More HELP reform – reduced discount for repaying early

Last week’s budget leak about cutting the discount for paying student contributions upfront was only part of the HELP reform story. They are also going to cut the ‘bonus’ for repaying early from 10% to 5%. (For example, if you pay the ATO $1,000, they will now wipe $1,100 from your HELP debt, but only $1,050 if this reform passes).

This is a broader change than the upfront initial payment discount, as the early repayment bonus applies across all the HELP schemes. It will partially deal with an absurdity that I plan to exploit, of people taking out FEE-HELP loans and then repaying ‘early’, effectively reducing the cost of the course at taxpayer expense.

The bonus was last cut in 2005, and it did push voluntary repayments down:


Source: Higher Education Report 2009

However why this is a good idea, even aside from the FEE-HELP anomaly can be seen in this table from the ATO Taxation Statistics report:

As you can see, on average people take 7 years to make their first voluntary repayment and on average finish repaying about 10 months after that payment. So the purpose of the discount – to get people to repay early and save the government interest subsidy costs – is not being achieved. People are repaying at the end of the repayment period, after they have already received the interest subsidy. The government would be better off collecting the full remaining amount owed to them.

The question really is whether there should be any ‘early’ repayment bonus at all.

6 Responses to “More HELP reform – reduced discount for repaying early

  • 1
    Baz
    May 11th, 2011 07:01

    Yes, this part is very true. I did it myself. Took the interest subsidy for as long as I could, then in the last year of re-payment, I paid the loan off before I was requested to, and took a nice discount. My personal gain aside, policy shouldnt really encourage that.
    You could have it though that you only get the discount when you first incur the cost. In fact, I thought they did this – that there was a higher discount for paying immediately as opposed to a voluntary lump sum 4 years down the track. But I could be wrong here. I know they keep changing the rules every second year.
    In any case, I think the amount not being paid pack, the long lead time for some people to pay it back, is of far bigger concern than the discounts (at least you get your money back and quickly). Of course, if the discount is still a worry, just put university fees up. They are of course far too low.

  • 2
    caf
    May 11th, 2011 08:16

    Yes, I did the same thing. If you know that your compulsory repayments in the current financial year will end up clearing most or all of your debt, you’re best off making a voluntary repayment in May, right before the indexation is applied on June 1. You’ll get the 10% (now 5%) bonus, and you’ll avoid the indexation. Your compulsory repayments, now excess, will be returned to you in your tax return, which you can get as early as mid July if you get on to it quickly.

  • 3
    conrad
    May 11th, 2011 09:05

    I can third that strategy.

  • 4
    Russell S
    May 11th, 2011 12:51

    As can I – we seem to be on a common theme here and it makes you wonder why everyone doesn’t do it and more often – or are we just better informed on how the system operates.
    As Caf says you do this just before submitting your tax return – on this basis the 15/10% bonus even makes it worth short term borrowing to fund the payment.

  • 5
    Andrew Norton » Blog Archive » HELPless taxpayers ripped off
    May 18th, 2011 10:48

    [...] is the interaction between the bonus for repaying ‘early’ (to be cut from 10% to 5% as a result of the Budget) and the arrangements for FEE-HELP applying to students who enrol through [...]

  • 6
    Andrew Norton » Blog Archive » Should the student learning entitlement be abolished?
    June 1st, 2011 07:04

    [...] of anyway, so unlike SLE it is not a lot of additional bureaucracy. Unfortunately, despite the sensible changes to HELP discounts in the budget last month the government shows little interest in dealing with the costs, anomalies [...]