Pay off HECS/HELP debt before indexation?

UPDATE: The latest annualised inflation figure came in at 7.0%, meaning HECS-HELP debts will be indexed to 7.1%, based on the previous two years' worth of data.

Someone with a $30,000 debt will likely see that balloon to more than $32,130 if it is not touched before indexation on 1 June.

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Every year, tertiary education debts are indexed to inflation on 1 June, and this year the rate is set to be huge.

Indexation is calculated each year after the March quarter inflation numbers are released, and is based on figures collected by the ABS over the previous two years. 

Data for this important quarter is released on 26 April 2023, giving those with a tertiary education debt just over a month to decide.

Either way, however, it's set to be a big number: last year's 3.6% was accounting for the Covid period of deflation and persistently low inflation.

The December quarter headline inflation figure was 7.8%, and while it was lower at 7.0% in the March quarter, it's still a big number.

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Pay it off or not?

The Savings Tip Jar podcast spoke to financial coach and founder of MoneyHappy, Rebecca Maher (pictured below), who said ultimately it's a personal decision.

"One thing for people to understand when they're trying to decide whether or not they should make additional repayments is to look at how much they actually are repaying right now," Ms Maher said.

"Graduate salaries have increased over time, so when someone moves out of university and gets their first position, they might be on a starting salary of around $60,000 to $80,000, from day one. That puts them at a repayment rate of 3-6%.

"I think it's important to understand what you are paying first, and to have a look at the size of your debt as well. Work out what that looks like in terms of your repayment timeline."

1. Pay off other debts first

Ms Maher said the priority should be to pay off other debts if you have any.

"We're in a very high interest rate environment. You should be potentially looking at paying other debts off as a first step before you move to looking at debts like your HECS/HELP debt," she said.

"The reason for that is there is no interest cost attached [with HECS/HELP]. Yes, the debt is growing at an annual indexation rate. But your repayment is actually linked to your income, not any interest cost associated with it."

Someone with an $80,000 income dedicates 5% of their paycheque towards repaying tertiary education debts, which could be much lower than repayments on credit cards, personal loans or car loans.

If you had a car loan of $30,000 over five years at 7% p.a. interest, that works out to be $7,248 a year, or just over 9% of your gross income if you earned $80,000.

Other personal loans and credit card repayments attract higher interest rates still.

2. Consider opportunity cost

If you had saved a lump sum and were thinking of using it to clear your student debt, you have to consider the opportunity cost - i.e. what else that money could be used for. 

Grant Millar from Inspired Financial Planners explained this in more detail.

"If you are saving for something and need your savings for that particular thing - a home deposit, holiday, new car, and so on - you need to weigh up the opportunity cost, and thus prioritise what's more important," Mr Millar told Savings.com.au.

"If you reduce the HELP debt, it reduces the duration, and the amount of future income, required to clear the debt in the future. If you don't, you need to understand that the opposite is applicable."

Again, the decision is ultimately personal. If you had $10,000 saved up, would you prefer to put that towards a house deposit, paying off uni debt, or investing in shares or other investments? 

You will need to consider what could yield better returns, however the decision is also emotional, according to Ms Maher.

"Some people are naturally more comfortable and competent with taking on debt, with managing debt, and carrying debt over longer or shorter periods of time," she said.

"That comes down to their money mindset including how they were brought up around money.

"So it really is a trade off between making financial sense, and also making someone feel comfortable so that their financial wellbeing is also taken into consideration." 

3. Consider future income potential and cashflow

As you move through income bands, your repayment rate gets higher. It starts off at just 1%, and if you earn $100,000 you're repaying 7%. 

It gets as high as 10% if you're earning $141,848 or more.

Mr Millar said if the debt continues to get indexed, you reduce your take-home pay for longer because more money is needed to clear the existing principal.

"Let's talk numbers. If the person is on $70,000 a year, they're paying 3.5% of their income toward the HECS debt.

