There were 2.9 million people with outstanding student debt in 2022-2023. The average HECS/HELP (Higher Education Commonwealth Support/Higher Education Loan Program) debt for this cohort was $26,494. 21% of the cohort had debts above $40,000.

We’re often told that there’s good debt and there’s bad debt. Bad debt includes credit cards, personal loans – any debt that isn’t tied to an appreciating asset. ‘Good debt’ is tied to an investment or appreciating asset. HECS/HELP is often put in the ‘good debt’ column – you can view it as an investment loan in yourself.

The theory behind this is that you have taken this loan out to pay for tertiary education and qualifications that will make you more employable. It will make you more attractive to potential employers. It will raise your earning capacity. It is an investment in a more secure job, a higher salary, and more opportunity.

That is the theoretical trade-off of student debt. There are many practical debates about whether this trade-off is still fair. Part of this debate is around the debilitating impact of HECS/HELP on the financial health of students after they have finished university. 

Not only do they have their wages garnished, but they also have indexation rates (based on the Consumer Price Index) that often exceed the amount they pay back each year. This situation was exacerbated in 2023 when the applied indexation rate was 7.1% after a period of unusually high CPI/inflation. The uproar that followed caused the Federal Government to propose indexation rates to be adjusted to the lower of CPI or the Wage Price Index (WPI). The legislation is yet to pass.

This combination of growing debt and garnished wages are extremely frustrating for many individuals with HELP/HECS debt. They are told that it is one of the best and cheapest types of debt that you can get – it only grows with CPI. It is a logical argument, but it does not stop the exasperation when indexation is piled onto the debt on June 1 of every year. Oh, yes – unlike other debts, indexation is applied before the payments are taken into consideration.

Say I have a $25,000 debt. I may have my wages garnished by $500 every month, but indexation will apply to $25,000, instead of $20,500 at June 1. My contributions are not counted towards my balance until after I submit my tax return in the new financial year.

This is an extremely frustrating situation for many student debt holders. So why exactly, if this debt grows each year, do financial advisers and professionals recommend paying this debt last?

Ani Bhattacharjee, Financial Adviser at Perpetual Ltd suggests for individuals to consider how HECS/HELP debt is repaid instead of recent circumstances. He says ‘The benefit of not paying off your HECS/HELP debt is that it is generally the cheapest form of debt you could have as it is paid from your pre-tax salary. This allows individuals to direct cashflow to other goals and build wealth effectively.’

 

Made with Flourish

Figure: Indexation rates on student debt have historically been low, making the debt one of the cheapest forms of debt individuals can acquire. Source: Data – ATO, Chart – created with Flourish

The history of indexation shows that it has usually favoured debtholders. It is not hard to see how advisers and other finance professionals have recommended to be patient and continue to pay down the minimum payments from pre-tax salary.

However, are there circumstances where the debt should be repaid?

Adverse economic conditions

When we speak about investments and personal finance, ‘past performance is not a reliable indicator of future performance.’ The same applies for indexation on student debt. Ani explains that there is a point where high CPI may find paying down the loan being more attractive than alternative endeavours for surplus cash flow.

He elaborates ‘Since FY19, individuals should be looking closely at their debt level and understanding the interaction between their repayment rate and the indexation of the debt. Prior to FY19, those earning $55,000 had a repayment rate of 4%, with higher income earners having a higher repayment rate. This was effective in slowly paying down debt, as the repayment rate was higher than the indexation rate.

Now, those earning between $51,000 (1% repayment rate) and $79,000 (4% repayment rate), are barely covering the indexation level at best and many people are falling behind. This means some thought should be given to whether an extra repayment may be worthwhile.’

He suggests that those with HECS/HELP debt should regularly review where they are with how much they are repaying and what the likely interest increase will be.

It is worth noting that another dimension to this decision is that the minimum repayments that are taken are from your gross salary (pre-tax). Paying towards your HECS/HELP debt from your bank account is less efficient but if you do decide to contribute additional payments, it may be worth making before the 1 June deadline to reduce the total indexation.

