Your HECS deal will get a little help in the Budget but there is more needed

The government has made some limited improvements to student arrangements with three million Australians set to have their debts cleared.

Federal Education Minister Jason Clare as one in two younger Australians now have a university degree. Picture: NCA NewsWire / David Swift

In a pre-budget teaser, the federal government will wipe $3bn of debt from the three million Australians who have HECS debts.

With inflation peaking above 7 per cent in recent years, the government has decided to move away from using the Consumer Price Index (CPI) as the sole marker to index HECS debts. Under the announcement, the lower of the Wages Price Index (WPI) or CPI will be used and the commencement will be backdated to last year.

The government’s intention is clear – crank out more university graduates, upskill the workforce, drive more economic activity and hopefully increase tax revenue.

Federal Education Minister Jason Clare, who announced the change, said: “When I was a little kid, only 5 per cent of Australians had a university degree, now it’s about 26 per cent. And about one in two, almost one in two Australians now have a university degree if they’re in the 20s or their 30s … by the middle of this century we need about 80 per cent of our workforce to either have a TAFE qualification or a university degree.”

Gemma McWhirter, a schoolteacher from Sydney’s south has been vocal in HECS reforms and feels the government still has more to do.

“Women earn less than men in nearly every sector and also are more likely to leave the workforce or work part-time to raise children. This means that the debt of women rises, while their partner becomes debt free,” she said.

“A welcome step in the right direction might be to freeze indexation for unwaged persons, carers or persons with a disability which impacts their capacity to work. This could be applied for on an annual basis.”

Interestingly, in divorce situations, judges have ruled that HECS debts are a personal liability, meaning they are excluded from divorce settlements and the person with the debt just has to deal with it on their own.

With the average university degree costing anywhere between $20,000 and $50,000, the government’s loan assistance scheme has been successful in producing millions of HECS-funded university graduates since its introduction in 1989.

But when it comes to repaying HECS debt, this has been less successful with the total HECS debt owed to the federal government exceeding $80bn and over 10 per cent of loans flagged as “debt not expected to be repaid”.

It takes a student 9.5 years on average to repay a HECS debt as mandatory repayments only kick in when income exceeds $51,550. But even at this income level, mandatory repayments are only 1 per cent of income. This does increase in tiers such that someone who earns $151,201 must contribute 10 per cent of their income to mandatory HECS repayments.

The average HECS balance is $26,000 and for many in their 20s and 30s, this lingering debt has implications when they apply for a home loan. Most lenders take into account both the applicant’s HECS balance and how much repayments they are making which can reduce the maximum home loan size offered.

This is where a potential strategy comes into play for parents and grandparents wanting to help out their children in a manner that cannot be squandered by the child. Voluntary HECS repayments can be made at any time, however the previous 10 per cent discount on lump-sum payments is no longer available as it ended last year.

Making voluntary HECS repayments reduces the indexation that occurs on the balance each year and can also help improve the student’s home loan borrowing capacity.

The key date for indexation is June 1 as this is the date that the Australian Taxation Office applies indexation on HECS balances each year. As such, if you decide to make a voluntary repayment for your child, you need to get going pretty soon given the deadline is approaching.

Another quirk with the HECS system is that voluntary repayments are applied to the HECS balance before indexation occurs, but mandatory HECS repayments that are taken out of a pay throughout the year is applied after the indexation has occurred.

McWhirter would like to see this addressed by the government and says: “It is an absolute scandal that indexation has been applied before the mandatory repayments are applied to the debt. In addition, the indexation is compounded because the total indexed debt is increased by indexation each year.”

The government has flagged more changes to education affordability in the upcoming budget so we are likely to see further improvements, but whether we see the mistiming of mandatory payments issue rectified is yet to be seen, but it would be a welcome change for HECS students.

Similarly, the reintroduction of the lump-sum voluntary repayment discount, would be a win-win situation. The government could recoup more of the $80bn outstanding quicker and students can pay off their student loan to the government quicker.

James Gerrard is principal and director of Sydney planning firm www.financialadviser.com.au