The ATO has announced its yearly indexation adjustment to Study and Training Loans, including the HECS/HELP* debt scheme.
They maintain that indexation is necessary to ensure the sustainability of the loan schemes and to reflect inflation.
Except this year it’s almost doubled, with indexation for all Study and Training Loans set to increase to 7.1% on 1 June 2023.
So if you’re someone who currently has a Study or Training loan, like HELP debt, what will this mean for you?
Here is your guide to: HELP Debt Indexation.
*While you may know the student debt loan scheme as its former title, HECS debt, for the sake of this article, we will refer to it as HELP debt.
Here’s what you need to know about the HELP indexation increase
For many, the attraction to the student HELP debt scheme is due to its interest free nature. Include the fact that it’s not repayable until you reach the income threshold, and for many students, it seems like a pot of gold at the end of the higher education rainbow.
What many seem to misunderstand however, is that while the loan is interest free, it is subject to indexation, which is adjusted every year in line with the Consumer Price Index (CPI).
A recent survey conducted by ABC News Australia showed more than 50% of current students believed HELP debt indexation to be fixed rate, unaware that it’s actually subject to the ebbs and flows of CPI and yearly indexation.
With rising costs of living and inflation at an all time high, this year’s CPI increase has seen the HELP debt scheme, along with other study and training loans, indexed at a record 7.1%.
It’s important to note that not only does indexation affect the HELP debt scheme, but also:
- VET Student Loans (VSL),
- Student Financial Supplement Scheme (SFSS),
- Student Start-up Loans (SSL),
- ABSTUDY Student Start-up Loans (ABSTUDY SSL) and
- Trade Support Loans (TSL)
For more information on which loans are affected by the ATO’s indexation, click here: https://www.ato.gov.au/Rates/Study-and-training-loan-indexation-rates/.
What is a HELP debt?
Before we dive in to how this indexation increase may affect you, it is important to understand what HELP actually is.
The Higher Education Loan Program (HELP) scheme (formerly known as the Higher Education Contribution Scheme or HECS) was introduced in 1989.
The scheme allows eligible tertiary students to defer payment of their tuition fees until they earn above a certain income threshold.
The amount that students can borrow under the HELP scheme depends on the course they are studying and the provider they choose. Currently, the maximum amount that can be borrowed is $106,319 for most students and $152,700 for students studying medicine, dentistry, or veterinary science.
The indexation rate charged on HELP debt is linked to the Consumer Price Index (CPI), which measures changes in the price of goods and services over time.
The ATO defines the purpose of indexation as follows: “Indexation maintains the real value of the loan by adjusting it in line with changes in the cost of living as measured by the consumer price index (CPI). The indexation figure is calculated each year after the March CPI is released. It is based on financial figures collected by the Australian Bureau of Statistics over the previous 2 years.”
Prior to June 2023, the indexation rate was set at 3.9%. However, from 1 June 2o23, the indexation rate will increase to 7.1%. This means that the amount of HELP debt owed by graduates (on balances owed for longer than 11 months) will increase by 7.1% between 1 June 2023 and 31 May 2024.
When do I have to start paying my HELP debt?
One of the primary benefits of the HELP debt scheme, and why it is so appealing to many students, is that you are not required to make repayments until you reach a certain income threshold.
Unlike traditional debts, HELP debt repayments are calculated by percentage of income.
The income threshold starts as low as 1% for those earning between $48,361 – $55,836, and progresses to up to 10% for those earning over $141,848 per year.
For a full breakdown of the income threshold, click here: https://www.ato.gov.au/Rates/HELP,-TSL-and-SFSS-repayment-thresholds-and-rates/
HELP Fact: The HELP debt is commonly known as “the debt that dies with you”. If an individual passes away with an amount still owing, the trustee or executor is required to make any outstanding HELP repayments for the period before the deceased persons death. The rest of the HELP debt is completely wiped.
Should I pay some or all of my HELP debt before 1 June?
Now that the indexation rate increase has been confirmed, the big question on many Australians lips is – Is it worth making a voluntary contribution, or paying it offer entirely, before indexation kicks in?
While it may seem like a good idea to “get in early”, there are some important factors that you may want to consider when deciding whether to pay off your HELP debt before 1 June 2023:
Before you decide to pay off your HELP debt, you should consider whether you have already exceeded the income threshold for repayment. Currently, the income threshold for repayment is $48,361 for the 2022-23 financial year. If you earn less than this amount, you are not required to make any repayments.
With cost of living and inflation at an all time high, if you’re not earning enough to repay your HELP debt, it might be beneficial to hold off on paying it back for the purpose of easing strain on cash flow.
Although at the mercy of inflation, HELP indexation is relatively low when compared to other high interest debts such as credit cards and personal loans. Coupled with the fact that, unlike other debts, HELP is not bound by a fixed term or deadline, it may be beneficial to pay off higher priority debts first.
It’s important to consider not only what will be cash flow friendly now, but also what is going to be most cost effective in the long run.
It’s essential to evaluate and understand your financial situation before deciding to pay off any debt. If you’re comfortable with your current financial position, have an emergency fund, and have no other high-interest debt, you might consider paying off your HELP debt in full, or by voluntary contributions made on top of your required repayment amount. However, if you’re struggling for cash flow or have other financial priorities, you may find it beneficial to hold off on making any unnecessary repayments.
If you’re unsure about whether paying off your debt will help or hinder your finances, you should engage the help of a professional financial advisor to ensure you’re making the best and most informed decision for your financial future.
How much additional HELP debt can I expect to owe now?
- a $10,000 loan balance will increase by $710.
- a $25,000 loan balance will increase by $1,775.
- a $50,000 loan balance will increase by $3,550.
For eligible students with the maximum loan amount of $152,700, this years indexation will see their balance increase by $10,842.
How do I make a voluntary contribution to my HELP debt?
For anyone who wishes to make a voluntary contribution to their student loan debt before 1 June 2023, or is interested in checking their outstanding balance, you can do so via the myGov website or app.
For those wanting to make a full or partial contribution before the increased indexation kicks in, it’s worth paying well ahead of the due date, to ensure that your payment is processed with ample time.
So there you have it! The ATO’s indexation increase means a lot of different things to a lot of different people. For some, it’s an incentive to get ahead of the curve before its implementation in June. For others, it’s further confirmation that they are in no rush to pay off their student loans.
As for whether you should pay off your HELP debt before the increase is implemented, well that all depends on your unique financial situation and circumstances. It’s important to consider all factors before making any decisions, and if you’re unsure, it’s always best to seek advice from a professional advisor.
When it comes to debt, understanding changes and your obligations can be overwhelming, but it doesn’t have to be. At BIS Cosgrove, we are here to help you understand your financial position, give you peace of mind and guide you through the complexities of your finances. We provide expert advice and help you make informed decisions about your money.
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The material and contents provided in this publication are general and informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.