Handy HECS hints for students
We’ve heard lots of talk recently amongst students and in the media about the recent ‘window of opportunity’ to attain reprieve from HECS debt indexation by paying before indexation occurs on 1st June. However, there are some other important factors to consider before jumping in and making lump sum repayments now.
Understanding HECS & Indexation:
Firstly, a ‘HECS’ debt is acquired by students who use the Higher Education Loans Program (HELP) to fund their studies. The students will then pay this loan off later in their career, in increments through the tax system, once they earn income above the relevant thresholds. For example, the current threshold where automatic repayments start is $51,550 with a repayment rate of 1% of income, increasing to 10% if earning more than $151,200 in a year. While HELP loans do not incur ‘interest’, indexation is applied to these student debts on 1st June each year to allow for inflation – or to match the changing value of the dollar so to speak.
In June last year, students were slapped with a hefty indexation rate of 7.1%, based on the Consumer Price Index (CPI), leaving some in a debt spiral with loans increasing faster than they could be repaid. This pressured many students into contemplating whether they’d be better off repaying their debt ASAP, rather than letting their salary pay it off over time once they begin working and earning more than the threshold.
But don’t stop reading just yet…
The Government has announced changes to cap the HELP indexation rate providing some relief to higher education students and preventing another shock increase like last year. Once the legislation has passed these changes will mean that indexation will be based on the lower of either CPI or the Wage Price Index (WPI). This is to prevent indexation from outweighing wage increases.
The government announced they will apply this change retrospectively for June 2023, decreasing the 7.1% indexation applied to the WPI rate of 3.2%, wiping $3 billion from the total pool of student debt. Students who already paid with the 7.1% indexation will receive a credit against their HELP loan or if this has since been repaid in full including the 7.1% indexation, the overpayment will be included in their 2024 tax return. The indexation rate for the 2024 financial year is estimated to be 4.0%.
An example:
Considering the average graduate HELP debt of $26,500, and the estimated 4.0% indexation rate as of 1 June, their debt will increase by $1,060 for the year. However, if a student has savings in an account earning say 5% they could receive $1,325 over the next year from holding onto that $26,500, plus more due to the effect of compounding if interest is credited to their account monthly.
Key considerations:
In the end, it all boils down to whether the amount you would earn from interest by keeping your excess money in a savings account would outweigh the indexation you would incur on your HECS-HELP debt – which could often be the case. It is, however, important to note that the comparison is contingent on savings account interest rates available and indexation rates applied each year, so these are both worth considering.
If you would like some assistance exploring what HECS-HELP repayment strategy may be best for you, our expert advisers would be more than happy to help.