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The HECS/HELP Cliff

Written by Michal Lancemore

Forget for a minute about the ‘mortgage cliff’ looming for approximately 880,000 borrowers – currently being splashed around the media.

For the three million Australian’s holding the $74billion in outstanding tertiary debt (Higher Education Loan Program or HELP – formally known as the Higher Contribution Educations Scheme or HECS), their debt is about to increase significantly.

Whilst these debts are interest free, they are subject to indexation on an annual basis.  For the past decade, the indexation rate has averaged just shy of 2% per annum.  Thanks to the global pandemic and inflation skyrocketing over the last 12 months, the indexation for these tertiary debts from 1 June 2023, is likely to be closer to 7% – the actual rate to be formally announced by the ABS on 26 April.

The average HELP/HECS debt is around $25,000.  An indexation of 7% adds an additional $1,750 to this average loan balance.  (spare a thought for the owner of the highest debt level of $737,000!)

There is no obligation to pay any of this debt back UNTIL your annual income exceeds $43,361 pa (see sliding scale below).

The question is: with loans exploding this year due to CPI figures, should individuals pay the debt back as a priority?

Unfortunately, the answer is not a one size fits all.  There are a number of things to consider:

  • How old are you?
  • What are your goals?
  • Do you have other debts?
  • What is your inflation outlook?
  • Do you intend to apply for finance in future?

Generally, individuals with these debts are younger and therefore arguably better off utilising surplus cashflow to support other goals – ideally investing in either property or the sharemarket.

If you have other debts, like credit cards or personal loans, these are likely to have much higher costs and should be reduced first.

If you believe the RBA will succeed at their job of easing inflation, then next year’s indexation rate will be much more palatable.

HELP/HECS debts can affect your borrowing capacity when looking at finance (as your cashflow is affected).  If you have a reasonable deposit, it is worth speaking to a finance broker to determine how your capacity would change if you retained this lump sum VERSUS using some to reduce your tertiary debt.

The Greens are pushing to freeze indexation on tertiary debt this year. Whilst a long shot, it is worth holding out until after the May Budget before making any decisions around reducing your HELP/HECS debt prior to 1 June.

For mine, ultimately, a debt is a debt and there is an obligation to repay it.  Whether that be via the mandatory repayment rate or with added voluntary repayments, it is completely subjective and worth having a discussion with your financial planner to assess your personal position.

 

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