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· Posted on
February 21, 2024

Should I pay off my HECS-HELP debt early?

With student loans indexed at 7.1%, should you think about paying off HECS early?

What's the key learning?

  • HECS-HELP debts will jump by 7.1% on June 1st because each year, it is indexed against inflation
  • Before deciding whether to pay off your debt early, you need to understand the opportunity cost
  • Paying off a HECS-HELP debt may be more suitable for some people than others

This article is part two in a two-part series on HECS-HELP Indexation 2023. If you haven’t read part-one on "What's happening to my HECS-HELP loan this June?” check that out first!

So, you’ve heard the news by now that HECS-HELP loans will increase by X% on June 1.

Major SIGH, ikr!

To read more about that, you can head here

Okay so we knew this was probably coming because HECS-HELP debts are indexed to inflation. And inflation has been climbing faster than the Road Runner runs.

But the big question now is, should you pay off your HECS-HELP loan early? Should you re-assess your financial priorities?

Unfortunately, it ain’t a straight yes or no. Generally, experts advise against voluntarily paying off your HECS-HELP loan because HECS-HELP debts don’t accrue interest unlike credit cards or personal loans.

And you’re only required to make HECS-HELP repayments when you hit a certain salary threshold (in the 2022-23 financial year, it’s $48,361), so if you were to lose your job you wouldn’t have to make HECS-HELP repayments. 

The same isn’t true for any other debts though (aka your credit cards, you might want to prioritise knocking them out first)

So experts usually recommend just making the minimum required repayments for your HECS-HELP loan.

Yeah, but what about with an indexation rate of 7.1%?

Good question.

An indexation rate of 7.1% definitely doesn’t hit the same as a rate of 1.8% which was the indexation rate was pre-Covid.

With the current situation, some experts do actually think it might be worth paying off some of your HECS-HELP debt for some people.

Reminder yourself of the Opportunity Cost

Anything you put your money towards will come at the cost of something else.

Read that again. In bold. And blue.

Anything you put your money towards will come at the cost of something else.

So if you choose to spend your $10 for lunch on sushi, you can’t spend it on a sandwich or soup or paying down your Afterpay account.

Dealing with the rise in student debts like…

So paying off your HECS-HELP debt could come at the cost of other investment opportunities.

It might come at the cost of putting money into your paying down larger debts, superannuation, investing, or saving for a house deposit. While paying off your HECS-HELP debt sooner might save you an extra $1,000 today, it may not be a greater benefit in the long run.

Let’s run through some stats:

  • Over 10 years, the ASX200 has returned an average of 9.3% per annum
  • Over the past 10 years, the median Growth super fund has returned 7.77% per annum
  • Over the past 30 years, the average Australian property has increased by 5.4% per annum

That same $1,000 could earn you a return that outweighs the benefit of paying off your HECS debt early. You also need to take into account your risk profile and your financial priorities with this.

Indexation changes every single year

It’s important to remember that indexation of your HECS-HELP loan will change each year.

For example, if the government is able to manage inflation properly and get it back to its 2-3% target next year, then the indexation on your HECS-HELP loan will likely drop next year too. 

But is that likely? Only time will tell.

So who should pay off their HECS-HELP debt early?

There are a few different groups of people who may look to pay off their HECS-HELP debt early:

  1. So close to closing it anyway: If you are due to pay off your HECS-HELP debt over the next couple of years anyway, it is worth considering doing it early - as this could save you a few hundred or thousands of dollars.
  2. Looking to buy a property: Help debts do affect how much a bank is willing to lend you for a mortgage, because they lower your take-home pay. This means if you’re close to applying for a home loan, you should run the numbers with a mortgage broker to determine whether you’d be in a better position if you paid off any Help debt now, or kept that extra cash for your deposit.
  3. Debts - be gone: Although this may not make sense financially, some people want to feel emotionally removed from all debts. This means wiping the slate clean.

Ultimately it's a personal decision but it’s worthwhile considering your broader financial situation and financial goals when making this decision.

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