Should I pay down my HELP Debt before 1 June?

With the upcoming 7.10% indexation to all Study and Training loans (such as HELP Debt) set to be applied on 1 June, we have had a lot of clients ask if they should make a voluntary payment.

TL;DR

While student loans are indexing by 7.10% on the 1st of June, making a voluntary payment may not be the best option!

 What is changing?

On the 1st of June each year, all Study and Training loan outstanding balances are indexed by a predetermined rate. While this rate has historically been very low, due to record inflation the upcoming rate has been set to 7.10%.

What can I do?

The easiest option, and the option most people I speak to are looking at, is to make a voluntary payment before the indexation is applied, giving an equivalent to a 7.10% tax-free return for the year.

Should I do this too?

There is no one answer to this question, as everyone has different circumstances – however if you are considering making a voluntary contribution, you also need to be clear on the benefits. 

While any voluntary repayment will save you 7.10% this year, future savings will be based on future indexation rates. Even when considering the recent unusually high indexation rates, the 10-year average indexation of education loans will only sit at 2.48% (don’t believe me, check out the ATO page). So while the benefit this year may sound great, it is unlikely to be the same in the future. 

What other options do I have?

There are so many things we could add to this section, but some of the ‘go-tos’ would be:

  • Invest funds in the share market
  • Pay down personal debt
  • Prepay future education costs (if tax deductible) instead of adding to your Study and Training loan balance)
  • Make a contribution to superannuation (options such as pre-tax or post-tax contributions, or even a spouse contribution may provide a better outcome over the short and long term).

For example, if we are to compare paying $10,000 off of a HELP Debt, or investing funds in super in a High Growth asset allocation, even after taking earnings tax into account, 0ver 10 years, putting funds into superannuation would be expected to provide an approximate 4.63% increased benefit (based on an 8.5% average return, less 15% tax).

BONUS – This example only considered net earnings compared to the end loan balance. There is no consideration for the tax benefits of making pre-tax contributions to super!

If someone earning $80,000 were to contribute $10,000 to super instead of making a voluntary HELP repayment, not only would we expect a better outcome in 10 years, but they would also get an immediate $3,450 personal tax deduction for the Financial Year! While this $10,000 would be taxed when entering super at a rate of 15%, this would still provide a net year 1 tax benefit of  19.50%!

Please note, this is an example only and should not be taken as advice. This,  along with many other options could be considered – not all options are appropriate for everyone. To see how this option, along with any other options would impact your situation, contact us directly and we can work with you to assess your personal situation and find a solution that works for you.

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