Should you pay off your HECS before June 1?
In 2014 public servant Taylor Green emerged from four and a half years of university study with an undergraduate degree, a masters and over $45,000 worth of HECS debt.
While she viewed the size of her debt as significant, it didn't cause Green as much concern as another form of debt would have. In fact, she was just thankful to have been able to defer the cost of her degrees at all.
"When I first took out the loan I was really grateful that I didn't have to pay anything upfront for my university studies, so I treated it as a problem for down the road - I didn't really worry about it.
"I had read a piece by an economist years ago who made the case that you shouldn't view HECS as bad debt. That always stuck with me, and I've always thought that there have been more important things to spend money on, so even with that debt being there in the background I figured it wasn't the worst thing in the world."
Green hasn't given a whole lot of thought to that debt over the years, but like many former students, prominent coverage of student loans in the media and talk of a much higher indexation rate for 2023 has changed that.
Daniel Thompson, a financial adviser and partner at Finnacle, has seen this first hand, as the topic of student debt has been broached by his younger clients in recent months.
"For the first time in a long time we've been starting to talk with our clients about really considering paying extra off HECS and paying it down quicker. In the last six months it's a question that's definitely become more prevalent, especially this year when the indexation rate has been looking like it's going to be the highest that it's been in a long time."
2023 indexation rate soars
Unlike most forms of debt, study and training loans like HECS-HELP debt don't attract an interest rate. Instead, an indexation rate is applied to loan debt every year which takes into account inflation and changes in the cost of living.
While the 2023 rate will be officially confirmed by the ATO in the coming weeks, an indexation rate of 7.1% is likely to be applied to HECS-HELP debt and other study and training loan balances from June 1.
That will be the highest the rate has been in years which, aside from last year's rate of 3.9%, has typically hung around the 2% mark for most of the last decade.
So why is it so much higher this year? As Thompson explains, indexation is calculated using the Australian Bureau of Statistics' consumer price index (CPI) which has been far higher than usual.
"It's based on inflation, and as everyone's become aware of now that seems to be enemy number one. Last year, indexation was a touch under 4%, but this year's figure is obviously set to be a lot higher because of inflation over the past 12 months."
The result is that, from June 1, most Australians with an outstanding student loan debt will see their balances shoot up by hundreds or even thousands of dollars if the indexation rate does come in at 7.1%. For example:
- a $10,000 loan balance would increase by $710
- a $25,000 loan balance would increase by $1775
- a $50,000 loan balance would increase by $3550
It's worth bearing in mind that the indexation rate applied to the loan balance, and the repayment rate by which someone will have to pay it back through compulsory contributions, are two different things though. Repayment rates are determined by income, starting at 1% for lower income earners and steadily rising to 10% for those on higher incomes.
Is paying off HECS-HELP debt worthwhile?
Now that the indexation rate likely to be applied from June 1 is clearer, the big question for Australians with an outstanding loan will be whether it's worth making a voluntary contribution to reduce their balance, or paying it offer entirely, before indexation kicks in.
Of course, plenty of former students won't have the money at their disposal to make a voluntary contribution. But for those who do, Thompson believes that it's certainly worth considering.
"It really is a bit of an individual situation and it's based on someone's complete financial picture and what they're wanting to achieve, but we're finding that for the first time in a long, long time it might actually be worth paying off HECS," he says.
"If people have a personal loan, or a credit card or other debt with a high interest rate it's probably still going to be better to focus on that.
"Then there may be other goals that aren't worth pushing back. We've looked at this with a few people looking to buy a home in the next 12 months, and sometimes it isn't worth putting more towards HECS because it either pushes back that home purchase goal or it means a smaller deposit and a larger loan.
"But if there's no urgent need for the money in the short term, that's where it's probably worthwhile looking at making some extra contributions."
Nine years on from graduating, Green's HECS debt has been steadily whittled down by compulsory contributions to just under $7,000 - a figure which could drop to zero once the contributions she's already made during the 2022/23 financial year are applied to her balance come tax time.
Because of this she's weighing up whether or not she'll make a voluntary payment before the June 1 indexation date, but whatever her decision, she says she feels for those about to be hit by an increase.
"I've benefited in the last decade from very low indexation which has meant that I've been paying it off faster than it's grown, and I should actually pay it off either this year or the next. But I think it would have scared me a lot more to have seen my debt go up by the indexation people are talking about now."
Making a voluntary contribution
For anyone who does want to make a voluntary contribution before June 1, or is just interested in checking their outstanding balance, can do so via the Australian Tax Office (ATO) through the myGov website or app. And payments can be made through BPAY or with a credit card.
Thompson says that it's worth making the payment well ahead of the due date though to ensure that it's actually processed in time.
"With anything, including something like making contributions to super, it's worth taking into account processing times and getting in a bit earlier than the cut-off date. Usually a couple of weeks is more than enough, but it's generally good to do it a little bit earlier to make sure that the payment's made before that new indexation rate kicks in."
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