"If they have $10,000 in HECS debt and inflation comes in at 7%, that debt increases to $10,700.

"It may not seem like much, but it's going to take you almost 3.5 months in the following year just to pay the extra $700 back. This means only 8.5 months of the year is actually going towards reducing the original $10,000."

By increasing take-home pay, that extra money could go to things like a savings account, a house deposit, other investments, or a holiday.

However Ms Maher highlighted that once you've repaid that debt, it can't be redrawn if you need the cash in the future.

"You need to be across your current cost of living, your current short term cash needs, and your other goals that you're saving towards, so that you don't leave yourself in a more difficult financial position in the short to medium term," she said.

"On a day to day cash flow position, HECS/HELP repayments reduce the purchasing power that you have with your existing income.

"It's a bit of a catch-22 and you need to ask yourself: What is the long term or medium term implication of the debt indexing at this higher rate over the next couple of years? Am I better or worse off addressing these shorter term cash flow needs?"

Does HECS/HELP uni debt impact borrowing power or credit score?

Tertiary education debts by all means affect your home loan (or other loan) borrowing power due to two factors: the residual loan amount will likely be factored into your maximum borrowing amount, and your repayments coming out of your pay will affect your serviceability.

As you're paying off the debt, you have less take-home income to play with, which lenders will factor into your Household Expenditure Measure.

Where it differs to other debts, however, is that it doesn't impact your credit history or credit score, which Ms Maher said could be used to your advantage to prioritise other debts.

"If you've got a smaller debt, say $10,000 or less, then it's likely to have less impact if you've got a higher debt," she said.

"There's over half a million people with HECS debt over $40,000. That's quite significant in terms of a first home buyer looking to take on a mortgage."

How to find out how much you owe

Finding out how much you owe is simple thanks to the MyGov system. To find out how much you owe you will need to log in to MyGov, and link the Australian Tax Office (ATO) service. From there it will give a balance owing and a breakdown of how much it's been indexed.

As HECS/HELP debts usually come out of your pay-as-you-earn salary through your job, your employer will likely pay off what's owed after the end of every financial year.

You can also choose to make voluntary extra repayments after-tax through the MyGov-ATO portal.

"It's a very simple process. It comes down to, 'How much should I allocate to paying it off?' That comes back to cash flow and budgeting," Ms Maher said.

Which education loans are indexed to inflation?

Any higher-education loan scheme is indexed, including:

• Higher Education Loan Program (HELP)
• VET Student Loan (VSL)
• Student Financial Supplement Scheme (SFSS)
• Student Start-up Loan (SSL)
• ABSTUDY Student Start-up Loan (ABSTUDY SSL)
• Trade Support Loan (TSL).

HECS/HELP repayment rates

The amount you repay - which usually comes out of your regular paycheque - is based on your income. It's reflected as a percentage of your income, rather than the debt owing. 

If you earned the average (mean) full-time salary of $94,000, as defined by the ABS, you'd repay 6.0% or $5,640 per year. If you earn less than $48,361 per year, you are repaying nothing.

Income	Repayment Rate %
Below $48,361	Nil
$48,361 - $55,836	1.0
$55,837 - $59,186	2.0
$59,187 - $62,738	2.5
$62,739 - $66,502	3.0
$66,503 - $70,492	3.5
$70,493 - $74,722	4.0
$74,723 - $79,206	4.5
$79,207 - $83,958	5.0
$83,959 - $88,996	5.5
$88,997 - $94,336	6.0
$94,337 - $99,996	6.5
$99,997 - $105,996	7.0
$105,997 - $112,355	7.5
$112,356 – $119,097	8.0
$119,098 – $126,243	8.5
$126,244 – $133,818	9.0
$133,819 – $141,847	9.5
$141,848 and above	10

Source: ATO

Head photo by Charles DeLove on Unsplash

Photo of Rebecca Maher supplied