Opinion
It’s ‘good’ debt, but should you pay your HECS off early?
Dominic Powell
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When compared with countries like the US, Australians have often felt pretty chuffed about our student loans system. HECS, devised in 1989 − and known as HECS-HELP since 2005 − has long been considered a relatively fair scheme, to the point where many advocates label it as “the best debt you can have”.
Australia has a pretty good student loan scheme, but it’s affected by inflation.Credit: Michael Howard
Of course, the best debt is no debt (looking at you, Baby Boomers who had the benefit of free uni), but all things considered, HECS-HELP is pretty good. There’s no interest charged on the loan, you don’t have to pay it off by a certain deadline, it’s written off on your death, and the repayments increase only as your salary does (and remain quite low).
What’s the problem?
However, the one thing HECS-HELP does do is increase in line with inflation, which was all fine and dandy when it was around 1 to 2 per cent. But the whopping 7.1 per cent rise last year, and the predicted 4.8 per cent rise this year, mean HECS-HELP balances are ballooning, in some cases effectively wiping out any progress workers had made paying down their debt.
There are just shy of 3 million people with outstanding HECS-HELP debts, with an average balance of around $26,000. The total value of HECS-HELP debts reached $78 billion last year, up $4 billion from 2022.
What you can do about it
Changes to HECS-HELP are slated to be announced in the federal budget this month, and Prime Minister Anthony Albanese has flagged the system will be made “simpler and fairer”. Meanwhile, here are some things to consider if you want to get your HECS-HELP in order before the expected June hike:
- Should you pay it off early? Financial planner Grace Bacon says the question of paying off HECS-HELP early is one she’s often asked by clients. Like many things when it comes to your finances, the answer is quite specific to your individual circumstances, but she says if you have money sitting in the bank that you could use to pay off your student loan, it might be worth considering. As indexation means HECS-HELP debts are expected to rise 4.8 per cent in June, if you’re earning less than 4.8 per cent interest on your savings, Bacon says it may make sense to use it to pay off some of your loan. “Also, say you’re looking to buy your first home, paying off your HECS-HELP debt makes sense because clearing the debt helps your credit rating and could increase your borrowing capacity.”
- When to do it: But paying off your HECS-HELP isn’t as simple as it may sound, because while your employer deducts repayments from your pay throughout the year, those deductions don’t actually reduce your debt until your tax return is lodged and processed. This poses a conundrum for anyone hoping to avoid this year’s indexation, tax agent Julia Hartman says, as the indexation will kick in automatically on June 1, before any of the amount you worked hard to pay off is actually deducted from the loan balance. “If this is your last year of paying HECS-HELP and you can find the funds to pay off the debt at the end May then you will save yourself 4.8 per cent,” Hartman says. “When you do your tax return in July all the employer deductions will be refunded.”
- Working overseas: Bacon also makes the point that anyone who is planning to work or live overseas for an extended period of time should consider paying off some of their HECS-HELP beforehand. “HECS debt is not paid off via taxation if you are not earning income in Australia and filing tax returns, so you risk accumulating debt – meaning you could return home eventually to a nasty surprise,” she says.
- Double check: While seeing your student loans increase by 4.8 per cent – on top of last year’s 7.1 per cent hike – is bad enough, it can be made doubly worse if you’re slugged with a massive tax bill in August because your employer hasn’t been withholding enough tax to meet your compulsory repayments. This is more common than you think, and the ATO advises workers to check with their employers that they’re putting enough aside. You can check what your repayments should be here and cross-reference that with your employer.
Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.