Managing a HECS-HELP debt can be challenging if you want to get ahead. However, understanding how to leverage the rules in your favour can lead to significant savings. Time is running out on an opportunity to save on HECS repayments.
Understanding HECS Repayment
When you take out a HECS-HELP loan to finance your higher education, you're only required to make payments once your income surpasses an annual threshold (currently $48,361). Once your income exceeds this threshold, your employer will deduct additional PAYG withholding from your salary to cover the annual repayment obligation. For earnings between $48,361 and $55,836, repayments begin at 1% of your income. The rate increases based on bands of income up to a level of 10% for income exceeding $141,848 per year.
While the PAYG withholding is withheld progressively through the year, it is the event of lodging a tax return that crystalises the HECS repayment and takes the withheld tax amount off the HECS debt.
Understanding Indexation Charges
HECS debts do not incur "interest" in the traditional sense but are instead "indexed" annually on 1 June based on inflation. Between 2017 and 2021, when inflation remained low, the average indexation rate was 1.52%. At this moderate level of increase, making additional repayments seemed unnecessary for many. However, the "indexation rate" this year is an alarming 7.1% (on the back of higher inflation). Recent data indicates that the average Australian HECS debt is $23,685. At a 7% indexation rate, a HECS debt at this “average” level will increase on 1 June by $1,658.
The Opportunity for Savings
Making additional repayments towards your HECS debt before June 1 this year will reduce the balance on which indexation is applied, resulting in a saving of 7.1% for any amount repaid.
While it may require some effort to find the funds to pay down your debt, the long-term benefits are significant. Once you successfully pay off your HECS debt, your future net pay will receive a boost because your employer will no longer need to deduct a portion for HECS repayments.
Moreover, if you have had HECS repayments withheld from your pay throughout this year and are in a position to fully eliminate your HECS debt before June 1, you will receive the entire amount that was withheld from your pay towards your HECS debt repayment when you lodge your FY2023 tax return.
By making extra HECS repayments before June 1, you can beat inflation and potentially save significant $ on your debt. Seize the chance to strengthen your financial position and enjoy greater financial freedom in the years to come.
