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In 2018, arts worker Sarah began paying off her student loan debt of $31,330. She didn’t think too much about it until this year, when she logged on to her MyGov account to check the balance – and saw it had only gone down to $30,630.59. Despite having paid $5,721 from her salary over the past five years, she has only managed to knock off $799.41.
“It was the first time I realised that despite all this money coming out of my salary, I had barely made a dent,” Sarah, who asked that only her first name be used, says. “It was just a shock there, because I feel like we were very much sold it as a ‘no interest loan’.”
While they are interest free, loans from the Higher Education Loan Program (Help) – previously the Higher Education Contribution Scheme (Hecs) – are subject to indexation, which adjusts debts each year in line with inflation. For the past 10 years, the indexation rate has always hovered about 2% – still enough to make paying off your loan a slow-going endeavour and downright sisyphean for those earning under $60,000 a year.
Now current inflation levels mean that this year’s increase, which will be announced on 26 April, is projected to land at about 7%. That means Australians with an average Help debt of $24,770.75 are poised to see their balance increase by at least $1,700 when the indexation comes into effect on 1 June. And that’s after Australians experienced the largest real wage decline on record in 2022.
For Sarah, despite what she’s already paid towards the debt, after indexation, her loan balance will be higher this year than it was when she finished university. That’s a bitter pill to swallow.
“I took that Hecs debt out knowing that I would pay it back later and I thought that was a fair system,” Sarah says. “But should [the government] really be making that extra money on the education system? I don’t know that’s what we agreed to.”
If you’re one of the many Australians who, like Sarah, will soon watch your Help debt go up, should you be trying to proactively pay it off faster?
The answer will of course vary hugely based on your individual circumstances, but here is some general advice to keep in mind.
Should I be worried about my Help debt?
If your financial education came from a copy of the Barefoot Investor in the early 2010s, you may remember reading that Help is a “good” debt to have – and not one you need to rush to pay off. But given the current economic climate, does that advice still hold true?
“I think it depends on if you believe inflation will get under control and indexation will come back down to a reasonable level – around that 2 to 3% mark,” says Rocky Johnston, a financial planner with Prosperity Wealth Advisors.
Johnston believes we’re likely looking at big indexation rates this year and next. Then, “if the government does their job”, inflation should ease, as will the annual upward adjustments of indexation.
Everyone’s situation is different, Johnston says. But broadly speaking, even if you have enough in savings to pay down your Help debt before the indexation date, in most cases he would probably still advise clients to leave their Help debt as is.
Even though the forecasted 7% indexation rate is a lot higher than the 3-5% you might be earning in interest on your savings balance, Johnston believes it is better to “take the hit” this year and next and continue to pay Help debt off slowly.
That’s because Australians with Help debts are typically young people, who are likely better off using any spare money for other goals. “Whether it be putting money in your super, investing, or buying that first home, which over the long run might provide a [greater] benefit to your life than just trying to save an extra $1000 by paying off your Hecs a little bit earlier.”
Johnston also points out that when you make extra repayments towards your Help debt, you can’t get them back – there’s no redraw facility. This means you have to be very sure you won’t need that money for something more pressing.
But what if I want to buy a home or have a baby?
There are some situations in which it might make sense to consider paying down your debt before the indexation date, Johnston says.
If you are due to pay off your Help balance in the next two years anyway, it is worth considering, he says. In that case getting rid of the last of your debt now might save you between a few hundred to a couple of thousand dollars, depending on your income.
Help debts do affect how much a bank is willing to lend you for a mortgage, because they lower your take-home pay. This means if you’re close to applying for a home loan, you should run the numbers with a mortgage broker to determine whether you’d be in a better position if you paid off any Help debt now, or kept that extra cash for your deposit.
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A planned career break is the final reason it may make sense to get rid of your Help debt faster.
“What happens if you take a break away from the workforce to have children, or go down to part-time work and you no longer have to make repayments?” says Canna Campbell, a financial planner and author, who is a big advocate for provocatively paying down your Help debt – after more “toxic debt” from credit cards or personal loans has been tackled first.
“This is where things really blow out for women,” she says.
“While they’re not working or not making repayments, that debt gets bigger and bigger and bigger [because of indexation]. And people return to the workforce to … discover their Hecs debt has compounded and gotten slightly out of control.”
Finally, there is the harder-to-quantify emotional incentive for getting rid of debt: it alleviates the frustration of seeing your wages garnisheed. “I’ve never met someone that said to me, I regret paying off my Hecs debt,” says Campbell.
Remember: the rules could change
The government dictates the terms of your Help debt. For instance the previous federal government significantly lowered the salary at which you must start making repayments. Campbell believes the terms around our student loans could change again – even swapping from an indexation rate to an interest rate.
From 2016 through to today, Help debt holders would have been in a better position if they had been charged interest at the cash rate, rather than having their loans indexed. So the potential for change doesn’t mean you should act fast – waiting things out might prove advantageous.
The Greens are currently pushing for a bill that would essentially freeze Help indexation this year. “It doesn’t look like it’s overly likely to happen,” Johnston says, but such legislation could always be introduced in the future.
If you are considering paying off your Help debt before the indexation date, Johnston suggests waiting a few more weeks, to see what happens in the May budget, just in case the Greens do succeed.
But be aware that, confusingly, Help debts index on 1 June, not 1 July. Johnston advises making any payment in mid-May, to ensure the ATO gets it in time.
And while it may seem a little morbid, there’s one final point to keep in mind.
“A lot of people don’t know this, but [Help] actually dies with you,” Johnston says. “I know it’s a little bit grim to discuss but it’s worth considering that it’s the only type of loan that’s forgiven if you were to pass away.” So there’s always that.
