HELP-HECS debt is rising to reflect rising interest rates, but what does this mean for you?
Another consequence of rising interest rates is increased HECS-HELP debt. While this may send you into a panic, it may not be the worry you think it is.
HECS-HELP debt will be indexed by 3.9% on June 1 this year. These interest-free loans are indexed each year – which adjusts with interest rates – but won’t be the same number you hear about on the news.
“It’s the average of the quarters of the last two years”, retired financial adviser, host of the my millennial money podcast and author of Sort your money and investGlen James told news.com.au.
“They don’t just say, ‘Oh, the inflation rate in March 2022 is 5.1%, so in June HECS-HELP will be pegged at 5.1%. They’ve smoothed it over the last two years, so it’s not unfair if there’s a spike in inflation for just one quarter.”
Either way, 3.9% sounds like a big jump – and it is. In fact, it’s the biggest increase we’ve seen in over a decade. However, James says overall there is still no cause for alarm.
“There’s no reason to panic if you have HECS/HELP debt,” he said. “You have to remember that if you look at the last 10 years of indexation – including the indexation amount of 3.9% this year – the average annual indexation rate is still only 1.97% .
James also explained that while the index may rise, the amount you must legally repay from your paycheck won’t necessarily change much, if at all.
“The house didn’t catch fire, but it’s always a good time to assess our financial goals each year,” he said.
Should you pay off additional HECS-HELP debt?
While many seem to be panicking and suggesting people with these loans prioritize paying off more before June 1, James disagrees.
“Do you have to pay extra on your HELP debt given the rate increase?” he said. “The answer is probably no, because you probably have other financial goals.
“You can if you want,” he continued, “but you have to do the math and make a balanced judgment with other financial goals in your life.”
Despite the increase in the index, HECS-HELP remains a debt that dies with you, meaning that your family or estate will not have to repay it if you die. Because of this, James still thinks it can often be better to place him lower on your list of financial priorities.
“I think if you have extra money in your life, you might be better off investing it in a superannuation, or in your own stock fund, or paying off your mortgage,” he said. he suggested.
“At least if you have a family and you died prematurely or unexpectedly, that extra refund wasn’t wasted.”
That said, James recognizes a caveat to this general rule – and it comes in when you’re considering buying a home.
“You might consider clearing your HECS-HELP debt if you’re looking to get a mortgage,” he said.
“Banks and lenders don’t care how much HECS/HELP debt you have – whether it’s $200,000 or $5,000 – but they do consider the percentage repayment rate your employer withholds each year to repay the debt,” he continued.
“So you could wipe it out as part of a strategy to increase your service to get a mortgage.”
Overall, however, James suggests keeping in mind “there is never much harm in paying off a debt”.
That doesn’t mean there aren’t problems
While in general the rise in the index shouldn’t cause you to panic, it is part of a wider trend that is troubling, particularly for young Australians.
Earlier this month, National Union of Students President Georgie Beatty spoke after the first two days of a strike at the University of Sydney, stressing that rising tuition fees in general are a another burden for young people when the cost of living is higher than ever. .
“It’s not just that our fees are based on a much higher rate of inflation than our salaries,” Beatty said. “It’s that Scott Morrison’s ‘Graduate Ready’ tuition has also driven unprecedented fee increases, with arts degrees rising 113%.
“Students are wondering how we’re going to afford these extra fees when we’re dealing with rising costs of living, precarious work and haven’t seen significant wage growth for most of our life.”