Student HECS and HELP loans in Australia are interest-free, but they are indexed every financial year based on a cost of living index.
With the surge in inflation this year, millions of Australians with student loan debts are facing a 7.1% increase from 1 June, almost double last year’s 3.9 per cent.
HECS-HELP debt is can impact your borrowing capacity and is an important piece of information that banks take into consideration when assessing your application for a home loan, so it’s important to understand yours.
If you’re a little unsure about all the details, it’s worth reading on to see how indexation will impact you.
What is HECS-HELP?
The Higher Education Loan Program (HELP) is a federal government scheme that offers loans to students to assist in paying for their university and higher education courses.
Most university courses fall under the banner of a Commonwealth Supported Place (CPS). With these, the federal government covers some of the student’s university fees, while the student covers the rest – known as the ‘student contribution amount’.
HECS-HELP loans can be used to pay the ‘student contribution amount’. Luckily, it can’t be used for things like accommodation, textbooks or your dormitory’s mini bar supply, or there may be a few ex-students with much heftier bills.
Find out how much your HECS-HELP debt is
You can check the balance of your HELP debt, the indexation amounts and your voluntary and compulsory payments through myGov or by contacting the Australian Taxation Office (ATO) directly.
Do you pay interest on a HECS-HELP debt?
HECS-HELP debts are interest-free, but the amount of the debt is adjusted on 1 June each year in accordance with an annually determined inflation factor.
With the significant cost of living increases this year we have seen inflation ging through the roof, the latest annual indexation factor is higher.
The 2022-23 HECS-HELP debt indexation factor for 2022-23 is 7.1%. To put it in perspective, in 2022, it was 3.9%. In 2021, it was 0.6%. Big difference, right?
Another way of looking at it is like this:
- a $10,000 loan balance would increase by $710
- a $25,000 loan balance would increase by $1,775
- a $50,000 loan balance would increase by $3,550.
Why does this impact getting a home loan?
When you apply for a home loan, lenders will look at all your financial commitments and this will include your HECS-HELP debt when assessing your loan application.
While this type of debt is different from credit card debts and personal loans, you still need to make repayments on your student loan and this ultimately affects your income and borrowing capacity.
Paying off your HECS-HELP debt
You start paying back the debt when your income exceeds a certain threshold, your employer will then deduct a percentage of your income to go towards the debt. The more you earn, the higher the repayment rate.
You can find more about the HELP repayment rates and thresholds here.
These PAYGW (pay as you go withholding) amounts are only applied after you do your tax return. So, if you were to jump online and look at your HECS-HELP debt today, your PAYGW payments wouldn’t have been applied yet.
Can you make voluntary payments?
Yes, you can make additional voluntary payments towards your HECS-HELP debt through myGov. Once processed, voluntary payments are credited directly against the loan balance by the ATO.
If you wanted to pay your loan balance off in full before indexation is applied on 1 June, you’d need to do so as soon as possible (taking into consideration bank processing times).
It is recommended to talk to your accountant or financial advisor about whether making voluntary payments is right for you.
Get ready
Whether or not you are considering buying a property, it’s important to understand your HECS-HELP debt and how this year’s higher indexation could affect you.
If you’d like to find out more about how your HECS-HELP debt might be treated by lenders, get in touch and we’ll explain.