Should You Pay Off Your HECS-HELP Debt Early? A Cost-Benefit Analysis
Higher Education Contribution Scheme-Higher Education Loan Program (HECS-HELP) debts are a common financial burden for many Australians who have pursued tertiary education. With recent increases in indexation rates, the question of whether to pay off HECS-HELP debt early has become more pertinent. This article provides a comprehensive cost-benefit analysis to help you decide if early repayment is the right choice for you.
Understanding HECS-HELP Debt
HECS-HELP is a loan from the Australian Government that allows eligible students to defer their tuition fees. Unlike other types of debt, HECS-HELP does not accrue interest. Instead, it is indexed to inflation annually, which means the debt increases in line with the Consumer Price Index (CPI). Repayments are income-contingent and are only required once your income exceeds a certain threshold, which for the 2023-24 financial year is $51,550.
Pros of Paying Off HECS-HELP Debt Early
1. Reducing Indexation Impact
While HECS-HELP does not attract interest, it is subject to annual indexation based on the CPI. Recent years have seen significant increases, with a 7.1% rise in 2023 and a predicted 4.8% rise in 2024. Paying off your debt early can help you avoid these increases, potentially saving you a substantial amount over time.
2. Improved Borrowing Capacity
Clearing your HECS-HELP debt can improve your credit rating and increase your borrowing capacity, which is beneficial if you plan to apply for a mortgage or other loans. Lenders consider your total debt when assessing your ability to repay a loan, and a lower debt load can make you a more attractive borrower.
3. Financial Freedom
Eliminating your HECS-HELP debt provides a sense of financial freedom and allows you to allocate funds towards other financial goals, such as saving for a house deposit, investing, or building an emergency fund.
Cons of Paying Off HECS-HELP Debt Early
1. Opportunity Cost
One of the main drawbacks of paying off your HECS-HELP debt early is the opportunity cost. The money used to repay your debt could potentially yield higher returns if invested elsewhere. For example, investing in the stock market, contributing to superannuation, or paying off high-interest debts such as credit cards or personal loans may provide better financial outcomes.
2. Lack of Flexibility
Once you make a voluntary repayment towards your HECS-HELP debt, you cannot reverse the decision or access those funds again. This lack of flexibility can be a disadvantage compared to other financial strategies, such as making extra mortgage repayments, where you may have the option to redraw funds if needed.
3. Income-Contingent Repayments
HECS-HELP repayments are only required once your income exceeds the threshold. If your income falls below this level, you are not obligated to make repayments, providing a safety net during periods of lower income or unemployment. Paying off your HECS-HELP debt early removes this income-contingent flexibility.
When Should You Consider Paying Off HECS-HELP Debt Early?
1. High Indexation Rates
If the indexation rate on your HECS-HELP debt is higher than the interest rate on your savings or other investments, it may make sense to pay off your debt early. For instance, with an indexation rate of 4.8%, if your savings are earning less than this rate, you are effectively losing money by not paying off your debt.
2. Planning to Borrow
If you are planning to apply for a mortgage or other significant loans, paying off your HECS-HELP debt can improve your borrowing capacity and credit rating, making it easier to secure favourable loan terms.
3. Overseas Employment
If you plan to work or live overseas for an extended period, consider paying off your HECS-HELP debt beforehand. While overseas, you are not required to make repayments, which means your debt will continue to grow with indexation. Clearing the debt before you leave can prevent it from accumulating.
Deciding whether to pay off your HECS-HELP debt early is a complex decision that depends on your individual financial situation and goals. While early repayment can save you money on indexation and improve your borrowing capacity, it also comes with opportunity costs and reduced financial flexibility.
Consider your income level, investment opportunities, and future financial plans when making this decision. Consulting with a financial adviser can provide personalised advice tailored to your circumstances.
For more detailed information, refer to resources from the Australian Taxation Office (ATO) and Study Assist, and seek guidance from licensed financial professionals.