HECS/HELP Loan Nightmare: Should You Pay It Off Before June 1st?
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| Should You Pay It Off Before June 1st? |
For most Australians, going to university means taking out a government loan known as HECS-HELP. We are told, "Don't worry, it's the best loan you'll ever get because it's interest-free."
Technically, that is true. Banks don't charge you interest. However, the Australian Taxation Office (ATO) applies something called "Indexation" every year on June 1st.
In the past, indexation was negligible. But after the shock of 2023 (when it hit 7.1%), the rules changed. While the government introduced reforms to make it fairer, the debt still grows if you ignore it.
So, the big question is: Should you rush to pay off your HECS debt before June 1st? Let's crunch the numbers.
What is Indexation and How Does It Work?
To keep the "real value" of the money lent to you, the government adjusts your debt balance. Following the recent Universities Accord reforms, the calculation method is now fairer:
- The Date: Indexation is applied on June 1st every year.
- The Calculation: It is now based on the lower of the Consumer Price Index (CPI) or the Wage Price Index (WPI). This protects you from extreme inflation spikes.
- The Pain: Even with the cap, if the rate is 3-4%, on a $30,000 debt, that is still roughly $1,000 added to your balance overnight for zero value.
The "Voluntary Repayment" Dilemma
Your employer already deducts HECS repayments from your salary if you earn above the threshold (approx. $56,725 for the 2025-26 FY). But there is a catch: these compulsory credits are often only applied to your loan balance after you lodge your tax return in July.
This means Indexation (June 1st) happens BEFORE your year's worth of salary deductions officially reduce the principal.
Should You Make a Manual Payment by May?
✅ YES, Pay It Off If...
- You have the cash sitting idle: If your savings account earns 4.5% interest (which is taxable), and indexation is predicted to be 4.0% (tax-free "loss"), paying the debt can be mathematically smarter.
- You are applying for a Home Loan soon: This is critical. Banks view HECS debt as a significant liability. It reduces your borrowing power (often by $40,000 to $60,000). Clearing it can boost your mortgage approval chances.
- The debt is small: If you only have $2,000 left, just clear it to avoid the administrative hassle and future indexation.
❌ NO, Don't Pay It Off If...
- You don't have an Emergency Fund: Never use your last dollar to pay HECS. You cannot redraw this money if you lose your job.
- Inflation is Low: If indexation drops to 2% and your High Interest Savings Account (HISA) pays 5.5%, you are better off keeping the cash in the bank.
- You are saving for a House Deposit: Cash is king for deposits. Lenders usually prefer a bigger deposit over a debt-free HECS account, as it lowers the LVR (Loan to Value Ratio).
The Trap: Salary Sacrifice vs. HECS
Be careful if you use "Salary Sacrifice" to boost your Superannuation. While it lowers your taxable income, the ATO adds it back (Reportable Employer Super Contributions) when calculating your HECS repayment income.
You cannot use Salary Sacrifice to "hide" income and avoid HECS repayments.
Watch the Data
Every year around late April, the ABS releases the inflation (CPI) data. This gives you a preview of what the June 1st indexation rate will be.
Strategy: Wait until May. Compare the predicted indexation rate against your savings interest rate. If you decide to pay, ensure you make the voluntary repayment by May 25th to allow processing time before the June 1st deadline.
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