Thinking of repaying your HECS? Here’s how to do it

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For those who went to university (and weren’t lucky enough to get the government to pay for it), HECS-HELP debt is something you tend to try not to think about, like a particularly unpleasant chore that you’re determined to put off until the very last moment.

And with the average Australian owing $27,500 in student debt (presumably ignoring notable outlier “HECS Debt George” who owes a whopping $737,000), fair enough.

HECS debt is considered a “good debt”, but it can affect your ability to buy a home.Credit: Michael Howard

No one likes to think about a debt that’s designed not to be thought about, and for some Australians, your HECS debt will likely sit around and slowly get whittled down until one day, it’s suddenly gone.

But for many people, that’s not the case. According to a recent Finder survey, 63 per cent of people said they were either slightly or extremely concerned about repaying their HECS debt, and another 12 per cent said they think they’ll never be able to repay it.

What’s the problem?

This is a problem because despite HECS generally being viewed as good debt (unlike credit card or car loan debt, which is bad), it can affect your ability to borrow when attempting to buy a home. It also eats into your paycheck, which is obviously less than ideal, and gets indexed (increased) each year at a relatively high rate thanks to inflation.

What you can do about it

If you’re thinking about how and when to pay off your HECS, read on.

• When should you do it? The best time to pay off some or all of your HECS is, well, about now. The Australian Taxation Office advises that it’s best to make any additional repayments before June 1, which is when this year’s indexation rate of 3.2 per cent will be applied. The ATO also suggests doing so before you lodge your tax return. From a less logistical, broader perspective, Gen Z finance commentator Esther Abiya says anyone thinking about buying a home should first think about paying off some or all of their HECS. “For budding first-time home buyers, it could be wise to pay off their HECS. Banks look favourably on buyers who have small HECS debts and are close to paying them off,” she says.

• Salary sacrificing: A small portion of your paycheck is already diverted to your HECS once you start earning over $54,435, starting at 0.5 per cent and slowly ratcheting up another 0.5 per cent for each additional $5000 or so you earn. But the most efficient way to start chipping away at your student debt is to salary sacrifice it, effectively doubling (or more!) the amount you’re taking off it each pay run. Renae Vercoe, financial adviser at Money Mode, says successful salary-sacrifice arrangements “can have the impact of stretching your dollars further as you would be making repayments with pre-tax dollars”. However, not all employers will be agreeable to this, she says, and warns that entering into a salary-sacrifice arrangement may result in your employers providing a fringe benefit to you, which could result in additional taxes. It’s worth getting advice before you pursue this route.

• Lump sums: To make a lump sum payment off your HECS, you’ll need to log on to your MyGov account and send your payment to the ATO via BPAY or credit card. It’s not much more glamorous than that, and probably feels pretty anticlimactic, but Vercoe has a solid tip for anyone thinking of going down the lump sum route, though it requires a little pre-planning. “Save that money in a high-interest account so you can earn some interest throughout the year and the take the opportunity to make a lump sum repayment in May, ahead of the next round of indexation,” she says. “That way, the money is working for you throughout the year earning some interest before paying an amount of the debt before indexation.”
• One last thing: It’s also worth noting that one of Labor’s flagship policies this election is a promise to slash student debts by 20 per cent by July 1, so if you’re not desperate to repay, it might be worth waiting to see if that happens. For example, if you have the average HECS debt of $27,500 and are planning to repay $5000 now, waiting to receive the discount on the full amount before repaying will see you $1000 better off.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.