HECS-HELP debts set to rise by 4.8% in June

Millions of Australians with outstanding student loans, like HECS-HELP debt, are likely to see their balances rise by 4.8% on June 1 this year.

Study and training loans in Australia are subject to an annual indexation rate based on inflation, so with the release of the quarterly Consumer Price Index (CPI) from the Australian Bureau of Statistics this morning, the indexation rate is now known.

While the 4.8% rate likely to be applied in June is a far cry from the 7.1% indexation rate of last year when inflation was running hot, it's still the second highest in more than a decade.

"Historically, the indexation rate has been fairly low - an average of 2.48% over the previous 10 years and as low as 0.60% only three years ago," says Marie Ryan, director, finance solutions at BDO Australia.

Today's news and the upcoming indexation in just over a month's time is likely to feel like another financial blow for many younger Australians already dealing with the pressure of higher living costs.

On the average HECS balance, which Ryan says is currently sitting around $26,500, a 4.8% indexation rate would add $1272 to the balance come June.

Marie can empathise given that, for some former students, the impact of indexation will outweigh the compulsory repayments they've had taken out of their salary throughout the year.

"I've heard of students that feel like they're getting nowhere - that they're having these amounts deducted from their pay slips and they're thinking 'Great, I'm paying down my HECS debt', but when they look at their debt at the start of the next financial year it looks like it's gone nowhere."

Should you pay off your HECS before June 1?

So with HECS-HELP balances likely to be hit with a 4.8% indexation rate in June, could it be worthwhile paying off a portion of that debt, or the entire remaining balance?

Ryan says that it really does come down to the individual, but it's an avenue worth considering for those with the cash to spare.

"There is a small window in the next six weeks to clear or reduce your debt with a voluntary payment before the HECS indexation is applied on June 1.

"So if your cashflow allows it and those savings are not earmarked for another purpose or to pay down other higher-rate debt, then it could make sense to reduce HECS debt before the indexation is applied."

That could be particularly relevant for those who are forecast to pay off their debt this year.

Because of the timeline in which indexation is applied before compulsory payments are taken out, some people with the money to spare elect to pay off their balances in full before June 1, that way ensuring that they don't get hit by indexation. They will then get their compulsory payments back at tax time.

Anyone wanting to check their current loan balance or to make a voluntary repayment can do so through the Australian Tax Office (ATO).

Payments can be made via BPAY, credit card or even with a cheque or money order sent through the post. The ATO strongly recommends that people wanting to ensure that their payment arrives before indexation is applied on June 1 give themselves at least four business days to spare though.

Is it worth paying HECS-HELP off before buying a home?

Whether or not it's worth getting rid of student debt is also a consideration that Ryan has seen become more relevant to young Australians trying to enter the property market.

"I deal in finance, so I have people coming to me asking for finance, usually to buy a home or to refinance. Two years ago having a HECS debt wouldn't really have had a massive impact on your borrowing capacity, but that's changed," she says.

Again, Ryan notes that the benefits and drawbacks of paying off student debt before applying for a loan really comes down to each individual situation, but income is one of the larger factors.

"Last year I had a few different people come to me who were saving towards a house where it did work out better to pay out their HECS debt. That could be that they had higher incomes, because if you've got 10% of your income coming out it can significantly impact the maximum amount you can borrow.

"By the same token, if you're a first-time buyer and you don't have a massive income, but your challenge is more saving up a 20% deposit to avoid lenders mortgage insurance, you might be better off not paying off your HECS debt and keeping that money aside for your deposit."

Could HECS debts be wiped?

Earlier this month the United States' President Joe Biden announced that his administration would cancel US$7.4 billion worth of debt held by 277,000 former students, bringing the total amount of debt cancelled in recent years to over US$150 billion.

While a similar move in Australia seems unlikely at present, the federal government has been hinting at changes to the way the HECS-HELP system works.

During a radio interview last week, Prime Minister Anthony Albanese stated that "...there's a range of areas where we need to do much better with the younger generation basically, and HECS is one of them."

One of the changes the government could make is to the way indexation is calculated. Instead of basing the indexation rate on inflation, it could be the lower of CPI or the Wage Price Index (WPI).

That was one of the reforms put forward in the Australian Universities Accord which was released by the government back in February.

The Accord also suggests changing the current schedule in which indexation is applied before the compulsory repayments which former students have been paying throughout the year are taken out.

Whether the government chooses to adopt any of the reforms related to student debt put forward in the Accord is, of course, to be seen. But with the 2024 federal budget just three weeks away, there's plenty of speculation that any changes could be unveiled then.

Looking to avoid accumulating a larger student loan debt than you need to? Check out our article on six ways to minimise your HECS-HELP debt.

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