HECS-HELP debt is an important consideration for students in Australia who have pursued higher education. Many students wonder whether paying off their HECS debt early is beneficial. In this article, we will explore the advantages and potential drawbacks of paying off HECS debt ahead of schedule.
Understanding HECS-HELP Debt
HECS-HELP debt is designed to provide financial assistance to students. It allows students to defer payment of their tuition fees and repay the debt later based on their income. It is crucial for students to understand the terms and conditions of this debt and how it can impact their financial situation.
Benefits of Paying Off HECS Debt Early
Whilst HECS debt doesn’t accrue interest monthly, unlike a credit card or personal loan the balance does increase annually with indexation. So with a current indexation rate of 3.9%, you might be thinking of repaying your student loan early. To put this into perspective, an indexation rate of 3.9% means that a $35,000 balance would increase by $1,365. Given inflation is currently 7% and not tipped to slow down too soon post the 31st May 2023 your new indexation rate could be 7% which would mean an increase of $2450 next year on a $35,000 balance.
Paying off your HECS debts early also benefits you as below:
- Reducing Interest: Paying off your HECS debt early can help you save on interest charges. By making voluntary repayments, you can minimize the amount of interest accumulating over time, potentially saving you money in the long run.
- Financial Freedom: Clearing your HECS debt early can provide a sense of financial freedom. It eliminates the obligation of making ongoing repayments, allowing you to allocate those funds towards other financial goals, such as saving for a house or starting a business.
- Improved Credit Rating: Paying off your HECS debt early demonstrates responsible financial behaviour, which can positively impact your credit rating. A good credit rating can be beneficial when applying for loans or other forms of credit.
Considerations Before Paying Off HECS Debt Early
- Other Debts: Before focusing on early repayment of HECS debt, it’s essential to evaluate your overall financial situation. If you have other high-interest debts, such as credit card debt or personal loans, it may be more advantageous to prioritise those debts first.
- Opportunity Cost: Consider the opportunity cost of paying off your HECS debt early. If you have other investment opportunities that could potentially yield higher returns than the interest rate on your HECS debt, it might be wiser to allocate your funds there instead.
- Income Level: Evaluate your income level and repayment obligations. Depending on your income, the required repayments for your HECS debt may be relatively low, and you may not benefit significantly from paying it off early. In such cases, it might be more prudent to focus on building an emergency fund or saving for retirement.
Conclusion
Deciding whether to pay off your HECS debt early is a personal financial choice that requires careful consideration. While there are benefits to early repayment, it’s important to weigh those advantages against other financial priorities and obligations. If you want to discuss your personal situation prior to the 1st July this year reach out to one of the Inspired Money Team at your earliest convenience to help you make an informed decision based on your individual goals and financial situation.
Remember, this article provides general information and should not be considered personalised financial advice. If you have specific questions or concerns, it is always recommended to seek guidance from a professional financial advisor or accountant.
References:
[1] Source: Well Kept Wallet – Oberlo
[2] Source: Clever Girl Finance
[3] Source: Consumer Financial Protection Bureau
This article was written by Director & Senior Adviser Shane Mitchell.To book a session to review yourgoalscontact Shane directly on 08 6222 7909 orbook a meeting directly via his booking page.
FAQs
Paying off your HECS debts early also benefits you as below: Reducing Interest: Paying off your HECS debt early can help you save on interest charges. By making voluntary repayments, you can minimize the amount of interest accumulating over time, potentially saving you money in the long run.
Is it worth paying off HECS debt early? ›
There are several benefits that come with paying off your HECS debt early, including: Reducing indexation: although you're not charged interest on your HECS debt, it's subject to indexation. So by making additional repayments, you're able to reduce your debt and the amount of indexation you're charged.
Is there a downside to paying off student loans early? ›
If you have federal student loans and pay them off early, you could lose the opportunity to take advantage of a student loan forgiveness program (if you qualify). If it's still worth it to you to pay off your student loans quickly, it may help to refinance your student loans as part of the process.
