Understanding HECS Debt and indexation

 

Navigating the transition from education to the workforce can be daunting, especially when you factor in financial considerations like HECS-HELP debt. This student loan program, which is unique to Australian higher education, serves as both a support and a concern for graduates. While it provides an avenue for students to pursue tertiary studies without having to pay upfront, its structure and indexing can often lead to misunderstandings and anxiety.

 

Understanding HECS-HELP

The Higher Education Contribution Scheme (HECS) is an income-contingent loan scheme for students who are enrolled in Commonwealth supported places. This means that the government covers a portion of the cost of higher education and the student pays the remainder, usually through a loan. HECS-HELP specifically encompasses the loan for tuition fees included under the HECS scheme.

  • Who is Eligible for HECS-HELP? Students at an Australian university are eligible for HECS-HELP if they are enrolled in a Commonwealth supported place and are either an Australian citizen, a permanent humanitarian visa holder, a New Zealand Special Category Visa holder, or a permanent visa holder who is undertaking a bridging study for overseas-trained professionals.
  • How Does it Work? Under HECS-HELP, the government covers a share of the tuition fees, and students can choose to either pay the remainder upfront or defer it through the HECS-HELP loan. The loan does not require repayment until the student’s income exceeds the minimum repayment threshold, which is updated annually.
  • Online Services and Information – Students are encouraged to manage their HECS-HELP debt through the Australian Government’s myGov online service, where they can track their debt size, current balance, and previous repayments.

 

The HECS-HELP Repayment Scheme

Understanding the repayment scheme is crucial for any graduate entering the workforce. The scheme is designed to consider individual income levels, ensuring that repayments are manageable and fair.

  • When Does Repayment Start? Repayments commence through the tax system once a graduate’s income reaches the minimum repayment threshold.
  • Repayment Rates and Indexation – The repayment rates are a percentage of the graduate’s income and are determined by their total repayment income. It starts at 1% and increases gradually with income. Indexation is applied annually to the outstanding HELP loan debt, which is calculated using the Consumer Price Index.
  • Voluntary Repayments – Graduates can make voluntary repayments at any time to the ATO, over and above what they are required to repay. These payments can go towards reducing the principal of the debt, meaning they can save on indexation costs over time.

See below the 2023–2024 repayment income thresholds and rates.

Repayment income (RI) Repayment rate
Below $51,550 Nil
$51,550 – $59,518 1.0%
$59,519 – $63,089 2.0%
$63,090 – $66,875 2.5%
$66,876 – $70,888 3.0%
$70,889 – $75,140 3.5%
$75,141 – $79,649 4.0%
$79,650 – $84,429 4.5%
$84,430 – $89,494 5.0%
$89,495 – $94,865 5.5%
$94,866 – $100,557 6.0%
$100,558 – $106,590 6.5%
$106,591 – $112,985 7.0%
$112,986 – $119,764 7.5%
$119,765 – $126,950 8.0%
$126,951 – $134,568 8.5%
$134,569 – $142,642 9.0%
$142,643 – $151,200 9.5%
$151,201 and above 10%

 

HECS-HELP Debt and Interest

Indexation is the process of adjusting the nominal value of the HECS-HELP debt to maintain its value against inflation. It’s essential for graduates to understand how indexation affects their debt and why it grows, even when they’re not actively making repayments.

  • How is Indexation Calculated? Indexation is calculated by taking the sum of your debt at the start of the financial year and adding the indexation factor. The factor is based on a 10-year treasury bond rate, with additional percentages added to compensate for the risk (interest rate) that the Commonwealth incurs under the loan scheme.
  • Why Does the Debt Grow? One of the common misconceptions about HECS-HELP debt is that it doesn’t grow until a graduate begins making money. In reality, the debt grows annually due to indexation, meaning that graduates are effectively borrowing more each year that it’s not repaid.
  • Minimising Long-term Costs While it’s not possible to avoid indexation entirely, there are strategies graduates can employ to minimise the long-term burden, such as making additional voluntary repayments when possible.

