HECS-HELP debt

Updated May 2024

Good news from the Budget (May 2024) if you have a HECS-HELP student debt.

From now on it will be indexed to match whichever is lower out of the Consumer Price Index or the Wage Price Index.  This will stop HECS loans growing faster than wages.

The policy will be backdated to June 1 2023, which means last year's 7.1 per cent indexation will be lowered to the Wage Price Index of 3.2 per cent.

This means that if you still have a HECS-HELP debt you will receive a credit on last year’s indexation, and if you recently paid it off you will have that amount subtracted from the other taxes you pay, or get a tax refund.

In my opinion, HECS-HELP is the lowest priority when it comes to paying off debt.  If you have a home loan, a personal loan, a car loan or a credit card debt, pay them off first. Those debts are much more expensive and will have a greater impact on your financial well-being.

Having said that, there are a few situations where you might consider making voluntary repayments to speed up your repayment.  The first is if you’ve nearly completed your repayment, another is if you’re thinking about getting a home loan and finally if you’re planning to take a break from employment.   I’ll explain these at the end of the article. Whether it’s worthwhile or not depends on your personal situation and what other debts you have.

How HECS-HELP is paid

As a psychologist, with years of university education, I’m sure you’re familiar with HELP (the Higher Education Loans Program) or its earlier rendition HECS (Higher Education Contribution Scheme) which you can use to pay for eligible higher education courses and then begin to pay back when you earn an amount above a threshold - which is currently $51,550. 

A percentage of your income, ranging from 1% to 10%, depending on how much you earn above the threshold, will be automatically taken out of your pay with the rest of your tax by your employer. 

For example if you earn between $51,550 and $59, 518 your repayment rate will be  1.0%, if you earn while if you earn  between  $79,650-$84,429 your rate will be 4.5% 

Each pay period that you are over the threshold your employer must withhold the required payment amount from your wage before you are paid and

they will send your compulsory HECS-HELP repayment  to the ATO, together with your Pay as you go (PAYG) tax. On your pay slip you may see STSL.  This is a payroll code that stands for ‘study and training support loan’ and it’s the HECS-HELP being taken out of your pay.  

If you have other income, you may need to pay a top-up on your HECS-HELP debt at the end of the financial year.

If your income goes below the threshold, you are no longer charged HECS-HELP repayments. 

Unlike other loans, if you pass away the debt dies with you.

When you pay off your HECS-HELP debt you need to let your employer know by filling out a new withholding declaration  and answering ‘no’ at question 6  so they will stop taking it out of your pay. 

Your loan balance

You can check your loan balance online with  myGov or ATO online services (From the menu select Tax > Accounts > Loan accounts.) Account. 

However, I have to warn you that this can be a bit depressing because even though your HECS-HELP repayment is taken out of your pay each pay cycle the loan balance doesn’t reduce after each pay cycle.

Your compulsory repayment is only applied as a lump sum once a year after you’ve lodged your tax return.  This is why when you look at the amount of your debt it doesn’t look like it’s going down.

Tax deductibility

HECS-HELP loan repayments aren’t tax deductible, not even the voluntary repayments. .

Salary Sacrifice and HECS-HELP

If you have salary sacrifice arrangement with your employer, you also need to make sure that you put additional money aside for your HECS-HELP repayment. This is because, when your employer works out the HECS-HELP that you have to pay, they work it out based on your net pay – i.e. your salary less salary sacrifice amount. However, when the ATO works out your HECS-HELP repayment, they add back any salary sacrifice benefits and  work out your repayment percentage on a higher amount.

For example, if your gross income is $100,000 per annum and you have $20,000 salary sacrifice into your mortgage, your net income is now $80,000. Your HECS-HELP repayment % based on $80,000 is 4.5%. However, the rate that the ATO will use is 6%, which is 1.5% higher.

While it’s possible to use salary sacrifice to pay your HECS-HELP debt, it is NOT recommended.    If you have a reportable fringe benefit, it’s added on top of your taxable income.  With a higher taxable income you will need to pay a higher percentage of your wage in HECS-HELP.

There may be other issues as well, so I recommend talking to your accountant if this is something you are considering.

Voluntary Repayments

You can also make voluntary repayments to pay down your HECS- HELP debt at any time even if you are under the  repayment threshold. Although, the payments are non-refundable, meaning you cannot redraw on the loan. 

The voluntary repayments do not affect your minimum compulsory repayments.

If you make voluntary repayments during the year, you must still  pay your  minimum compulsory repayments at the end of the financial year.

There is also no discount for early repayment of your HECS-HELP debt.

Voluntary repayments made by you, or by someone else other than your employer, are not tax deductible. 

You can make voluntary payments online.

HECS-HELP and Indexation

The important difference between HECS- HELP and other loans like your credit card, personal loan or home loan,  is that HECS-HELP loans don’t charge interest, instead, the loan  is adjusted for inflation in prices (CPI) or increase in wages (WPI) (as of June 2024).

Every year on June 1 indexation is added to your debt. This means the inflation rate for the year (Consumer Price Index or CPI)  will be applied to the debt or the Wages Price Index (WPI), whichever one is lower.

The indexation changes but the real value of your debt will not change. It’s just being adjusted to today’s prices. For the past 10 years, the indexation rate been around 2%.

Any voluntary repayment that you make which is received before May 31 will reduce the balance used for indexation.  Although it’s advisable to do it at least a week beforehand to make sure it has time to process.

As I mentioned earlier, other debts which are more expensive like credit card debt, a personal loan, car loan or home loan have priority.  The interest rates on those are higher than indexation and the sooner you pay them down the better.

In addition, while the indexation is moderately high this year, inflation is changeable.  It could go up or down in the coming years.

A few situations where you might consider making voluntary repayments to speed up your repayment

If you are due to pay off your HECS-HELP in the next two years, it may be  worthwhile paying off your debt early. However, at the risk of sounding repetitive,  other debts such as credit card debt, personal loans and home loan debt should have priority.  If you think you might be in this situation, give me a call because it’s something we need to work on right away.

HECS- HELP debts  affect how much a bank is willing to lend you for a mortgage, because they lower your take-home pay. If you’re thinking about applying for a home loan, talk to a mortgage broker to see if it would be better to pay off  any of your HECS-HELP debt now, or to use that money for your deposit.

If you are planning to take extended parental leave, you might consider making some voluntary repayments to keep the HECS-HELP debt down while you’re not earning, however, it depends on your situation and if you have other debts.

If you are self-employed

If you’re self-employed, you’ll need to put some money aside each month in an interest earning account till the end of the year to cover your HECS-HELP repayments through your tax return. 

You can calculate what your repayments will be here : https://www.ato.gov.au/calculators-and-tools/study-and-training-loan-repayment-calculator/

So, while it may seem like it’s taking an age to pay down your student loan, that’s ok. You already have the benefit of your education, and the loan terms are much more favourable than a loan from a bank.