By Gillian Bullock, ninemsn Money
, November 2008
To pay or not to pay that is the question. When your income is high enough to trigger compulsory repayments of your Higher Education Loan Program (HECS-HELP) debt, should you be rushing to pay it off as quickly as possible or just pay the minimum amount?
For the 2008-09 financial year, once your income is greater than $41,594 a year, you will have to pay a compulsory minimum payment to clear your HELP debt. It’s based on a percentage of your income 4 per cent if you earn $41,595 to $46,333 gradually increasing to 8 per cent once your salary is more than $77,248. In dollar terms this can be as little as $32 a week to more than $120 depending on your income.
If you are suffering serious hardship then you can arrange to defer your repayments although time limits apply. And if you spend way over your income on clothes and partying, you won’t qualify for serious hardship. Deferment is for a period up to two years.
If you pay more than your minimum requirement, then you can enjoy a discount.
A voluntary payment of $500 or more will see you enjoy a 10 per cent bonus. So if you were to make a voluntary contribution of $600 you would get a $60 bonus. The 10 per cent is not calculated on your total debt but on the amount you voluntarily pay.
In the current economic climate the threat of high inflation may make paying off your HELP debt appear more attractive.
While your HELP debt does not attract an interest rate charge, it is indexed so each year it will rise with the rate of inflation. At June 2008 the indexation rate applied was 2.8 per cent. In the current financial year we are looking at inflation rates of 5 per cent.
But even with a 5 per cent inflation rate, it is still worth remembering that you are paying no interest on your HELP loan so if you wanted to shift debt, clear your other debts such as c redit card balances first.
According to Scott Pape, author of the book The Barefoot Investor – five steps to financial freedom in your 20s and 30s’ paying off your debt will depend on your individual circumstances.
“I chose to pay off my HELP largely because I have analysed my financial choices and the returns I could reasonably expect at that time,” says Pape. “If you pay off your HELP, you receive an immediate discount.”
To pay or not to pay comes down to personal choice. If you don’t like carrying debt, look to clear it. But remember it’s about the cheapest debt around.