One of the most common questions we are asked by our younger clients, or the parents of our younger clients, is whether and when to make a voluntary repayment of a Commonwealth Student Loan.
Most Australian citizens who undertake tertiary study qualify the Higher Education Loan Programme (HELP) offered by the Commonwealth Government. This programme allows a student to defer their student fees until some future time when their taxable income rises above a particular threshold. At that stage, compulsory repayments commence via the Australian tax system.
The amounts involved can be substantial. The amount of the fee varies according to the type of study being undertaken, but common university degrees such as law or arts generally cost students at least $15,000 per full time year, with at least three and often four years of study required to graduate. Accordingly, new graduates are often leaving university with a debt of more than $50,000.
The HELP replaced the previous Higher Education Contribution Scheme (HECS). HECS was introduced in the late 1980s. The idea was that, because university graduates generally earn higher incomes, it was fair that they would make a contribution to their University education, but at a later time when the income-generating impact of their education had taken effect. This is why repayments of the student loan were tied to the student’s future taxable income.
HELP loans need to be repaid regardless of whether a student actually graduates with a degree. The debt is imposed on a per unit basis, so if somebody enrols in four subjects, and remains enrolled beyond what is known as the ‘census date’ in the relevant teaching semester, they will incur the debt even if they discontinue their studies.
For any person with a HELP debt, compulsory repayment of their debt begins when their income exceeds $51,550. A person receiving this level of income will have to repay an amount equal to 1% of their taxable income. The percentage that needs to be repaid increases along with income such that a person earning $151,201 or more repays the debt at a rate of 10% of their income.
In addition to these compulsory repayments, anyone with a HELP debt can make a voluntary non-refundable repayment at any time. These are the repayments that clients ask us about.
There is no interest imposed on HELP debts. However, they are indexed to the CPI. For the ten years or so prior to 2022, the rate of CPI was low, and in particular it was lower than the interest rate payable on just about any type of consumer loan (such as a personal loan or a home loan). As a result, the standard advice for people with outstanding HELP debts was to not make voluntary repayments, instead using any savings they have to reduce or avoid personal debt such as a home loan.
For example, a recent graduate looking to borrow money to buy a home would be better off keeping any savings they can create to reduce the amount they need to borrow. If they already have a debt, then they are better off directing any saved income to repaying that debt, rather than repaying HELP. In summary, it was better to repay (or reduce) interest-bearing debt than to repay or reduce the non-interest-bearing HELP debt.
The CPI indexation is applied to the level of HELP debt outstanding as of 1 June last year (with the exception that any debt incurred within the current financial year is not indexed until 1 June in the next financial year). As you know, recently the CPI has been quite high – the indexation factor this year was 7.1%. While the CPI has fallen since then, on June 1 2024, outstanding HELP debts are still likely to be increased by between 3 and 4%.
This has meant a loan of $50,000 on May 30 2023 rose to be worth more than $53,500 on June 1. In turn, this has left some people wondering if they should make extra, voluntary repayments before the next June 1, to avoid their debt growing.
While it always depends on individual circumstances, our answer is still likely to be that you should only voluntarily repay HELP loans if you (i) have no other debt now and (ii) will not incur other debt in the future. In almost all cases, the rate of interest payable on loans is higher than the CPI – as evidenced by how the RBA has responded to increase in the CPI, where they have increased interest rates as a response. Remember, too, that personal debt such as a home loan needs to be paid using after-tax money. As a result, debts other than HELP loans will almost certainly be more expensive than the HELP loan. It almost always makes sense to repay or avoid the most expensive debt first.
This usually boils down to younger University graduates choosing not to make extra repayments. ‘Older’ graduates, who may have paid off their home loan, for example, might think about using any savings to avoid their HELP debt being increased by inflation each June 1.
That said, even here there is a word of caution. Under the current rules, if you die with a HELP debt outstanding, the debt dies with you. So, if you want to maximise your kids’ inheritance, don’t make any extra repayments!
For ‘older’ clients who do not intend to die soon, there is often also a desire to help their adult kids buy houses. Again, if you are this older person and you have a HELP debt, then gifting any saved money to your kids so they can reduce how much they have to borrow will reduce the amount of interest that the family ‘loses’ to interest.
All this adds up to one conclusion: the circumstances in which it makes sense to make a voluntary repayment are still quite rare. An interest free Government loan is usually the last one to be repaid.