Your HECS-HELP debt is about to increase by 3.9%. So should you pay it back sooner?

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It’s often called the “best loan you’ll ever get.”

But with rising inflation, you may be wondering if you should worry about your student debt.

If you have an unpaid HECS-HELP debt, your balance should increase by 3.9% on June 1.

That’s a big jump from last year’s rate of just 0.6%.

If you have spare cash, you may be wondering if it’s worth prepaying to beat the June 1 rise.

We spoke to two financial advisors to help you understand what’s going on and weigh the pros and cons yourself.

Why HECS-HELP Debts Are Growing

HECS-HELP debt does not earn interest, but is indexed to inflation. The rate is based on the Consumer Price Index (CPI), a measure of the cost of living.

Before the pandemic, the escalation rate averaged about 2%, about half the rate of increase this year.

Year

Indexation rate

2022

3.9%

2021

0.6%

2020

1.8%

2019

1.8%

2018

1.9%

Source: australian tax office (OTA)

So what does it mean if you have student debt?

Well, data from the Australian Bureau of Statistics (ABS) showed that average HELP debt balance was $23,686 in fiscal year 2021.

This would suggest that the average person’s debt will increase by around $920 on June 1.

What makes things more difficult lately is that wages have not kept up with inflation.

Recent data shows that wages have only increased by 2.4% over the past year, which is well below the CPI.

Why it may be beneficial to focus on other debts before HELP

While you may be worried about your HECS-HELP debt, it’s important to consider your overall financial situation, says Kate McCallum, financial advisor and co-author of The Joy of Money.

“My baseline with HECS-HELP debt is that it’s actually a fairly inexpensive form of debt,” she explains.

“In reality, all indexing does is keep the debt at the same value in real terms [i.e. after inflation].”

The other advantage of HECS-HELP debt is that it is flexible. If you lose your job, for example, thereyou will not have to make refunds.

The same cannot be said for your mortgage, car loan or credit card.

“If you have other types of debt…it doesn’t matter if you’re unemployed. It doesn’t change the repayment terms,” ​​says Andy Darroch, a Sydney-based financial adviser.

What if you have no other debts?

If you have no other debt and you have excess cash, Mr. Darroch says it’s important to weigh paying off your HECS-HELP with other options.

“If you pay it back, you have a guaranteed return of 3.9%. But there is no possibility of recalculating… there is no prospect of long-term growth, and there is no no tax savings either,” he explains.

For example, if you’re saving for a security deposit, it might be a good idea to prioritize that over paying off your student debt.

If you’re trying to increase your retirement savings, you might consider adding the money to your retirement pension instead, which could lower your tax bill.

Keep in mind that if you are saving for a home, you can also withdraw voluntary super contributions under the First Home Super Saver program.

If you own your home, it’s important to weigh the benefits of paying off your HELP debt early against the option of paying off or offsetting your mortgage.

I’m thinking of making an early repayment. How do we do it?

First, you can check your HELP debt balance by logging into the ATO service in MyGov.

You should see your HELP debt balance on the opening screen. If you click on it, you will be given the option to make a voluntary refund, which can be done via BPay or by credit card.

If you’re thinking about making a prepayment, make sure you get there early. If your payment arrives after June 1, it will be applied to your balance after the 3.9% indexation has been applied.

The bottom line

If you’re still wondering what to do, Mr Darroch says: “It depends on your personal situation.”

What will help is to keep an eye on your HELP debt – even if it’s only once a year – rather than completely logging out, as tempting as that may seem.

“Everything about financial strategies is not set and forget, because there’s so much that changes,” Ms. McCallum said.

“All of these different pieces of the puzzle can move around, so you have to re-evaluate.”

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