Do you have a HELP debt and wondering what rising interest rates will mean for you?
After you have graduated you will most likely have paid for your university course through the HELP scheme. This scheme means that you have not had to pay for your university tuition upfront and the costs have by and large been covered by the loan you now have with the government. These loans are unique in that they are income-contingent and indexed to inflation.
Income-contingent means that for the 2022-2023 financial year when your income exceeds a minimum threshold of $47,014 you will have to start repaying your loan and your employer will withhold and pay to the government a HELP fee component from your wages.
Indexed to inflation means that each year on 1 June your debt is recalculated to factor in changes to inflation so that the debt maintains its real value over time. Remember that HELP is a debt you must pay off and is indexed to inflation which in 2021 was 0.6%, in 2022 3.9% and in 2023 could be as high as 7%. That means that the indexed amount on a loan of $100,000 could be $7,000 this year and this is why HELP is in the news lately because as inflation continues to rise the indexing on the loans is getting higher as well.
Another bone of contention is how your HELP debt is indexed. You see the indexing is calculated at the end of the financial year, 1 June, but since you won't be submitting a tax return until later than that time, your compulsory deductions are not taken into account when the government does the indexing. So the indexation occurs on the full amount and not the amount minus your compulsory payments. The compulsory payments will reduce your debt after your tax return has been submitted.
You can make a voluntary payment to reduce your loan balance. It is best to make a voluntary payment before 1 June because voluntary payments do reduce the debt amount and so the indexation will be on the reduced amount.
So as interest rates rise, when is a good time to make a voluntary repayment?
A basic rule of thumb is to pay off any debts, such as your credit card, with interest rates higher than inflation first. But if you have no debts of higher priority and have some spare cash sitting in a bank account earning very little interest you might benefit from paying down the HELP debt with it. Finally, if you don't intend to be working for a substantial period of time there is no need to pay off your HELP debt and you probably need the money for other things.
Incidentally, when you die, the executor of your will, will lodge your final tax returns and then any compulsory repayment is made and the rest of the debt is written off! Won't that be a relief...