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Welcome to part two of the good and bad of HECS debt where we interview one of our Financial Advisers to discuss what to be aware of when managing student debt.
Welcome to Part 2 of the good and the bad of HECS debt, how to manage your student debt. HECS or HELP debt (Higher Educational Contribution Scheme / Loan Programme) is a government program that has allowed millions of Australians to go to University by taking on a government loan. In fact, as of April 2019, over 2.9 million Australians currently have HECS debt, with the national total debt amount rising to over 6.2 billion[1]. The average HECS debt is now sitting at $20,000, and over 200,000 Australians owe more than $50,000 on their HECS loan.
In Part 1 Marketing Specialist Madeleine Plummer covered the challenges behind HECS debt and relayed some of her own experiences with keeping on top of the fees and repayments.
In Part 2 we are now joined by Financial Adviser Taylor McGill to help us understand how we should approach and manage our debt and how you can avoid having your HECS debt spiral out of control.
Understand how a financial adviser can support you with your need for financial security. Get in touch.
Here is the summary of our Q&A with Taylor:
1. A quick recap – what kind of debt is HECS debt?
There are two kinds of debts, bad debt including credit card debt, personal loans and car loans vs good debt, including student loans, mortgages and investment loans. These ‘good debt’ loans are intended to have a positive effect on income, through the asset growing in value, generating income, or in the case of student loans allowing you to gain skills that will lead you to a more lucrative career.
HECS debt doesn’t have interest attached, which adds to its value as good debt. It is, however, subject to CPI (indexation), which last year for HECS was 1.8%.
There is also no time limit on when you need to repay HECS debt unlike most other kinds of debt. The repayments kick in once you are earning above a certain threshold and are automatically deducted at tax time subject to CPI.
2. What is Indexation
Indexation adjusts the loan amount in accordance with the cost of living each year, measured by the Consumer Price Index (CPI). Indexation is added to your loan on 1st June every year. For FY22 the indexation was 3.9%. It is important to keep track of how much you owe, to avoid the pitfalls of not looking at your revised HECS debt.
3. Should you try to pay off your HECS before other debt?
As HECS debt is a good debt you should prioritise paying off other bad debts first such as credit cards or car loans as these have high interest and will end up costing you more to keep the loan.
Keep in mind once you earn over the salary threshold of $51,957, your salary payments will automatically be deducted from your paycheque by approximately 2-8% each week depending on your salary. Your HECS will, therefore, pay itself down over time without you having to make any additional repayments[2]. You can view the repayment rates and thresholds here.
HECS debt is considered good debt and is deducted from your salary once you earn over $51,957.
4. Should you put money into investments or paying off your HECS debt?
If you have no bad debts currently to your name, you are now in a position to be looking at paying off any good debts and/or choosing to invest your money.
At the moment, with lower interest rates, you may decide it is a better investment to pay off your HECS debt sooner rather than put money in a savings account for investing.
A dual approach is always worth considering, where you pay off additional HECS debt reducing repayments, removing the ‘mental block’ of debt and moving closer to freeing up your cash flow, and also put a modest amount away each pay into a savings account so you can invest down the track.
You may, for example, choose to pay an additional $3,000 off your HECS debt annually, and at the same time put $3,000 into a savings account that is accruing interest just to get started.
5. Should you make additional repayments on your debt?
If you are in a position to make additional repayments and they are in align with your unique financial goals, then absolutely cut the debt down faster. I always suggest using extra cashflow such as your tax return to pay down debts, so if all your bad debts are paid off and paying down your HECS debt is a goal of yours, then make additional repayments where you can.
6. If your salary is below the threshold to contribute should you make voluntary repayments?
Something important many people don’t realise, which was mentioned in Part 1, is that if your salary meets the threshold and you have automatic repayments coming out from your pay, however throughout the financial year as a whole (July- June) you don’t earn the threshold amount, your contributions will be returned to you in your tax return.
It’s good to be conscious of this each year and consider paying any returned amount back into your HECS debt to keep paying off the debt and reducing the impact of CPI.
If you know your salary is below the $51,957 threshold you could also consider paying off CPI only each year as this will avoid CPI compounding and hiking up your debt.
It’s important to ensure that you can pay off the amount you want to and that you are not paying off too much given what you can afford.
Paying off your HECS debt faster can increase your cash flow and savings for later in life.
7. What should you do during periods when you’re not working and not making automatic contributions?
As this debt doesn’t have a time limit, you do have some flexibility here. CPI is typically a lot lower than the interest on most other debts. However once again try and repay the CPI amount and what you can without causing financial stress. You can check the status of your HECS debt on my Gov.
8. Do you have any other tips and is there anything we should look out for?
For those who plan on buying a home, your HECS debt is taken into consideration as any debt is a liability. HECS debt reduces your income as payments are automatically deducted from your paycheque each pay period which therefore lowers your borrowing capacity.
If this does concern you, I would recommend looking at a borrowing capacity calculator and using the figure you receive as pay each week and not your overall salary to determine the effect it may have on you. If this does put you in a position where you are now priced out from buying a home, I would suggest looking at paying the loan down to help you achieve your financial dreams and goals faster.
Your HECS debt may impact your borrowing capacity for a home loan so keep an eye on it.
Overall unless your HECS debt is very high and is impacting your ability to achieve your goals, it isn’t something you should be too worried about. It is important not to forget about it either, as compounding CPI can cause your debt to grow quite rapidly over the years, as explored further in HECS Debt Part 1. The best rule of thumb is always pay off bad debt before good debt, and pay off what you can.
If your goal is to pay off your debts and save for a house, you may want to pay off your HECS debt sooner. This situation will be different for everyone based on your goals and financial situation.
If you’re unsure of where you should be putting your money and how you are going to go about achieving your goals, I would highly recommend speaking with a financial adviser who can help you on your unique journey.
Book an appointment with a Financial Adviser today about how you can address your debt, clarify your goals and dreams for the future and save so you can invest for your future. We’re here to help at Invest Blue and the first appointment is complimentary. If you’re ready to talk about your financial situation, simply contact us or reach out and ask us a question.
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