Buying a house

One of the main reasons that individuals decide to pay down HECS/HELP debt is due to advice from mortgage brokers when looking to purchase a home. The primary impact is that any debt, including student debt, has an impact on borrowing capacity. Niaz Bhuiyan, Mortgage & Finance Advisor at Smartmove Professional Mortgage Advisors explains that in general, lenders will treat HECS/HELP as an ongoing liability which reduces your disposable income.

For example, if your annual salary is $90,000, according to the current threshold your HECS/HELP repayment for the year is $4,500 (5% of $90,000). In this case, lenders will take that as an ongoing liability/expense of $375 per month ($4500 divided by 12 months) which will reduce your borrowing capacity.

He adds that there are circumstances where paying down student debt can help with maximising borrowing capacity.  Following on from the last example, a single person earning $90,000 a year has a HECS/HELP balance of only $2,000. Lenders will still use $375 per month ($4,500 a year) as an ongoing liability/expense to calculate borrowing capacity regardless of the actual balance. This can result in reduction of up to $50,000 in borrowing capacity for the client.

Paying off $2,000 in HECS/HELP has increased the borrowing capacity by $50,000.

Having children

Deciding to have children is a significant milestone. Large student debts being paid down over a longer time period mean that there is now often crossover between holding a HECS/HELP debt and starting a family.

There is no denying that children are expensive. Ani recommends that people considering starting a family weigh up the benefits of having lump sum savings to draw expenses from vs. paying down the student debt and increasing cashflow for the long-term.

This is also complicated further if families are planning for retirement and participating in schemes such as superannuation salary sacrificing. This changes your adjusted taxable income and may cause a tax debt that can reduce cashflow further. Investment income where tax has not been withheld will also cause cashflow issues, as HECS/HELP is calculated on total income.

By having cleared the debt, the family is able to enjoy their increased take home income, without having to worry about any tax bills that may not have been accounted for.

Wealth Transfer

Ani explains that an often-unconsidered reason that HECS/HELP debts could be paid down is part of the transfer of wealth between one generation and the next. This concerns incoming transfers, rather than outgoing.

The Intergenerational Wealth Transfer is a significant talking point at the moment. He encourages clients to look at how they can make gifts prior to passing to help loved ones sooner. Gifting recipients early inheritances would assist with improving financial situations, including paying HECS/HELP, increasing cashflow, and improving serviceability for a property purchase. Ani does point out however that it is important for parents to receive advice, as gifting can have an impact on their social benefits.

We touch on this topic of ‘early inheritances’ in our Investing Compass episode, ‘How to incorporate an expected inheritance into your financial plan’.

Behavioural

Personal finance is not always about the most efficient course to your destination. Our approach to money and finances are shaped by personal experiences. There are some people that face genuine anxiety from holding any kind of debt. I empathise with this group.

No bulletproof rationale, logical workings or ‘forget about it, it’s the best loan you’ll ever get!’ helps. If you are one of those people, if you truly cannot put it to the back of your mind – pay it off and move on with your life. At the end of the day, a debt paid off is not the worst thing you can do for yourself. There are people with much worse proclivities.

You’re on track to pay off your HECS/HELP debt in this Financial Year (or into the next)

I paid off my HECS/HELP debt early. Shock. Horror. There’s a couple of reasons I defied the common sense dished out by most financial advisers and tax professionals.

The first is that I started earning a decent salary. When you look at the repayment schedules, you can pay up to 10% of your salary towards your HECS/HELP debt. I was on track to pay off my student debt within two financial years.

This is a very real scenario for many individuals with the average full-time salary or higher (>$90,000).

Paying it off meant that I would not have to pay the indexation amount that would’ve hit me on June 1, and my wages would not be garnished for a full financial year when it was only going to take a partial year – plus, indexation in the second year.

This article went through a few reasons why you would choose to pay off your HECS/HELP. It is easy for us as an industry to say that how you should structure your finances and investments but ultimately it is completely personal to you. Blanket statements such as ‘don’t pay off your HECS/HELP, the money could be better spent elsewhere.’ may be sound advice for the majority of people but it doesn’t take your personal circumstances into account.  It is a very attractive loan that in most circumstances has minimal indexation comparative to the opportunity cost of other options. For example, you could be investing the funds – there would be a small hurdle rate in most years to beat the indexation amount.

There are always situations where general guidance may not be right for you. Consider your options and the best way to maximise your outcomes and achieve your financial goals.