This is the first post of a series on higher education loans.
In this post, I consider whether I should pay back my HELP debt before indexation on June 1.
The spreadsheet I have used to calculate this is available here.
Indexation
Indexation for the HELP loan is calculated as follows -
Because we do not yet have figures available for inflation for the first quarter of 2023 I’ve (gu)estimated the index number to be 132 (a modest increase from the previous quarter).
Indexation is not like interest - the value of your loan increases by the indexation factor on the date of indexation (Jun 1). And this is directly levied on whatever the pending amount of the HELP Loan Debt is on the 1st of June. For example, if I have a debt of AUD 10,000 (the dream, amirite?!) and the indexation factor is 7.2 per cent, then on the 1st of June, I’ll see a line item in my HELP summary of ~AUD 720 which will be added to my existing HELP debt.
Outside revenue options
Assuming that the opportunity cost of paying off my debt is basically what I would get on a fixed-term deposit or a nice savings account. (I’m commitment-phobic, so the latter is what I focus on in this piece.)
Important to remember as well, that when you pay off your debt, your monthly HELP payment ceases - which means you have extra cash in your monthly paycheck which could also be put into a savings account. Note that in this instance, because I’m only worried about the difference in the two scenarios, this is not that important; only the interest on the difference is.
I consider both of these when calculating the opportunity cost
So for example, say I was to pay off all my debt by May 31st by banking less money and instead putting it towards paying off the principal amount, then I’d be, according to my calculations, 180 dollars better off.
I still have a couple of questions about whether the method I’ve chosen to calculate this is right. My chief concern is about what constitutes repayment income. It’s a bit fuzzy, but it’s not the same as taxable income as far as I can tell.
I have some personal circumstances that make it (I think) better for me to pay off quicker as it increases my taxable income and, because I was out of work for most of this financial year, I will likely fall under the threshold for tax this financial year, so it makes sense for me to maximise my earnings before the 30 June tax date and bank the return in this financial year. Goes without saying that your mileage may vary.
Hope this helps you figure out your own situation!
in the next post, I’ll add in some funding clusters and longer time horizons!
Don't forget the option value of your savings (which includes the ability to clear the debt if you need to).