What happens when you pay off your HECS debt? ›
Once your debt is paid off, you'll need to complete a Withholding declaration form and mark question 6 on the form as 'no'. Then return the form to your employer to stop they stop withholding extra tax. For more answers to HECS-HELP questions, see our article.
Does a HECS debt affect your credit score? ›
When you apply for a home loan, lenders look at your total liabilities, including HECS debt, when they assess your serviceability. So this increase will have impacted your ability to borrow money. However, it won't affect your credit score.
What is the best way to pay your HECS debt? ›
To do this, you can either pay the ATO directly via BPAY, credit card or direct credit, or you can make a salary packaging arrangement with your employer.. Making voluntary repayments can help avoid bill shock at tax time, if these amounts haven't been taken out throughout the year.
When to pay HECS to avoid indexation? ›
To avoid indexation, we need to receive payment in full before 1 June so by May 31st. Ensure you allow enough time for your payment to be received and processed before 1 June. Indexation will be applied if your voluntary payment isn't processed in time.
Is it financially smart to pay off student loans? ›
Despite what you may think, paying off your loans as soon as possible isn't always the best thing to do. Getting ahead of your debt is, in general, a smart move; however, if it comes at the cost of avoiding other debt, or overshadowing other benefits you may be receiving, it could set you back in the long run.
Does paying off my student loan hurt my credit? ›
When paying off student loans, you could be closing some of your oldest accounts, and your average account age could go down. Both of these factors can negatively impact your credit score.
Is it bad to pay off student loans all at once? ›
A Lump Sum Payment Reduces Your Interest Amount
If a sizable part of your monthly payment is getting eaten up by interest each month, paying off a big chunk of your loans in one go will save you money in the long run.
Yep! If your account balance is $0 when we process the adjustment, you'll automatically be refunded any credits - minus any other tax debts of course. Keep in mind, the proposal isn't law yet and things may change. You can read more about the proposed changes to HECS-HELP indexation and what it means for you!
How long does it take to pay off HECS on average? ›
12 years and 10 months.
How much of my HECS have I paid off? ›
You can check how much you owe (your HELP debt) through ATO online services in your myGov account or by contacting the ATO on 13 28 61.
Is it better to pay off your HECS debt early? ›
Reducing Interest: Paying off your HECS debt early can help you save on interest charges. By making voluntary repayments, you can minimise the amount of interest accumulating over time, saving you money in the long run. Financial Freedom: Clearing your HECS debt early can provide a sense of financial freedom.
Is a HECS debt worth it? ›
Relatively low cost of student debt
Given the low indexation rate compared to typical loan interest rates, the financial impact of carrying HECS-HELP debt is relatively minor. As such, if you have other debts like a credit card or personal loan with higher interest rates, it might be better to pay these off first.
Does HECS count as a loan? ›
HECS-HELP is a loan from the Australian Government that you can use to pay your student contribution amount.
At what point do you start paying HECS? ›
A compulsory repayment must be made when you earn more than the compulsory repayment threshold. In the 2024-25 income year the threshold is $54,435. Your annual compulsory repayment amount is worked out by the ATO when you lodge your tax return.
How much of my HECS debt is left? ›
You can check how much you owe (your HELP debt) through ATO online services in your myGov account or by contacting the ATO on 13 28 61.
How much HECS should I be paying? ›
2021-2022 HELP & TSL repayment thresholds and rates
| 2021-2022 Repayment income | Repayment % rate |
|---|
| Below $47,014 | Nil |
| $47,014 - $54,282 | 1.0% |
| $54,283 - $57,538 | 2.0% |
| $57,539 - $60,991 | 2.5% |
15 more rowsStudent Loan Interest Deduction
You can take a tax deduction for the interest paid on student loans that you took out for yourself, your spouse, or your dependent. This benefit applies to all loans (not just federal student loans) used to pay for higher education expenses. The maximum deduction is $2,500 a year.
