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HECS debt is about to get bigger again

All you need to know about HECS, including how to clear your debt faster.

Ballooning HECS loans have long been a subject of debate and, for millions of young Aussies saddled with student debt, the call for a major shake-up in the system cannot come soon enough.

The Albanese government recently received 47 recommendations following the biggest review of universities in decades, including a proposal to overhaul the current repayment system to make it "fairer and simpler" – a move that could potentially save young debt-ridden Aussies up to $1,000 a year.

The government wants to see the number of university places double by 2050, but there are growing concerns among many young Australians who are already questioning whether the weight of a HECS loan and years of effort to earn a degree is worth it, especially with low employment prospects and wages.

Students - who will have to repay their HECS debt - walk through a passage at a university
HECS was introduced in 1989 to help university students cover upfront course costs. (Source: Getty)

Are you struggling with HECS repayments? Contact yahoo.finance.au@yahooinc.com

“Young people are paying taxes, the ones that are going to work ... and at the end of it, they have a huge debt,” independent MP Dai Le said.

What is HECS and how does it work?

The Higher Education Contribution Scheme (HECS), which was introduced in 1989, is one of the programs under the Higher Education Loan Program (HELP) that provides financial support for students.

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“HECS-HELP serves as a loan provided to qualified Commonwealth-supported students pursuing education at public Australian universities and certain accredited private higher education institutions,” RMIT senior finance lecturer Angel Zhong told Yahoo Finance.

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“Usually, Australian citizens and certain visa holders are eligible for HECS. It does not cover costs like accommodation, laptops, or textbooks. In essence, HECS helps Australians defer payment of their university tuition fees.”

How much HECS should you pay?

HECS receivers start to repay the debt through the tax system once their income exceeds the compulsory repayment threshold. “This threshold varies annually. For the 2023-24 income year, the compulsory repayment threshold stands at $51,550," Zhong said.

“Repayments are determined based on [an] individual's income, not the amount of debt they owe. If students' earnings don't exceed the threshold, they won't be required to make repayments. The higher the income, the higher the repayment is.”

She added that, in addition to the compulsory amount, individuals could elect to make voluntary repayments.

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A university student studies while lying on a library floor.
Some graduates have questioned whether a university degree is worth it. (Source: Getty)

How is HECS debt paid?

If someone is employed, it's essential for them to inform their employer about their HELP debt. Employers will utilise the Pay as you go (PAYG) withholding system to deduct repayments from their pay throughout the year. These deductions cover the compulsory repayment amount, calculated by the Australian Taxation Office (ATO), according to Zhong.

If students are already employed but are not having PAYG amounts withheld, they can instruct their employer to commence withholding or complete a Withholding declaration online via their myGov account.

What is HECS debt indexation?

“HECS debt is interest-free, but it still grows due to indexation,” Zhong explained, adding that the process occurred annually on June 1. “Indexation is implemented to adjust the debt in line with changes in the cost of living, with the rate based on the Consumer Price Index (CPI).”

HECS debts remain unindexed until they reach 11 months of age, she added. As of last year, the indexation rate was 7.1 per cent.

How to reduce your HECS debt

You can make voluntary repayments to reduce your HECS debt balance, which can be done at any time.

“Consider making voluntary repayments before lodging your tax return or before indexation is applied on June 1," Zhong said. "This way, you can minimise the impact of interest adjustments. Bear in mind that voluntary repayments are not refundable.”

University students smile and talk on a campus.
Voluntary payments can be made to bring down a HECS debt. (Source: Getty)

Should you pay HECS before other debts?

It depends. According to Zhong, this would be based on a person’s circumstances.

“I classify HECS as a good debt, as it is an investment in one's future to enhance career prospects and leads to increase in wages,” she said. "It is also a good debt due to a lower interest rate (indexation) and longer repayment term.

"If someone's income exceeds the earnings threshold, it is compulsory to deduct repayment from salary. In terms of voluntary repayments, I would encourage individuals to prioritise debts that have immediate consequences - utility bills, rent, mortgage, etc - to avoid late fees or legal actions.

“In addition," Zhong added, "Once the compulsory repayment is met, it is a better strategy to priortise debts with higher interest rates.”

Are university degrees still worth pursuing?

Zhong said that, while HECS widened access to higher education, the increasing associated costs and mounting debt are legitimate concerns for students, "especially as they transition into the workforce and commence loan repayments".

“This problem became more pronounced as the recent indexation climbed to an all-time high, due to rapid interest rate hikes and inflation," she told Yahoo Finance.

“But the other factor is that the number of Australians enrolling in tertiary education is significantly higher compared to the older generation. For instance, there were only 420,000 students in 1989 when HECS was introduced. But nowadays we have over 1.1 million domestic students in tertiary education programs.”

Given the current cost of living crisis, Zhong said it was understandable many young Australians were experiencing significant pressure after completing their university degrees.

“Many graduates do indeed face challenges in finding employment that justifies the cost of their education," she said. "The mismatch between the skills acquired through education and the demands of the job market can contribute to this. Additionally, stagnant wage growth and the prevalence of casual or contract work in certain industries can exacerbate the problem, making it difficult for graduates to repay their HECS debts.”

Zhong said it was important to recognise that, like HECS, tertiary education represented a long-term investment and its benefits would potentially "unfold over time rather than yielding immediate returns”.

“While the immediate job market may not always reflect the full value of a degree, its worth can manifest through enhanced skills, expanded opportunities and network, and higher earning potential over the course of one's career.”