Strategies for Managing Your HECS-HELP Debt While Building Wealth
For many Australian graduates, a HECS-HELP debt is an inevitable part of their financial landscape. While this government loan scheme provides invaluable access to higher education, it can also present challenges when it comes to building wealth in the early stages of your career. This article explores strategies for effectively managing your HECS-HELP debt while simultaneously working towards your financial goals.
Understanding HECS-HELP Debt
Before diving into strategies, it’s crucial to understand the nature of HECS-HELP debt:
- HECS-HELP is an interest-free loan from the Australian Government used to pay student contribution amounts.
- The debt is indexed annually to the Consumer Price Index (CPI) to maintain its real value.
- Repayments are income-contingent, meaning you only start repaying when your income reaches a certain threshold ($54,435 for the 2024-25 income year).
The Impact of Indexation
One of the key factors to consider when managing your HECS-HELP debt is indexation. While the loan doesn’t accrue interest, it is indexed annually to keep pace with inflation. Recent years have seen significant increases in indexation rates:
- 2019: 1.8%
- 2023: 7.1%
This sharp rise means that for many graduates, their HECS-HELP debt is growing faster than in previous years, potentially impacting their ability to save and invest.
Strategies for Managing HECS-HELP Debt
1. Prioritise High-Interest Debts
While HECS-HELP debt is indexed, it doesn’t accrue interest like credit cards or personal loans. Therefore, it’s generally advisable to prioritise paying off high-interest debts before making voluntary HECS-HELP repayments.
2. Consider the Opportunity Cost
Before making voluntary repayments on your HECS-HELP debt, consider the opportunity cost. Could that money be better used for investments that potentially yield higher returns than the indexation rate? For instance, if you can earn a higher return through investments or superannuation contributions, it might be more beneficial to direct your funds there.
3. Utilise Salary Sacrificing
If you’re in a position where your parents or grandparents can help pay off your HECS debt, consider this strategy:
- Have a family member pay off your HECS debt as a lump sum.
- In return, salary sacrifice an amount equivalent to your regular HECS repayments into your superannuation.
This approach keeps your personal cash flow the same but redirects funds from debt repayment to wealth building within your super fund.
4. Build an Emergency Fund
Before aggressively tackling your HECS-HELP debt, ensure you have a solid emergency fund. This financial buffer can prevent you from accruing high-interest debt in case of unexpected expenses.
5. Understand the Repayment Thresholds
Familiarise yourself with the HECS-HELP repayment thresholds and rates. For the 2024-25 income year, they are as follows:
| Repayment Income (RI) | Repayment Rate |
|---|---|
| Below $54,435 | Nil |
| $54,435 – $62,850 | 1.0% |
| $62,851 – $66,620 | 2.0% |
| $66,621 – $70,618 | 2.5% |
| … | … |
| $159,664 and above | 10% |
Understanding these thresholds can help you plan your finances and career progression more effectively.
6. Consider Your Career Plans
If you’re planning to work overseas, be aware that you’re still required to repay your HECS-HELP debt. Since 1 July 2017, non-residents with HECS-HELP debt must declare their worldwide income to the ATO annually and may be required to make repayments if their income exceeds the threshold.
7. Explore Investment Options
While managing your HECS-HELP debt, don’t neglect opportunities to build wealth. Consider low-cost investment options such as:
- Index funds
- Exchange-Traded Funds (ETFs)
- Micro-investing platforms
These can allow you to start building an investment portfolio even with small amounts of money.
8. Maximise Your Superannuation
Consider making additional contributions to your superannuation. The power of compound interest means that even small additional contributions early in your career can have a significant impact on your retirement savings.
When to Consider Paying Off Your HECS-HELP Debt Early
While there’s no one-size-fits-all answer, here are some situations where paying off your HECS-HELP debt early might be beneficial:
- If the indexation rate is higher than the returns you’re getting on your savings or investments.
- If you’re planning to apply for a mortgage and want to improve your borrowing capacity.
- If you’re about to move overseas for an extended period and want to avoid the complexities of managing repayments while abroad.
Managing your HECS-HELP debt while building wealth requires a balanced approach. It’s essential to consider your individual circumstances, including your income, career prospects, and other financial goals. While HECS-HELP debt is generally considered ‘good debt’ due to its relatively low cost, high indexation rates in recent years have made it more important to have a strategic approach to repayment.
Remember, financial decisions are highly personal. What works for one person may not be the best strategy for another. Consider consulting with a financial advisor to develop a plan that aligns with your specific situation and goals.
By understanding the nature of your HECS-HELP debt, exploring various wealth-building strategies, and making informed decisions, you can effectively manage your student debt while laying the foundations for a strong financial future.