Should I pay off HELP Debt or save/invest?

[JuicyCrab]

I love seeing questions asked on the MMM forums as you always get very clear and logical answers that help a lot of people.

Me: Male, 28, self employed running an online retail store.

In Australia we have a system where our university fees are paid for by the government and we incur a 'HELP DEBT' in the process. For me I completed a 4 year engineering bachelors at around $40,000. There is no interest on this debt, just inflation adjustment per year at 2-3%.

The debt is paid off automatically through the taxation system where if you earn over $55,000 or there abouts they start taking an additional 5% tax off your taxable income until the debt is cleared.

The government also offers a bonus 5% on all additional contributions over $500 (you deposit $500, they throw in another $25 for free).

My Question: Would it be better to pay this off with the 5% bonus, or invest the money elsewhere (index funds, bonds, property, cash accounts, etc).

It seems the opportunity cost of additional contributions might outweigh investing the money elsewhere, what are your thoughts people?

Cheers
James
Australia

[11ducks]

I'm in the same quandary. As someone who isn't super competent with investing (other than term deposits and the like), I plan to pay mine off in May (so I get the 5% bonus, and avoid paying 2-3% indexation in June).

I know there are moves to get rid of the 5% bonus sometime in the future- I'd rather take a guaranteed 5% return on my money, than a somewhat-uncertain 3-?% depending on my (rather dubious/crap) investing skills. But if you are a great investor who can get more than that back, it could better use the cash in higher interest debt or appreciating assets, by all means, invest it!

[SMCx3]

Pay off the debt.

[Murse]

Pay off the debt.

Agreed, 5% roi immediately+inflation risk free. Take it.

[MickeyMoustache]

I'm in agreement with the other guys, pay off the debt and enjoy your guaranteed 5%

[dess1313]

immediate, easy, no hassle, no risk, guaranteed return of 5%? 

pay down the debt

[Playing with Fire UK]

What happens if you don't finish paying off the debt before you FIRE?
How certain is it that you will pay it all off eventually?

[In the UK, after a certain amount of time the debt is wiped out, and you only pay above a set salary (not wealth) threshold. My SO is in a moderately paying public service role, at the current salary the loan will never be paid off (potentially by working until 65 and certainly before FIRE) and will then be written off. Any extra paid into this loan has a high likelihood of never being seen again]

If you might not have to pay off all the debt then I would invest instead. Otherwise you are effectively sending a charity donation to the government/loan company - but with a 5% bonus rather than whatever tax break you'd get for actual charity. If you choose to pay it off due to debt aversion or ethics that's cool too.

In fact, as the rate is so low I would invest anyway, but that is a much closer judgement call. I'm not a great investor, index funds all the way.

[JuicyCrab]

Thanks for the responses guys. I'm going with the majority of advice given and paying this sucker down.

Cheers

[ulrichw]

immediate, easy, no hassle, no risk, guaranteed return of 5%? 

pay down the debt

I'll throw in a differing opinion, based on the math.

You're NOT getting a 5% return, or more accurately you are getting a 5% return, but it's one time, not compounding.

It's like having a loan with a single 5% interest payment.

The longer you keep the loan, the lower the effective interest rate becomes.

The upshot is that from a strictly financial perspective, you should probably keep the loan as long as possible. The May be other reasons to pay off the loan, but it's quite likely that many investments will earn more than 5% over the lifetime of the loan.

[dess1313]

In Australia we have a system where our university fees are paid for by the government and we incur a 'HELP DEBT' in the process. For me I completed a 4 year engineering bachelors at around $40,000. There is no interest on this debt, just inflation adjustment per year at 2-3%.

The debt is paid off automatically through the taxation system where if you earn over $55,000 or there abouts they start taking an additional 5% tax off your taxable income until the debt is cleared.

The government also offers a bonus 5% on all additional contributions over $500 (you deposit $500, they throw in another $25 for free).

they add inflation adjustments that will eventually increase the cost of the loan however if you hang onto it for a long time.  the earlier its paid the less inflation you have to pay

[pancakes]

I tend to think there is little advantage to paying off a HELP loan faster than required.

My reasoning:
A lot of young professional Australians are looking to enter the property market and hit two barriers right away:
1. the size of the deposit required due to high property prices
2. transaction costs of buying on top of the deposit

If you are thinking of buying a property in the near future, use it towards those costs rather than paying back the HELP debt.

My second reasoning is that you don't ever have to pay back a HELP loan. If you die the debt is cleared and the estate only needs to pay anything that would have needed to be paid in that year's tax assessment. If you stop earning a taxable income above the threshold and never start again, you don't need to pay it back.

In my case I plan to have children before I'm remotely close to repaying my quite large HELP debt through compulsory deductions. While I have the money available to pay it all back, I'd rather the money be in some kind of investment that would be useful to my family in the event I die.


disclamer: the rules can change

[alsoknownasDean]

In my case (admittedly with a smaller HELP debt), I'm planning on ignoring it until it's fully repaid, and putting my money elsewhere.

Although I've noticed the 5% bonus (until 31 December), and that they accept credit card payments (so one could get points from it). Interesting.