HECS, HELP Loan Indexing: What Should You Do About Your College Student Loan?
Australians are set to be stung with the biggest rise in college debt repayments in more than a decade – with the average ex-student set to owe $1,000 more over the next 12 months.
Monthly and annual payments are expected to increase for the less than three million alumni with HECS or HELP debt from June 1 due to higher annual indexation rates. This means that the average college debt of $23,685 will increase by $1,013.
Indexation is a formula applied to student loans that have been outstanding for more than 11 months after graduation. It maintains the real value of a loan by adjusting it according to changes in the cost of living, which is measured by the consumer price index.
Australians who have yet to repay their HECS debts are set to suffer the biggest increase in payments in over 10 years due to the rising cost of inflation (pictured, the University of Sydney)
Indexation is a formula applied to student loans that have been unpaid for more than 11 months after graduation and is adjusted for the cost of living, which is measured by the consumer price index (photo, inflation of consumer prices from the late 1990s to today)
For this reason, the rate is closely linked to inflation, which reached 5.1% during the March quarter. Australia’s new escalation rate is 3.9%, well above last year’s 0.6% increase.
So how should Australians tackle their growing debts – and should former students try to pay them off?
Richard Whitten, a loans expert at Finder, told Daily Mail Australia that the increase should not deter Australians from pursuing higher education. But it should serve as a reminder that the debt is still there.
What is an indexation rate?
- The indexation rate is a formula applied to student loans that have been outstanding for more than 11 months after graduation
- It maintains the value of the loan based on rising inflation and the cost of living
- Rate up 3.9% since June 1 (vs. 0.6% last year)
“It’s not the most urgent debt, but it’s there. People should use it as a chance to get a little smarter about how they see college while they’re at it,” Whitten said.
“Dropping classes, dropping them before the census, the payment plans to pay it back sooner. These are all options.
With inflation rates and the cost of living skyrocketing across the country, many have advised against making further voluntary repayments to reduce HECS and HELP debt.
Mr Whitten said that without having a clear forecast of where the indexation rate might be next year, people should use it as a ‘general PSA’ rather than a wake-up call.
“It’s the least urgent debt ever, indexing takes place once a year,” he told Daily Mail Australia.
“With a home loan, it’s a daily rate, with this one, it’s a one-year charge. If you’re making $50,000 a year, you won’t even notice it.
The loan expert said that in the case of someone with no other debts, they could consider making payments to reduce future interest.
“The only person who applies is someone who has no debt – no credit card or personal loan, no mortgage and is not interested in investments,” he said.
“If it stays at 3.9% next year and the year after, you might want to consider paying off some of it.”
Mr Whitten said people should be more concerned about rising other costs, saying people who have not yet started college are planning to rack up a lot more debt than those who have already finished.
Richard Whitten, a loan expert at Finder, called HECS-HELP “the least urgent debt ever” and said people should be more concerned about rising other costs.
“With energy bills and rising interest rates, buy now pay later, urgent debt is a big deal,” he told Daily Mail Australia.
“It’s a good thing that people are aware. People going into college are now facing much bigger debts than someone in their 30s because the cost of education has gone up.
Interest rates and the cost of living are expected to remain high next year, which could see indexation remain close to 2022 figures.
Pivot Wealth founder Ben Nash told Nine.com.au the indexation rate was concerning as it exceeded current wage growth.
Mr Whitten said that without having a clear forecast of the possible indexation rate next year, people should use the increase as a ‘general PSA’ rather than a wake-up call.
“When you compare it to wage growth, which is 2.4% annualized, you can see it’s struggling at a higher rate than wage growth,” Nash said.
“So that means people are going to have to pay more of their salary to have the same impact.”
He said the numbers should not discourage people from pursuing higher education, as it is likely that the indexation rate will average around 2% over 10 years.
“It’s only slightly positive because the cost continues to rise, but the increases in HECS are not as high as the increases in many other goods and services,” he said.
The increase in the indexation rate means the average HECS debt of $23,685 will increase by $1,013 (pictured, UNSW students in Sydney)
A former University of New South Wales student said she was considering contributing more to her $30,000 debt.
“I would only do that if it was strategic to buy a house, you know, because I know the banks take into consideration the repayments you have to make for that debt,” Jasmine said.
“I wouldn’t rush to put money into it unless it was, you know, for a very strategic purpose.”
Barefoot Investor, however, claims Australians shouldn’t even contribute a dollar in extra payments to HECS.
Barefoot Investor advised people not to “rush to pay off the cheapest loan you will ever get” and reminded readers that HECS-HELP repayments are paid back as a percentage of income
“All the hoo-ha about the government’s proposed changes to the HECS-HELP rules focus on mandatory refunds that are a percentage of your salary,” the group said when asked about the increased payouts. volunteers.
“In doing so, the government has virtually given up on encouraging people to make voluntary contributions – the premium was abolished from 1 January 2017.
“So why would you bother rushing to pay off the cheapest loan you’ll ever get – it just goes up with the general cost of living – when it’s going to come out of your salary anyway?” The answer is you shouldn’t.”