Should you make a voluntary HELP payment before June 1?
Many young Australians with tertiary education debt will have come across the following advice at some point: don't worry about actively paying off your HECS-HELP loan. After all, most of those who enter the full-time workforce will reduce their debt over time through compulsory repayments.
The other part of the argument is that any money you do have to spare could be better directed either at paying off high-interest debt (like a credit card or car loan) or towards an investment with a high rate of return.
That's because the various types of study and training loans facilitated by the government, including HECS-HELP, don't accrue interest.
"There isn't any interest charged on the loan," says Mark Chapman, director of tax communications at H&R Block. "However, the amount of debt is adjusted on the first of June each year in accordance with an annually determined inflation factor - so, basically, the indexation rate is linked to the inflation rate."
Rising inflation, higher indexation
Unless you've been avoiding the news altogether, you'll have seen that inflation is on the rise. As Chapman notes, one of the consequences of rising inflation is that student loan debt is also about to be lifted.
Confirmed yesterday by the Australian Tax Office, the indexation rate applied to HECS-HELP debt will be 3.9% starting on June 1, which is not only a considerable jump from the existing rate of 0.6%, it's the highest rate in over a decade.
To put that into perspective, here's how a 3.9% indexation rate would impact the following student loan balances:
- a $10,000 balance would increase by $390
- a $25,000 balance would increase by $975
- a $40,000 balance would increase by $1560
Now it's worth noting that the indexation rate is different to the repayment rate - the former dictates how much your outstanding balance will be lifted each year to reflect its 'real' value, while the latter determines the value of your compulsory repayments based on your income.
"The repayment rate ranges from 1% to 10% depending on your income," says Chapman. "If you earn any more than $48,361 then you will have to make a compulsory repayment and the amount goes up depending on your income - so the more the earn, the higher the repayment rate."
Weighing up a voluntary contribution
For anyone with outstanding HECS-HELP debt, the big question is whether making a voluntary contribution before the new indexation rate kicks in on June 1 is worthwhile. Unfortunately, there's no one-size-fits-all answer.
"An indexation rate of 3.9% means it's definitely worth taking a look," says Chapman. "Each individual will obviously need to do their own calculations to work out what they can afford, but it could potentially be more attractive."
Glen Hare, a financial adviser and co-founder of Fox and Hare Wealth, says that paying off HECS-HELP debt needs to be weighed up against any other opportunities available.
"As a general rule, and obviously this depends on someone's personal circumstances, it's not usually a number one priority. Yes, HECS is going up by indexation, but it needs to be considered with regards to the opportunity cost of paying it offer faster.
"Given those with HECS-HELP debt are typically younger and looking for long-term investment strategies there's a conversation to be had about whether it's better paying off HECS, which is going up with inflation, or investing in an asset class that has historically outperformed inflation.
"A lot of my younger members are also looking to buy property, so again, there's this balancing act between paying off HECS or buying their first home."
"The caveat to that is that choosing to put money in the stock market or a property rather than paying down HECS comes with a degree of risk that someone would need to be comfortable with it."
Those who are still going to be paying off their HECS-HELP debt over the coming years may also want to consider maximising any deductions available to them in order to reduce their taxable income says Chapman.
"Compulsory repayments are based on your taxable income, so the lower that is, the lower the compulsory repayments you'll have to make will be. Make sure that you're getting all of the deductions you're entitled too and speak to your tax agent to get your deductions correct because that will influence the amount you can look forward to paying."
For more information on the subject check out our beginner's guide to HECS-HELP debt, or if you're looking to crunch the number on whether a voluntary contribution could be worthwhile there are a number of unofficial calculators online.
Get stories like this in our newsletters.