment, I would receive a 10% ($500) bonus that would see the entire debt paid off. The result is an effective return on the $5,000 invested of 13.74%. 

So when this effective return of 13.74% is compared with, for example, paying off your home loan at 7.62% it obviously comes out a winner. Even when compared with investing the cash into the equities market where the long-term average return has been approximately 11-12%, the strategy of repaying HELP provides for a larger GUARANTEED return on your investment.

HOWEVER, this strategy will only suit certain individuals and it is important that you discuss the appropriateness of this strategy with your Hudson adviser. There are several other important factor to consider including:

• The 10% bonus only applies to voluntary repayments of $500 or more;
  

• HELP debts are only repaid when your repayment income exceeds $39,824. Your repayment income refers to your taxable income plus;

• any amount your taxable income was reduced by a net rental loss, plus

• your total reportable fringe benefits amounts shown on your annual PAYG payment summaries, plus

• any exempt foreign employment income amounts included in your tax return.

Therefore, if you believe that your repayment income will not exceed this level for a long enough period to repay the loan then you may not have to ever repay all or any of your HELP debt. 

• If you have a spouse or dependants and if, due to low family income, you are entitled to a reduction of the Medicare levy or you do not have to pay the Medicare levy, you will not have to make a compulsory repayment for that year. Again this may mean that you may never have to repay your HELP debt.

• Indexation is applied on the 1st of June each year, on any debt that has remained unpaid for a period of 11 months (or greater). Therefore, the best time to make a repayment is just prior to the 1st of June each year.

• Do you have accumulated credit card debts with higher rates of interest?

• A HELP debt doesn’t use up your equity. For example, if you paid down your home loan this may enable you to borrow more money for investment, whereas paying off your HELP debt doesn’t. On the other hand, it may improve your after tax income and also enable you to borrow more money to invest.

If you have an outstanding HELP debt and some spare funds lying around it may be worth considering making a voluntary repayment, however please consult with your Hudson adviser first to ensure that this is appropriate for your circumstances.