"I currently pay low amounts on my HELP debt through my compulsory repayments and with upcoming and ongoing CPI increases, the outstanding balance has barely been reduced. Should I make voluntary contributions?"
- Question from Callum in Melbourne, VIC
Top answer provided by:
Amy Lehmann
Hi Callum,
Firstly, thank you for sending in your question. As a financial adviser and a fellow graduate with a HELP (Higher Education Loan Program) debt, I can shed some light on my approach and thoughts on making additional voluntary repayments towards your loan balance. While there is no one-size-fits-all approach, there are several factors you should consider before making a decision.
Let’s start with the interest rate. Historically the interest rate applied to HELP loans has been famously low at rates between 0.6% and 2.6%, in line with the Consumer Price Index (CPI) or more simply, inflation. These low-interest rates meant any voluntary contributions may not necessarily have been the best use of your cash. But, Since the COVID-19 pandemic, we have seen this interest rate rise to 3.9% last year, and it’s set to jump to 7% on 1 June this year. Yikes!
Another thing to consider is your personal attitude towards debt. If you’re someone who feels anxious about this higher interest rate becomes and it becomes a source of stress, making voluntary repayments may provide you with a sense of relief and may be a stepping-stone in taking control of your finances. In this case and you have surplus cash flow and multiple debts, repayment should be prioritised in order of highest interest rate i.e., if you had a loan with a rate of 10% this should be prioritised to be paid off before your HELP debt.
On the other hand, if you’re someone who views debt as a strategic tool for investing and building wealth, you may want to consider if your surplus income would be better used to achieve future goals, such as saving for a home deposit or investing in your Superannuation.
Now if you’re a young adult I know you’ve just mentally disregarded the Superannuation option. But what you may not know is that Superannuation can play a significant role if one of your goals is to save for your first home, introducing the First Home Super Saver Scheme (FHSSS). The FHSSS allows first home buyers to save for a home deposit by making voluntary contributions to superannuation in a tax effective way. A basic example is this, if you earn between $45,001 - $120,000 and you make a personal deductible contribution or salary sacrifice $10,000 into Superannuation, your contribution will be taxed at 15% on the way into Super, meaning you will have approx. $8,500 saved, ready to be withdrawn for the purchase of your first home. If you instead received that $10,000 of salary from your employer, it would be taxed at 34.5% (Medicare levy inclusive) and you would be left with approx. $6,500 in the bank. There’s almost $2,000 saved using this strategy, making Superannuation interesting for young people again. Yay!
Investing into Superannuation is also a smart financial move (if you can cope with building wealth and not being able to flaunt it until age 65), as the returns can be significant over the long term. By making additional contributions to Superannuation, you may be able to take advantage of the governments co-contribution scheme where the government could match up to 50% of your contribution and boost your retirement savings. As with most financial strategies, eligibility requirements apply, so it’s important to chat with a financial adviser and conduct your own research.
Of course, at the end of the day, whether you make voluntary repayments to your HELP debt is up to you and your personal circumstances. But hopefully, thinking about these factors can help you make a decision that works best for you and your financial goals.
All the best,
Amy
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