How is rising inflation affecting HECS-HELP debt repayments?

With the inflation rate surging, impacting cost of living expenses and cost of borrowing, students may be wondering how repayments on their HECS-HELP debt will be affected.

HECS-HELP loans allow students to borrow from the Commonwealth to cover some of all of their student contribution for their university or other approved higher education studies.

What is HECS-HELP indexation?

HECS-HELP indexation is a process that adjusts your outstanding debt balance every year on June 1 to reflect changes in the cost of living. The indexation rate is based on the Consumer Price Index (CPI), which measures the average price of a basket of goods and services in Australia.

Why is HECS-HELP indexation important?

HECS-HELP indexation ensures that the real value of your debt does not decrease over time because of inflation. It also helps the government recover some of the costs of providing subsidised education to students. It works the same as interest on a home loan, except that it’s calculated annually only, rather than daily.

How much will HECS-HELP indexation increase my debt?

The exact amount of HECS-HELP indexation depends on your debt balance and the CPI growth rate. For example, if you have a debt of $25,000 and the CPI growth rate is 7%, your debt will increase by $1,750 ($25,000 x 0.07) on June 1 each year.

The CPI or benchmark inflation rate expands, and contracts based on economic conditions. Over the past 10 years, it has mostly been below 2%. However, in 2023, it skyrocketed 7.1% driven by the impact of the COVID pandemic, global crises including war, rising fuel prices and so on. Economists anticipate inflation will remain higher than the preferred 2% to 3% range through 2024.

What can I do to reduce the impact of HECS-HELP indexation?

There are two main ways to reduce the impact of HECS-HELP indexation on your debt:

1. Make voluntary repayments before June 1. If you pay off some or all your debt before June 1, you will avoid paying indexation on that amount. You can make voluntary repayments through the myGov portal or by contacting the ATO. Please ensure you leave 4 days for processing time.
2. Make sure you have lodged your tax return early, so that the payments from your tax return are acknowledged on your HELP account prior to 1 June and aren’t subject to indexation.

As your income increases, you’ll pay off your debt faster. You are required to make compulsory repayments through your tax return once your income reaches a certain threshold ($51,550 for 2023-24). The higher your income, the higher your repayment rate and the faster you pay off your debt and reduce the amount of interest over the term of the loan.

Will HELP debt affect obtaining a home loan?

A HELP debt can affect your home loan application in the following ways:

1. It can be taken into account when the bank assesses your ability to pay back a loan, since the repayments lower your disposable income. But it will not be taken into account for your debt-to-equity assessment.
2. It can slow down your savings for a housing deposit once you start repaying amounts from your salary.

Should I be worried about applying for a loan with a HELP debt?

A HELP debt is not likely to derail your whole application. It is important to remember it is a low-risk debt that is automatically deducted from your salary but only if you earn over the minimum threshold. If something major happened to affect your earning capacity, it is not a debt with forced repayments if you don’t have the required level of income.

There are also some steps you can take to improve your borrowing position, such as:

1. Paying off your most urgent, high-interest debts first, such as credit cards or personal loans.
2. Reducing your monthly spending and saving more for a larger deposit.
3. Comparing different home loan options and finding the best deal for your situation.

If you are considering purchasing a property soon, or making additional optional HELP debt repayments, consult a finance broker, financial planner or get in touch with our expert Health Accounting team on 1300 764 200 for more information.