Imagine this: you’re buying your first home, or you’ve just decided to invest in a new car that won’t fall apart when getting you from A to B. So, you need a loan — maybe a big one.
You go to the bank (or your favourite comparison website) and consider your options. You receive your borrowing capacity and review the quotes, the credit guides, and the terms thoroughly so you know what you’re agreeing to. You triple-check the loan amount that is about to become your debt before you sign.
Can you say that you understand your HELP debt just as well?
Let's have a look at the fine print to discover how your HELP debt works — and how you can make it work better for your financial goals.
What is HELP?
The Higher Education Loan Program (HELP) is designed to assist eligible students finance their tertiary education in Australia to make it more accessible. The loan covers the costs of tuition and student amenity fees while avoiding two key requirements of traditional loans: immediate repayments and compounding interest.
The biggest difference, however, is that the eventual repayments are paid back to the government through tax once you pass a certain income threshold.
HELP debt is an accepted — and not much thought about — advantage of our education system for many students due to its convenience. However, this means you might not have a full understanding of how it works when you’re accruing it and, more importantly, how it can affect you in the long term afterwards as you advance in your career.
How do HELP loans work?
After you’ve opted into the program and deferred your education fees, the costs will be added to your HELP debt after each applicable census date.
Once your Repayment Income (RI) reaches the threshold — currently set at $51,550 — your annual repayments will start to be taxed in addition to your regular tax from your pre-take-home pay. In most cases, your employer (if you’ve informed them of your HELP debt) will deduct this automatically for you. If you work for yourself or do contract work, however, this may not be the case and you will need to put aside the correct amount of this income to pay the ATO come tax time. If you’re one of the latter, we recommend you speak to a trusted accounting advisor who can help you get it right and avoid penalties.
Your mandatory HELP repayment each year is based on your income. The amount you are required to pay depends on your income; the more you earn, the higher the mandatory repayment. The repayment rates range from 1% to 10% depending on your income. It's also important to be aware of how salary packaging can have an impact on this each year.
The repayment rate ranges are relatively small though and can catch you out if you’re unaware. If you progress to a higher-paying role within a single year or accrue overtime pay, contract work, or bonuses, it can easily take you up half or whole percentage brackets. At the current rates, the repayment percentage for a $70,000 income is 3.5% versus 5% at $80,000. This increases the repayment amount by $1,550.
HECS-HELP vs FEE-HELP
The two main student loan schemes are HECS-HELP and FEE-HELP. While both aid with tuition deferral, they cater to different types of students and courses.
HECS-HELP is the one you're probably most familiar with; it's designed for students enrolled in Commonwealth Supported Places (CSPs) and commonly applies to undergraduate degrees. Under HECS-HELP, the government subsidises a portion of the tuition fees to make education more affordable. The remaining portion is then applied to the student's debt.
FEE-HELP, on the other hand, is available to full-fee paying students. The scheme provides full or partial coverage of tuition fees as a student loan but doesn't subsidise it, meaning the individual must pay back the full cost. Because of this, you might be able to claim a deduction for your FEE-HELP expenses if they meet the ATO's eligibility criteria.
What is HELP Debt Indexation?
Each year when the latest Consumer Price Index (CPI) is calculated — normally in April — the annual HELP indexation rate with be announced. It will then be applied to your HELP debt from 1 June. But what is it?
While your HELP debt doesn't accrue compounding interest like a normal loan, that doesn't mean it's immune to inflation. This is the role of indexation, and it's important to understand how it impacts your debt amount.
Your HELP debt is something you will likely repay over several years. To ensure its value remains constant over that time, it's adjusted — increased by the CPI percentage — annually to align with the cost of living.
The important point to note is that because indexation is applied on June 1, your debt is adjusted before your standard compulsory or voluntary (salary sacrificed) taxed employment repayments are processed.
The unfortunate side-effect of indexation is that it can undo a good amount of any taxed repayments you make within the year, especially when the rate increases significantly as it did in 2023.
For example, an individual earning $70,000 in 2022 would be taxed with a HELP repayment rate of 4%. Their compulsory repayments would total $2,800. If they had a $20,000 HELP debt amount, once indexation was applied on 1 June, it would be increased to $20,780, effectively negating over a third of their repayment.
For that same individual the following financial year (assuming their income remained the same), their HELP repayment would be $2,450 (3.5%) towards their now $17,980 debt. However, when indexation was applied, their debt increased to $19,256.58 — over half of their compulsory HELP repayment taxed for that year.
Increases in the indexation rate can have a significant impact on the lifetime of your HELP debt. Understanding how it works and when it's applied to your debt becomes important if you reach a point where paying it off early is not only achievable, but beneficial for your financial goals. Ensuring any additional repayments to do so occur before 1 June means avoiding another year of indexation accruing.
Benefits of paying off your HELP Debt early
Paying off your HELP debt early can be an often overlooked yet strategically helpful move in achieving your financial goals. By paying off your HELP debt early, you can not only avoid additional indexation increases, but increase your available income and loan borrowing capacity.
When applying for personal loans or mortgages, lenders assess your application against a variety of factors, including your HELP debt liability. Because a portion of your income is earmarked for your HELP debt, it reduces the amount remaining from your income for additional loan repayments. As a result, lenders often calculate your borrowing capacity to be lower than it would be without a HELP debt.
Another benefit is the increase in take-home pay, as your employer no longer needs to withhold tax to contribute towards your loan. This allows you to redirect future income towards other financial opportunities, such as saving for your first home, investing, or making additional superannuation contributions for your retirement.
While your HELP debt can seem like a set-and-forget kind of deal, there are numerous strategies you can employ to get the most out of your loans and make it work best for your circumstances.
If you'd like personalised advice on optimising your debt and structuring your finances for the future, you can get in touch with our trusted accounting advisors today.
Nick brings a diverse set of skills to the specialist medical services team, combining his extensive taxation and financial reporting experience with his knowledge of the medical and dental accounting industries.
Nick started his career as a trainee with Cutcher & Neale in 2005. As a member of our Specialist Medical Services Division, Nick works closely with all of our Doctors in Training to deliver the WealthStart program. His experience in identifying key focus areas for our Doctors in Training is central in advising the best strategies as you launch into your financial journey.
