Yahoo Finance HECS debt to skyrocket by $1,245 next week: Should you pay it off early?
Aussies have to repay their HECS debt by June 1 if they want to avoid indexation.
Millions of Aussies will see their HECS debt rise again on June 1 when the government’s yearly indexation is applied. For someone with the average student debt of $26,494, their balance will increase by an eye-watering $1,245.
The government now wants to cap the indexation rate to be whichever figure is lower out of the Consumer Price Index (CPI) or the Wage Price Index (WPI). When legislated, this will be backdated to June 1, 2023, which means last year’s mammoth 7.1 per cent hike will be lowered to 3.2 per cent, while this year’s 4.7 per cent rise will be adjusted to 4 per cent.
While this means Aussies will now have some $3 billion worth of student debts wiped, it doesn’t change the fact that balances will still be going up next week. So, if you are able to, is it worth paying off your HECS debt early and avoiding another indexation hit altogether? A finance expert told Yahoo Finance the answer isn't black and white.
Are you worried about your HECS debt? Share your story with tamika.seeto@yahooinc.com
Like most money matters, financial adviser Helen Baker says the answer will depend on your personal circumstances including your income, where you are getting the money from and your future financial plans.
“If you are having to borrow money, for example, in order to pay that off, if the borrowing rate is at the 7 per cent mark that doesn’t make sense,” Baker told Yahoo Finance.
“Are you breaking into an investment to do it? Have you got money sitting in cash doing nothing? Maybe in that case it does make sense to clear some off.”
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Baker recommended people look at their plans for the next few years, including any plans to buy property or have a baby, and factor in how paying down your HECS debt could impact things.
“What tax bracket are you in? What commitments are you looking forward to? What things might change in your lifestyle going forward in the next few years? Look at all that together to work out whether it makes sense and how much makes sense,” she said.
Once you repay your HECS debt early, you also can’t get it back and use it towards other things, Baker noted. That’s unlike paying extra on your mortgage, where you can usually redraw some of it.
Should I pay off HECS debt if I am saving for a house?
Baker said there are a few factors to consider here.
Your HECS debt will be considered by the banks when you are applying for a home loan. Depending on the bank, Baker said it can have an impact on whether or not you are approved, how much you can borrow and potentially even the interest rate you are offered.
“Talk to a mortgage broker and ask, ‘How would having more, the same or less HECS debt affect my application for a loan?’,” she said.
Mortgage broker Maddie Walton, for instance, told Yahoo Finance her rule of thumb for clients was to save up their deposit first, rather than paying off their HECS. But make sure you speak to a broker about your own circumstances.
If you reduce the size of your deposit to pay off your HECS, this can also have knock-on effects.
“If you use cash to clear [your HECS] out and have a lower deposit, you may have to pay mortgage insurance because you slip under the 80 per cent bracket for example,” Baker said.
Another factor to consider is the home loan interest rates, which may be significantly higher than the indexation rate.
When do I need to pay HECS to avoid indexation?
You’ll need to pay off your HECS debt before June 1 to avoid indexation.
The Australian Taxation Office (ATO) recommends making payments four days before the cut-off date to allow enough time for it to be received and processed in time.
Are more changes to HECS needed?
Think Forward CEO and lead economist Thomas Walker has welcomed the HECS changes but noted it did not provide “immediate relief” for Aussies struggling with mounting student debts.
“Reducing the indexation rate from CPI back down to the WPI will save people a couple of thousand dollars off their HECS and they will pay it off sooner,” Walker told Yahoo Finance.
Walker said increasing the repayment thresholds, which now kick in once a person earns $51,550, could have been increased to put more money into workers' pockets. HECS repayments can be up to 10 per cent of people’s income.
“That 5 to 10 per cent of your income would be incredibly useful when you are trying to buy a home or pay the rent or start a family,” Walker said.
He believes a bigger conversation around the “ballooning costs of a university degree” needs to be had.
“If you are paying $50,000 for a university degree, the indexation rate is going to be an issue whereas if university degrees cost $5,000, $10,000 like they did 10 or 20 years ago, the indexation wouldn’t be as much of an issue," he said.
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