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It’s a common question and concern amidst the cost-of-living crisis that Australians are going through right now. Should you hustle to pay off your HECS-HELP debt early? Or should you just let it ride?

In this episode, we are cutting through the financial fog that often surrounds HECS-HELP indexation and repayment options. Questions about these bubble up often, and rightly so – it affects your financial future, after all. So, if you’re at the end of your uni degree or already receiving your pay cheque, this resource could save you time and stress.

What is HECS-HELP debt?

In Australia, when you’re preparing to enter university or Technical and Further Education (TAFE), there’s a good chance you’ll encounter HECS-HELP.

HECS stands for Higher Education Contribution Scheme. HELP, on the other, stands for Higher Education Loan Program. Together, they make up a system where you can get a loan from the government to pay for your studies. If you’re enrolled under a Commonwealth supported place or an Aussie citizen, you’re likely to qualify for that support.

Now, our system is wildly different from what you might find in other places like the U.S. There, student loans can feel more like a financial black hole. Since the debts are funded by private banks, they typically come with steep interest rates and confusing repayment terms. This means that even paying the principal amount can be a major challenge.

In contrast, Australians benefit from a relatively more reasonable student loan program in the form of HECS-HELP. Since it’s the government lending the money, we don’t start paying back until we’re earning enough to do so. That way, you’re not drowning in debt interest before you’ve even finished your studies.

How does it work?

Again, HECS- HELP debt isn’t your typical loan. It doesn’t rack up interest like you’d see overseas. Instead, your debt keeps pace with inflation, based on a two-year average of the Consumer Price Index (CPI). This is called indexation, and it’s a crucial detail that affects how much you’ll eventually pay back.

For example, after a period of low increases, we’ve seen it spike to 7.1% in 2023 – the highest in years. And while it's all theoretically tied to inflation, a spike like that can make a noticeable dent to your budget. So, it’s always worth keeping track of these changes and planning accordingly.

( Recent predictions put indexation somewhere between 4.2 and 4.8% increase. Make of that what you will. Remember, though: while these are predictions, it’s better to err on the side of caution and budget wisely. Fortunately, the government just announced plans to reduce the rate , so help may be on the way!)

Now, when it comes to paying off this debt, the process looks straightforward. Once you start earning over a certain amount (in the 2023-24 tax year, it's $51,550), you begin to pay it back through the tax system. In other words, these repayments are automatically deducted from your salary before you even see it.

However, it's easy to assume all is well and taken care of by your employer. But errors can happen, and you could end up needing a payment plan with the Australian Taxation Office (ATO).

So, to avoid any surprises, we recommend double-checking the details with your payroll team. Alternatively, you can use the calculators available on the ATO website to confirm that everything is on track.

How can you pay off this debt?

We know, it’s not the most thrilling topic, but it’s crucial for those of us climbing out of our student debts. When it comes to HECS-HELP debt, there’s a lot of chatter about the best strategies for repayment. So, let’s dig in to discover why you might consider one option over another.

1. Compulsory repayments

As we’ve mentioned, once you're earning over a certain threshold, your HECS-HELP debt repayments kick in automatically. This isn’t just some arbitrary rule, though. The system is designed to ensure you start paying back only when you're financially able to do so.

Think of this as a sliding scale. The more you earn, the more you contribute back. Again, these rates are set by the government and can change, so it’s a bit of a moving target. But the principle stays the same: as your income climbs, so does the percentage of your repayment.

Each pay period, your employer sends the withheld amounts to the ATO. Then, when you lodge your annual tax return, the ATO calculates your total HECS-HELP repayment amount for the year. They use the sums your employer has collected from your pay to balance your accounts. If by chance your employer has withheld too much, you might see a refund.

That said, the income threshold can change. So, it pays to keep an eye on the ATO website for the latest numbers. This way, you’re never caught off guard.

2. Voluntary repayments

Moving on to the proactive side of things: voluntary repayments. Why would you throw extra money at your HECS-HELP when it’s one of the more lenient loans around?

Well, first, it's all about taking control. There's an undeniable psychological benefit to chipping away at your debt. For those of us who sleep better knowing we're debt-free, accelerating HECS-HELP repayments can bring peace of mind.

Second, other folks may take this as an opportunity to improve their creditworthiness and potentially increase their borrowing capacity. Banks look at your debt levels when deciding how much they’ll lend you. And a lower HECS balance could mean the green light for that home loan you’re eyeing.

Most importantly, HECS debt is indexed on 1 June each year, which means the total you owe could tick up based on inflation. To sidestep this sneaky increase, you could consider making additional payments in May. It’s one way to save money that would otherwise go to cover just the indexation. (Remember, though: this is general info, and the details may change from time to time. So, consider speaking to a tax professional about this early repayment strategy.)

With that said, HECS-HELP is one of the more forgiving student loans out there. It’s almost interest-free in the traditional sense. The only increase you may expect will come from annual indexation based on how the inflation is doing. (Not to say that the repayment system couldn’t be better – just that reforms are always welcome.)

There's also no obligation to make repayments if your income falls below the threshold again. No debt collectors, no accruing interest penalties. It’s pretty unique in that respect.

Why someone might make (or not make) voluntary repayments

Obviously, voluntary repayments aren’t for everyone. So, here’s our take: weigh your options, and consider your entire financial situation or needs.

If having HECS-HELP debt feels like a cloud hanging over your head, voluntary repayments can help clear the skies. However, once you pay your debt off early, you can’t get that money back if you suddenly need it. So, if you’ve got high-interest debt elsewhere, it makes sense to tackle those first. (To begin, let our past episode serve as your guide: " What to do before you start investing .”)

If you’re comfortable with your financial buffer (a.k.a. emergency fund), and you don’t have other pressing debts, paying down your HECS-HELP debt could work for you. Your extra cash could get a guarantee return in the sense that you’re saving future interest and increasing your net worth.

On the flip side, liquidity – having cash on hand – is more important if you don’t have enough of an emergency fund yet. Life is unpredictable. And having accessible funds, rather than having it tied up in repaid debt, can be a lifesaver during unexpected financial dips.

What do you do?

Whichever way you repay your HECS-HELP debt, it all comes down to a broader point: your money, your rules. Ultimately, personal finance is whatever makes sense to you in your situation. This includes pacing your repayments in a way that you won’t lose any sleep over it.

And if you haven't heard yet, we have a new book coming out called " How to Not Work Forever ”. It’s for folks who want to take control of their money and start building a life of long-term financial freedom. You’ll discover practical info and strategies around Exchange-Traded Funds (ETFs) , budgeting, increasing your income, superannuation, and taxes. So, grab a copy on Amazon, Booktopia, and wherever you usually pick up your reads.

Happy investing!

Tash & Ana