 

HECS-HELP and Asset Declaration

Do you have to declare your HECS-HELP debt as an asset on financial statements? This is a common question for graduates, particularly those seeking to calculate their net worth or apply for loans and other financial products.

  • Is HECS-HELP Considered an Asset? HECS debt is not considered an asset for any income tax purposes, which means it does not affect your financial asset declarations or assessments by financial institutions.
  • How Does This Affect Financial Planning? As HECS-HELP is not considered an asset, it doesn’t factor into calculations related to net worth, and it does not impact things like eligibility for social security benefits, or on assessments for financial aid other than HELP loans.
  • Repayment and Its Influence – However, as repayment is income-contingent, it does affect a graduate’s cash flow, which might indirectly influence financial planning and eligibility for loans that have an income component, such as home loans or investment loans.

 

Navigating Financial Planning with a HECS Debt

The presence of a HECS-HELP debt can influence various aspects of financial planning, from the immediate post-graduation period to long-term investment and wealth management strategies.

  • Immediate Considerations – Immediately upon graduation, one must consider the impact of the HECS-HELP debt on their income. Understanding the repayment threshold and rates can help in creating a budget and making plans for the early years of work.
  • The Long View – HECS-HELP debt is a long-term financial commitment that can span decades. It’s important to factor it into discussions about saving, investment, and other wealth-building activities, particularly in relation to the age at which you plan to retire.
  • Investment and HECS-HELP Debt – When considering investments or high-yield savings, it’s essential to weigh the potential return against the cost of indexation on the HECS-HELP debt. In some cases, it makes financial sense to prioritize debt repayment over investment.

 

Managing HECS-HELP Debt Amidst Other Financial Considerations

Balancing a HECS-HELP debt with other financial obligations and goals is a fundamental part of personal finance management for many Australians.

  • Prioritising Repayments – While HECS-HELP loans are generally considered ‘good debt’ due to their low interest and income-contingent repayment nature, there can be benefits to accelerating their repayment, especially if it can be done without sacrificing higher-priority debts or savings.
  • Emergency Funds and HECS-HELP – Maintaining an emergency fund is a key financial principle that can provide a buffer against unexpected expenses. When managing a HECS-HELP debt, it’s important to maintain a healthy emergency fund while also considering the potential trade-offs with debt repayment.
  • Seeking Professional Advice – For complex financial situations or for those who are less confident in their financial management skills, seeking advice from a financial planner can be a wise investment that aids in managing HECS-HELP debt effectively.

 

HECS-HELP Debt FAQs

Finally, a roundup of frequently asked questions about HECS-HELP debt can provide clarity on issues that often puzzle graduates as they start their repayment journeys.

  • Can HECS-HELP Debt Be Paid Off Early? Yes, early repayment is possible through voluntary repayments, and it can be advantageous for those who can afford it. It reduces the principal debt, meaning less interest will be accrued over time.
  • Does HECS-HELP Debt Affect Your Credit Rating? No, HECS-HELP debt does not impact your credit rating or your ability to obtain credit, other than in relation to available income for loan repayments.
  • Is HECS-HELP Loan Refinancing a Viable Option? Currently, HECS-HELP loans cannot be refinanced through formal refinancing programs as one would with other debts. Voluntary repayments remain the primary strategy for prepayment.

 

The HECS-HELP debt scheme is a critical part of Australia’s higher education landscape, but with the right knowledge and strategies, graduates can manage it to their advantage. By demystifying the indexation process, understanding the income-contingent repayment system, and incorporating HECS-HELP debt into their broader financial planning, graduates can ensure that this educational investment does not become a financial burden but rather the foundation for a strong, informed approach to personal finance.

If you would like to improve your current investment strategies or are looking to start your investment journey, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.

 

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