Once thought of as "the best debt you'll ever have", the cost of HECS-HELP debts are rising. There are growing calls to abolish the practice of indexing HECS-HELP debts as indexation is forecast to rise steeply in line with inflation, alongside Australia’s largest real wage decline on record in 2022.
On 17 April 2023, a Bill aimed at pausing indexation and increasing the minimum repayment threshold was rejected by a Senate committee, signalling that there is not likely to be any easy answers to the problem of rising student debts. With this year's indexation rate scheduled to be announced on 26 April 2023 and inflation projected to be at least 7%, average loan balances are expected to spike this year in the absence of Government intervention.
While HECS-HELP debts are technically interest-free, they are indexed by an amount equal to the Consumer Price Index (CPI) on 1 June each year. The idea behind indexation is that it maintains the real value of the debt by adjustment in line with inflation. The difficulty currently faced by those holding student debt is that indexation is expected to add considerably more to their debt principal this year than it has in previous years.
In simple terms, the indexation of the debt adds to the overall amount that has to be repaid by an amount equal to CPI. In a way, indexation of a HECS HELP loan could be thought of as the annual interest charged on the loan. However, unlike most other forms of interest, the annual indexation amount is added to the loan principal all at once, rather than progressively over the course of the year.
Historically there has been little cause for concern by graduates over the past decade with the indexation rate remaining stable and below 2.6% each year. As shown in the table below, the rates began creeping up more recently as the last adjustment in 2022 saw the indexation rate increase to 3.9% for that year. That trend is now set to accelerate with the rate expected to almost double in 2023.
As a result, political commentators and a portion of the approximately 2.9 million people with outstanding HECS-HELP debt are concerned that in light of a number of economic factors, no clear intention for Government intervention, and the recent rejection of the Bill that proposed to halt indexation and increase the minimum repayment threshold, there appears to be little hope for relief.
The arrangements for indexing HELP debts are set out in the Higher Education Support Act 2003. They have been in place since HELP was established, and are based on those that applied to the former Higher Education Contribution Scheme (HECS) under the Higher Education Funding Act 1988.
Indexation is applied to the part of an accumulated loan that has remained unpaid for more than 11 months. Utilising the anticipated indexation rate of 7%, the below details the impact of indexation on a HELP debt of $15,000:
In order to calculate Lorraine’s accumulated HELP debt before indexation, any new HELP debt incurred is added to the HELP debt balance as at 1 June of the previous year. From that figure, any voluntary repayments made throughout the course of the year are subtracted, along with any compulsory repayments required to be made. Using this approach, Lorraine’s former accumulated HELP debt before indexation is $12,975 determined as follows:
($15,000 + $1,500) – ($525 + $3,000) = $12,975
Assuming an indexation factor of 7%, on 1 June 2023 Lorraine’s accumulated debt would be increased by an additional amount of $908.25, increasing Lorraine’s loan balance to $13,883.25. Because indexation is added as a percentage of the accumulate debt balance, HECS-HELP loans with a greater balance will be more severely impacted (in dollar terms) than those with smaller loan balances at the date indexation is applied.
There is no 'one-size fits-all' answer and whether an individual pays down their HECS-HELP debt is a personal choice. It is worth noting that a voluntary repayment can be made at any time to reduce the balance of your debt, however you may still need to make a compulsory repayment if, after making any voluntary repayments you still have a debt and your repayment income is above the minimum payment threshold.
The ATO advises that the best time to pay off your total loan balance with a voluntary repayment is before you lodge your tax return. If you lodge your tax return before your voluntary repayment is credited to your account, a compulsory repayment may be included on your notice of assessment. If an individual is looking to make a non-refundable and voluntary repayment, the ATO recommends that this occurs in May to allow enough time for the payment to be received and processed before the 1 June indexation date.
Although a HECS-HELP loan balance will be compounding over time, it has historically done so at a very low rate compared to most other forms of credit and the individual should weigh up the opportunity cost of repayment, against alternative asset classes that may provide a better financial return to the individual.
More information from Maddocks
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial Practice Group.
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Qualifications: LLB, Deakin University
Stephen is a member of Maddocks Commercial team. He is a corporate and commercial lawyer, who assists clients across a diverse range of industries including financial services, consumer markets and manufacturing in a wide variety of legal matters.
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