Unlike other loans, HECS-HELP debts are interest-free. However, in order to ensure people are returning what's considered to be the true value of the loan to the federal government, they're indexed in line with inflation.
While Australia's student loans are interest-free, the system is tied to inflation — meaning loans increase each year in line with the consumer price index in a process called indexation. The standard indexation rate is about 2 per cent, but this year HECS-HELP loans will increase by 7.1 per cent.
If I voluntarily pay off my whole loan, do I avoid the indexation? Only if you pay your entire debt off.
Indexation maintains the real value of the loan by adjusting it in line with changes in the cost of living as measured by the consumer price index (CPI). The indexation figure is calculated each year after the March CPI is released.
From Thursday, June 1, anyone who has an outstanding HECS loan will be slammed with a 7.1 per cent increase, which is the biggest increase in three decades. Although HECS loans are interest-free, they are indexed to inflation.
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.
The report reveals that while the average HECS-HELP balance is on the rise, so is the average amount of time it takes to pay it off. The average balance is now $22,636, which has jumped 10% in the past two years. The average time to fully repay the debt is now 9.5 years.
As mentioned and under the current law, if a person doesn't pay off their HECS/HELP debt before they pass away, that debt is wiped.
HECS/HELP indexation of 7.1% commences from Thursday 1 June 2023, meaning students or graduates will be required to pay an additional 7.1% ontop of existing debts. HECS/HELP indexation rate was 3.9% in 2022 and 0.6% in 2021.
Keep all work-related receipts and claim deductions for everything you're entitled to. This can reduce your taxable income and minimise your compulsory annual repayment amount. In doing so, you give yourself greater control over when and how you pay back your debt.
Whilst it is an interest-free loan, it is indeed, indexed (increased). For several years prior to 2022, the indexation applied was between 0% and 2%, coinciding with record-low interest rates.
By paying off your loans early, you'll lower your debt-to-income (DTI) ratio — the percentage of your gross monthly income (before taxes) used to pay your rent or mortgage, car payment, and other debts. Lenders look at this ratio when determining if you're a good credit risk.
HECS/HELP Debts Indexation Factor for 2022-23 is 7.1%
The annual indexation factor is updated in June of each year.
Loan repayments are then made through the Australian taxation system when your income reaches a certain threshold ($48,361 for the 2022-23 financial year; $51,550 for the 2023-24 year). It is possible to make voluntary repayments at any time regardless of income.
Introduction of HECS
In 1989, the Hawke Labor government began gradually re-introducing fees for university study.
YouTube How HECS/HELP indexation works. The Australian Tax Office (ATO) has released the country's 100 largest HELP/HECS debts through a Freedom of Information request – and the highest debt is a whopping $737,000.
New students starting university in 2022 will potentially lose their HECS-HELP loan assistance if they fail half of their classes. New laws passed under the Job Ready Graduates scheme in 2020 have been enacted this year.
Any outstanding balance on your loan will be forgiven if you haven't repaid your loan in full after 20 years (if all loans were taken out for undergraduate study) or 25 years (if any loans were taken out for graduate or professional study).
Higher loan debt generally increases the period over which repayments will be required, thus reducing disposable incomes in future years. The average time to repay debts in full has already increased from 8.2 years in 2011–12 to 9.5 years in 2021–22 (Table 3).
The Government has updated the repayment incomes and repayment rates for the Higher Education Loan Program (HELP) for the 2022-23 income year. The income levels and repayment rates for 2022-23 will be live from 1 July 2022. The minimum repayment income for the 2022-23 income year is $48,361.
As of January this year, students studying in 'Commonwealth Supported Places' (CSP) will have a limit of 7 years of HECS-HELP loans to support full-time equivalent study. After this limit runs out, they must pay full fees upfront. This includes any additional degrees or postgraduate studies.
Luckily, there is some good news. Whether you've got HECS-HELP or FEE-HELP debt from your studies, it won't affect your credit score. That's because these sorts of student loans work a little differently to the sort of loan you'll get from the bank. For starters, you aren't charged interest on your student loans.
If your HECS have been paid in full and overpayment has been made, you will receive this as a refund when you lodge your tax return. Credits may be used to offset any tax debt that may occur. You will need to notify your employer with a withholding declaration to stop the HECS repayments.
The Australian Taxation Office (ATO) assesses you on your 'adjusted taxable income' when working out how much you should pay in HELP or HECS repayments. So with an increased gross salary, you may need to increase your regular HELP or HECS repayments, otherwise you may end up with a bill at tax time.
The maximum rate a provider can charge for this discipline in 2023 is $4,124 (per EFTSL). How do I pay my student contributions? You can either pay it upfront to your provider, or if you are eligible, you can apply for a HECS-HELP loan.