What is HECS-HELP Debt?

Simply put, this scheme allows students to borrow money to cover their educational fees, repaying it via the tax system once their income reaches a certain threshold.

It empowers students to chase their academic dreams without the immediate financial burden, as repayments only start happening when their income allows.

Is HECS the same as HELP?

Essentially yes, but not quite.

Though initially, the Higher Education Contribution Scheme (HECS) was introduced to offer financial aid to students pursuing higher education, it later evolved and was integrated or “absorbed” as part of the Higher Education Loan Program (HELP) in 2005.

Under this new program, diverse loan schemes were unified to serve the same purpose; supporting students as they access tertiary education with greater ease.

What interest rate are you paying on your HECS-HELP Debt?

Understanding the interest rate applied to your debt can be a bit complex. So, let’s break it down!

As a starting point, you must be aware that HECS-HELP debt is NOT interest-free!

The interest rate is disguised as an “indexation rate” and is tied to the Consumer Price Index (CPI), which essentially refers to the “cost of living” or inflation rate.

This rate is adjusted annually on the 1st of June, impacting your HECS-HELP Debt repayments.

To make this clearer, let’s use an example! From June 1, 2023, the indexation rate for the entire financial year would be of 7.1% – the highest indexation rate we’ve seen in 32 years!

If John had a $10,000 HECS-HELP debt from his university degree, the 7.1% indexation rate would add $710 to his existing debt bringing it to $10,710.

As the CPI fluctuates, so does your existing debt, which can make understanding what you’re paying a little bit challenging.

Conducting a yearly check once a new financial year starts (in June every year), will help you understand the interest rate you are expected to pay throughout that year, for your existing HECS/HELP Debt.

Paying off your HECS-HELP debt: navigating HECS-HELP debt repayments

Keeping fluctuating interest rates in mind, you may be wondering how repayments work, and if there are ways to pay your HECS-HELP debt off as soon as possible.

Since repayments for your HECS-HELP debt are streamlined through the Australian tax system and are based on your income, here are a few things you’ll want to be familiar with to understand how it works:

• Your Income Threshold:

Repayments on your HELP debt will kick in as soon as your income reaches the annually adjusted compulsory repayment threshold.

This is a preventive measure that ensures individuals with lower incomes aren’t burdened with repayments until they are in a good financial condition to take care of them.

If your income is currently under this threshold, no repayments are being deducted from your income and therefore, your HECS-HELP debt is not yet being paid off.

• Repayments are Income-Contingent:

As your income increases, so does the repayment amount. What this means in practical terms is that basically, the more you earn, the more you will be repaying your debt.

• Repayment Rates:

Repayment rates are annually adjusted too and are calculated as a percentage of your taxable income. The ATO lists them on their website and are compulsory as part of your HECS-HELPS loan repayments.

• Taxable Income deducted:

To cover the repayments of your HECS-HELP debt, your employer automatically deducts an amount from your taxable income.

What this means, is simply that a portion of your salary is automatically put aside by your employer to cover your HECS-HELP repayments before your pay lands in your account. Though this may be fantastic in terms of making sure your debt is always getting smaller and smaller, it may get you to lose track of the overall amount you are covering.

Logging into your myGov account and into the ATO portal will help you understand the outstanding amount, so you are always aware of where you stand financially.

• Voluntary Repayments are an option:

As in, you can contribute more towards your HECS-HELP debt to save on interest and pay down your debt quicker.

Unfortunately, making your repayments “voluntary”, as in, choosing not to proceed with them for some time is not quite how it works. However, we highly recommend that you make the most of this feature to plan for a better future by contributing more instead. This will help you get ahead of the game and be debt-free sooner!

• Indexation is important:

As we discussed when talking about the interest rate on your HECS-HELP debt, the interest you will be paying is indexed annually in line with inflation. As the CPI changes each year, so will your debt.

Ultimately, understanding the best way to navigate repayments and manage this debt will come down to understanding your unique financial conditions. By accessing your myGov account or contacting the ATO directly, you may get a clearer picture of what each of these terms looks like (in terms of numbers) for your unique situation. Our team can also work with you on this, helping you build the right team to successfully understand and pay off your debt!

Does HECS-HELP Debt affect your home loan application?

Now that we’ve got clarity on what HECS-HELP Debt is and a greater picture of how it works, let’s talk about the impact it may have on your homeownership dreams.

Your HECS-HELP debt may impact your ability to buy a home, but it doesn’t necessarily have to be a barrier.

When a loan application is being assessed, lenders consider various factors that include your deposit, income, expenses, credit history, and existing debts.

Since your HECS-HELP is an existing debt, it will be considered as part of your application but will not be the only factor to determine a successful outcome. Your circumstances will change the impact of this debt, which is why working with a qualified and trustworthy mortgage broker is highly advisable to ensure that you get the best outcomes.

Does HECS-HELP Debt affect your borrowing capacity?

Even though having a HECS-HELP debt does increase your overall levels of debt and decreases the disposable income you can use to service a home loan, lenders tend to view HECS-HELP debt differently from other debts because repayments are “income-contingent”, which means they are directly deducted from your salary.

Because of this, the effects of HECS-HELP on your borrowing capacity may not be as bad as you may think.

• Should I pay down my HECS-HELP debt first before getting a home loan?

Keeping this in mind, paying off your HECS-HELP debt first may not have to be your main priority (or even the wisest choice) if you are looking to buy a new home or investment property.

Working with your dedicated Rise High mortgage broker can help you get a clear picture of what your borrowing capacity looks like, and what the wisest decision may be in terms of choosing to pay off your debt first, or actively pursuing your homeownership dreams first.

Responsible financial management and a demonstrated ability to meet mortgage repayments comfortably will ensure your HECS-HELP debt never stands in the way of homeownership and financial dreams! Having the right team to support you and guide you on this journey will ultimately make all the difference.

Conclusion:

At Rise High, we’re passionate about empowering you to achieve the financial future you wish for and are here to help you understand what the best way forward is to achieve your dreams and goals.

As part of our free services, we can discuss hypothetical scenarios based on your situation to help you determine whether paying off your HECS-HELP debt may be the right choice. Alternatively, we can help you understand what would be required to kickstart your journey as a homeowner or property investor, as you continue to pay it off!

Regardless of the questions and challenges you may be facing, we’d love to help! Reach out to our team or book a free chat so we can help you move in the right direction!