Should you plan to repay your HECS-HELP debt early?

Many young Australians with tertiary education debt will have come across the following advice at some point: don't worry about paying off your HECS-HELP loan early.

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 spare money could be better directed either at paying off high-interest debt (such as a credit card or car loan) or going 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."

Inflation strikes again

A consequence of rising inflation is that student loan debt has been lifted.

According to the tax office, the indexation rate applied to HECS-HELP debt increased to 3.9% on June 1, which is not only a considerable jump from the existing rate of 0.6%, it's the highest rate in more than 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

The indexation rate is different from 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 you earn, the higher the repayment rate."

Opportunity cost

Glen Hare, a financial adviser and co-founder of Fox & Hare Wealth, says 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 off 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."

He says many younger people are also looking to buy property, so there's a balancing act between paying off HECS or buying their first home.

"The caveat to that is that choosing to put money in the stockmarket 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 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.

"Make sure that you're getting all of the deductions you're entitled to and speak to your tax agent to get your deductions correct, because that will influence the amount you can look forward to paying."

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