Every year on 1 June, HECS/HELP debts are indexed. This means that the outstanding balance of the loan is adjusted in line with the Consumer Price Index (CPI) to reflect changes in the cost of living. The indexation rate is calculated based on the CPI data from the previous two quarters. This adjustment ensures that the real value of the money borrowed is maintained over time.
Is Indexation the same as Interest?
Indexation and interest are both methods of adjusting the value of money over time, but they serve different purposes and are calculated differently. Indexation is used to adjust the value of a loan or asset to maintain its real value in relation to inflation, as measured by the Consumer Price Index (CPI). It is applied to ensure that the value of the money borrowed retains its purchasing power as prices generally increase. In the context of HECS/HELP loans, indexation is applied annually to adjust the loan balance in line with changes in the cost of living. Interest, on the other hand, is the cost of borrowing money. It is typically expressed as an annual percentage rate and is charged by lenders on the amount of money borrowed. Interest can compound over time, meaning that interest charges can be added to the principal loan amount, and future interest calculations will include these added charges. In summary, indexation adjusts the loan balance based on inflation rates to preserve the loan’s value, while interest is a charge for the service of borrowing money and can lead to an increase in the debt due to compounding.
1 June, 2023 – A Whopping 7.1% increase!
On 1 June 2023, the indexation rate applied to the outstanding balances these debts was 7.1%. This increase was notably larger than previous years (and the largest since 1990!) due to several factors influencing the economy. These include heightened inflationary pressures from rising costs in goods and services, supply chain disruptions, and increased consumer demand as the global economy continued to recover from the impacts of the COVID-19 pandemic. Additionally, factors such as energy price increases and higher costs for housing and essential services contributed to the overall rise in the Consumer Price Index. This significant CPI increase reflects broader economic trends and challenges during that period, impacting various financial indices and calculations, including the indexation of HECS/HELP debts.
HECS indexation to be overhauled in budget with $3 billion in student debt ‘wiped out’
The federal government is now planning to alleviate student debt by implementing a significant adjustment to the HECS/HELP programs, aiming to reverse the unsettling indexation increase from last year mentioned above. This change is set to save the average individual approximately $1,200 by cutting around $3 billion in student debts. Outlined in the upcoming federal budget, this initiative will prevent student debts from surpassing wage growth in the future by capping the indexation rate for HECS and HELP loans. This cap will be tied to the lower of either the consumer price index (CPI) or the wage price index (WPI). This proposed change, requiring legislative approval, will be applied retroactively from June 1, 2023, effectively rolling back the indexation rate of 7.1% from last year. This move aims to prevent loans from growing at a faster rate than Australians can manage to pay them off. If passed through parliament, last year’s 7.1 per cent indexation will be lowered to the WPI of 3.2 per cent!
Should you make a voluntary payment towards your HECS / HELP debt?
Even with a potential reduction in the CPI impact, making a voluntary repayment towards your HECS (HELP) debt before the 1 June indexation date can still be beneficial. A lower indexation rate reduces the rate at which the debt increases, but any payment made before the indexation takes effect will still decrease the principal balance. This reduction in the principal means less debt to be indexed in the future, potentially saving money over the long term. Furthermore, reducing the loan balance earlier can accelerate the timeline for completely paying off the debt.
What are the downsides to making a voluntary repayment?
Making a voluntary HECS/HELP repayment has several considerations that might be viewed as downsides depending on an individual’s financial situation:
Non-Refundable: Once you make a voluntary repayment, it is not refundable. This means you cannot reclaim this money if your financial circumstances change or if you need access to cash for emergencies.
Opportunity Cost: The funds used for a voluntary repayment could potentially be invested elsewhere with a higher return. Given that HECS/HELP debt is indexed to the CPI, which is generally lower than the returns possible from other investments like stocks or real estate, some might prefer to invest their extra funds rather than pay down their student debt faster.
Lack of Tax Benefits: Unlike some other types of debt (e.g., mortgage interest), payments made towards HECS/HELP debt are not tax-deductible. This means there is no immediate tax relief benefit from making a voluntary repayment.
Financial Flexibility: Allocating money towards your HECS/HELP debt reduces your liquid assets. This could limit your financial flexibility, particularly if you face unforeseen expenses or opportunities where having available cash is beneficial.
Low Interest: Since the indexation rate of HECS/HELP loans is generally lower compared to commercial loans and is merely meant to maintain the real value of the debt against inflation, some argue that there is less urgency to pay off this type of debt compared to higher-interest debts.
Conclulsion
In deciding if you should make a voluntary HECS/HELP repayment you need to weigh up your own financial goals, other debts, investment opportunities, and personal circumstances generally. This blog post is general information only and does not consider your personal circumstances. Should you need assistance in this important decision, don’t hesitate to get in touch with our team to further discuss.
