For most Australians, University or TAFE is not free. That said, few Australians pay their Uni or TAFE fees upfront. Most pay them via a loan scheme known as the Higher Education Loan Program, or HELP. HELP replaced the previous loan scheme, the Higher Education Contribution Scheme, or HECS. Because of the way these loans are repaid, many people still owe the Commonwealth for money ‘borrowed’ under the HECS scheme. But the two programs are administered the same way.
The system works in a simple way. For every unit of study attempted (not completed!) at University or TAFE, the student can choose to borrow the amount they would normally be asked to pay the Uni or TAFE. The Commonwealth lends them this money, which is actually passed directly to the institution.
The student then ‘carries’ that debt, essentially as part of their tax profile, until it is repaid. Repayments automatically occur through the tax system in each year in which the student or former student’s income is higher than a given amount. Once a person earns enough income, they effectively pay a higher rate of tax, with the ‘extra’ tax being used to repay their debt.
The rate at which student loans are repaid varies according to how high the student/graduate’s income is in the given year. For the current financial year, the thresholds are as follows:
| Repayment income (RI) | Repayment rate |
|---|---|
| Below $47,014 | Nil |
| $47,014 – $54,282 | 1.0% |
| $54,283 – $57,538 | 2.0% |
| $57,539 – $60,991 | 2.5% |
| $60,992 – $64,651 | 3.0% |
| $64,652 – $68,529 | 3.5% |
| $68,530 – $72,641 | 4.0% |
| $72,642 – $77,001 | 4.5% |
| $77,002 – $81,620 | 5.0% |
| $81,621 – $86,518 | 5.5% |
| $86,519 – $91,709 | 6.0% |
| $91,710 – $97,212 | 6.5% |
| $97,213 – $103,045 | 7.0% |
| $103,046 – $109,227 | 7.5% |
| $109,228 – $115,781 | 8.0% |
| $115,782 – $122,728 | 8.5% |
| $122,729 – $130,092 | 9.0% |
| $130,093 – $137,897 | 9.5% |
| $137,898 and above | 10% |
As you can see, the higher the income, the greater proportion of that income is taken as a repayment. Accordingly, for a given level of debt, higher income earners will repay their debt faster.
Students/graduates can choose to tell their employer that they have a HECS/HELP debt, in which case the employer will deduct the appropriate amount from each pay. This is the same system used to pay income tax from that employer. Alternatively, students/graduates can wait until they lodge their tax return, at which time the ATO will assess any repayments that need to be made and send them an account to be paid.
Students and graduates do not have to wait until their income rises to pay off some or all of their debt. They can choose to make a part or full repayment at any time. This raises the question, should the debt be repaid earlier if it can be?
The usual answer to this question is ‘no.’ This is because the debt owed to the Commonwealth does not attract interest. It is indexed to inflation each year, but there is no additional interest charged. In 2021, the indexation rate is just 0.6%. This means that any debt owed to the Commonwealth rises by just 0.6% in 2021.
This indexation rate represents the effective ‘return’ that a person would receive if they paid off their debt in 2020. Let us illustrate with an example.
Anjani owed $30,000 in HELP as of the 1st of July 2020. She then inherited $30,000 from a relative.
If Anjani uses the inheritance to pay off her debt, then she will no longer owe the ATO anything for HELP. If she does not use the money to repay the debt, and her income is below the threshold, then the debt will be indexed upwards to $30,180. Remember, she still has $30,000 in cash, so the cost of not repaying the debt is just $180.
Almost all young people should be able to find a better use of cash than to repay their HELP. This is especially the case if they have any other debt or if they intend to borrow to buy assets such as a car or a home, or do something more enjoyable such as travel. For example, Westpac bank is currently charging over 6% for a car loan. That means the effective interest rate is ten times higher than someone is paying this year for their HELP debt. It makes no sense to repay HELP and then borrow to buy a car.
Often, clients tell us that they would like to pay the Uni or TAFE fees for their children or grandchildren, so that those younger members can start life off debt-free. These older members of the family often have no debt themselves, and so the effective interest return of 0.6% when avoiding HELP debt can look better than the interest they are receiving for money held in the bank. In these cases, we still tend to recommend that the HELP debt remain untouched and that any spare cash be used to help the next generation acquire useful but expensive assets, such as a car or a home.
Remember, the ATO will take back the Commonwealth’s money as soon as the student or graduate’s income is high enough. The debt will be repaid eventually (and, if someone dies before they have repaid the debt, the debt is cancelled!). So, we usually recommend that people simply wait for time to pass and their income to rise in order to repay this debt. They should then use any available cash to do wealth generating things like avoiding or repaying other debt or acquiring assets.
