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Ask Paul: Should I pay off HECS or save for a home?

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With HECS balances rising again, many young Australians face the same tricky choice: pay down student debt or keep saving?

Reader question

Hi Paul,

Young Australian woman budgeting at home while weighing HECS debt against saving for a home deposit.

I know you've previously said that HECS-HELP is the cheapest debt you can have, but with indexation my balance just keeps going up.

I'm in my 20s, fortunate to be living at home and working part-time while I study. Should I focus on paying down my student debt or save to hopefully buy a unit one day?

Paul's response

Good question, Ally. The technical answer remains no.

A zero-interest debt, and one that just disappears when you die, is a cracking loan!

Clearly, lenders will take into account your student debt in terms of determining how much you can borrow to buy a home.

Another interesting point is how much you might earn. Your repayments are taken from your pre-tax income once you earn above $67,000.

If you ended up in a high-paying job, at more than $190,000, you'd be paying 47% tax including Medicare levy. A high-income earner would soon shred this debt.

We also need to add in politics.

As you know, the government is reducing student loan debt by 20%.

And when it comes to loan indexation with inflation, the outcry tends to see indexation lower than the actual rate of inflation. Will another 20% cut appear in the future?

My view is pretty simple.

Personally, I'd be building savings to give me the power to invest or accumulate a home deposit. Control what you can is a pretty good rule of money.

We also need to consider our own personality.

This is what I call the sleep-at-night test. I'll pick on me and my wife, Vicki. She would hate having student debt, so she would be better off paying it off and sleeping well.

I'd find it quite entertaining to build my wealth and leave the student debt alone.

If it turned out I earnt a high income, the student debt would be paid down from the compulsory payments.

I'd be happy with that.

Maybe your best solution is to leave this interest-free loan alone, save as you can and revisit the issue as you build your life and career?

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Paul Clitheroe AM is Money's founder and editorial adviser. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of Ecstra, an independent charitable foundation building financial wellbeing of Australians. He is chairman of InvestSMART Financial Services, and was chair of the Australian Government Financial Literacy Board and Financial Literacy Australia from 2004 to 2019. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. View our disclaimer.