Furthering your education is a great way to make your CV more attractive to potential employers. Many employers are looking for candidates with advanced degrees or certificates in today’s competitive job market. Unfortunately, pursuing further education can often prove costly and requires taking out a student loan.
Australia’s Higher Education Contribution Scheme (HECS), now called the Higher Education Loan Programme (HELP), is designed to make higher education more accessible by providing low-interest loans repaid through the tax system. As such, you only start repaying your loan after earning a certain taxable income. This initiative has helped many Australians pursue their educational goals without facing a significant financial burden.
With the cost of living rising and wages stagnating, many graduates are looking to lighten their loan load by paying off their debts sooner rather than later. But how do you go about paying off your HECS debt faster?
Here’s what you need to know.
Understanding HECS – HELP Debt
Provided you meet all eligibility requirements (including studying at a Commonwealth-supported institution), the Australian Government will help pay course fees. They do this by paying your fees upfront and allowing you to pay the loan back once you start earning an income.
To ensure you’re in a financial position to afford the loan repayments, the Australian Taxation Office (ATO) has set a minimum threshold amount (which generally changes every year in line with inflation). The threshold essentially determines when you will need to start repaying your HECS-HELP debt.
The current threshold amount for the 2022/23 financial year is set at $48,361.
Once your repayment income (defined below) reaches the threshold amount, you’ll have to start paying a percentage of that income back to the government. The ATO will make the necessary calculations for the annual repayment amount based on this percentage and include it on your income tax assessment notice.
If you would like an estimate of this amount for budgeting purposes, the ATO also has a handy calculator tool that you can use.
What is Repayment Income and How Much Are the Compulsory Repayments?
Your “repayment income” includes:
- taxable income (less any assessable First Home Super Saver amounts)
- any reportable fringe benefits
- total net investment loss
- reportable superannuation contributions
- any exempt foreign employment income amounts
Your employer will need to withhold extra amounts from your wages or salary to cover the repayments. To ensure your employer withholds the correct amount, mark the appropriate checkbox on your Taxation Declaration Form, as this will factor your repayment obligations into your PAYG withholding.
Nicholas attended Griffith University in Brisbane for four years to obtain his accounting degree. Fortunately, he could secure an entry-level accounting position within a few months of finishing his degree, and his annual taxable income was $60,000.
As this is above the repayment thresholds, Nicholas will have to start paying off his HECS-HELP debt immediately. Based on the ATO’s repayment rates for the 2022/23 financial year, he will have to pay 2.5% of his repayment income each year. Once his income increases, so will his repayment rate.
In his first year of employment, Nicholas will contribute $1,500 (2.5% x $60,000) towards his HECS debt balance.
Here’s an example table of the loan repayment rates for the current financial year (2022/23):
$48,361 – $55,836
$55,837 – $59,186
$59,187 – $62,738
You can view the rest of the repayment income thresholds on the ATO’s website.
Can You Make Additional Voluntary Repayments Towards Your HECS Debt Balance?
Yes, the above example table is the compulsory repayment amount, but you’re allowed to make additional voluntary repayment amounts to pay off your HECS debt faster.
It’s worth noting that you don’t pay any interest on this loan from the government, but as we mentioned earlier, the ATO indexes the repayment rates to align with inflation (as measured by the consumer price index). Prior to the pandemic, the ATO indexed the rate at an average of around 2% each year. The most recent index factor was 3.9%.
As inflation rises, your repayment income rate will likely continue to index at higher rates than usual, so it might prove benficial to consider making voluntary repayments towards your outstanding HELP debt to pay it off sooner.
Of course, if you’re experiencing serious financial hardship, you can defer your repayments until you’re able to repay them again; it’s always worth considering paying your student loan back sooner if you can.
You can either make voluntary contributions towards your HECS-HELP debt via BPAY or credit card at any time of the year, although we generally advise you to do so before lodging your income tax return to benefit from the lower index rate. You could also enter into a salary sacrificing arrangement with your employer, who can then make the voluntary contributions on your behalf, in addition to the compulsory repayments.
Salary sacrificing is a type of pre-tax contribution, which means that the money is deducted from your salary before income tax is applied.
Is it a Good Idea to Pay Your HECS Debt Off Sooner?
It’s always a good idea to pay off your accumulated HELP debt early if you’re in a position to do so. If you have other types of personal loan debt, however, such as a direct credit card, home loan, or car loan, we would generally advise that you prioritise those debts over your HECS-HELP debt if you aren’t able to pay off all your debts at an accelerated rate.
The reason for this is that other types of debt have higher interest rates, which means they will generally compound much faster over time. These debts also impact your credit rating, whereas your HECS-HELP debt doesn’t.
So, depending on your financial position and personal circumstances, you may want to consider paying off these debts first and then your HECS-HELP debt. Having said that, however, if you’re able to make additional contributions (i.e., beyond your minimum payment requirements) to these debts along with your student debt, then it’ll lighten your load in the long run.
A financial advisor can help you assess your current financial situation and provide advice on how to best manage your money. If you’re considering making an early repayment towards your HECS-HELP debt, they can help you calculate whether you can afford the repayments and whether it would be beneficial for you to do so.
They can also provide guidance on other debt repayments, such as credit card debts or personal loans. Paying off your debt sooner can help to improve your financial position and reduce the amount of interest you pay over the life of the loan.
As mentioned above, it’s important to ensure that you don’t put yourself in a difficult financial situation in the process. A financial advisor can help you make the right decision for your circumstances.
Higher education can be expensive, and many students rely on loans to cover the cost of tuition. In Australia, the government offers a loan programme called HECS-HELP, which allows you to pay for your education over time.
The amount that is due each year is based on your income once you start earning one, and you have the option to make voluntary contributions to pay off the debt sooner.
If you want to learn more about how to pay off HECS debt faster and whether or not it’s a good idea in light of your financial circumstances, get in touch with a financial advisor or accountant to help you develop a payment plan.
Here at KNS Accountants and Business Advisors, we can help you create a tailored plan to do just that. We’ll take into account your income, expenses, and other financial obligations to come up with a repayment schedule that works for you. And because we’re experienced in dealing with all types of debt, we can also offer advice on how to minimise the amount of interest you accrue.
Contact us today to find out more.