If you’re an eligible student in Australia, the government helps pay course fees through the HECS-HELP scheme. This essentially acts as a student loan, making it possible to afford university courses and upper-level education. That being said, understanding your HELP debt repayment can be tricky.
Unlike other types of loans, you don’t begin repaying your HELP loans until you reach an income threshold. This threshold changes each year, and you repay a specific percentage depending on your income each year. It’s important to note that you don’t pay interest on your HELP debt, but these debts do face what’s called indexation.
Because your HELP loans are tied to indexation, they can rise and fall year after year depending on certain factors. Understanding indexation applied on HELP debt specifically helps you prepare for your upcoming payments and stay on top of how much you owe. In this guide, we’ll explore everything you need to know about indexation and HELP debt.
What Is the HELP Debt Income Threshold
To begin, let’s talk more about HELP debt and the income threshold. Since these loans are designed for students of all backgrounds, it’s important that they stay as affordable as possible. You don’t begin repaying your HECS-HELP debt until you reach the Help Repayment Income Threshold.
For the 2019-20 year, this income threshold was $45,881. Once you reach this income, you face a compulsory payment of at least 1% of your income HELP repayments. These payments are taken out of our regular payslip through higher tax. You can choose to pay more if you wish, but it’s not required. Meanwhile, as your income increases, so does the percentage amount by 0.5%.
You’re always able to make voluntary repayments at any time. This could be a good idea if you want to aggressively pay down your debts, or you’re worried about indexation long-term (see below).
What Is Indexation?
Next, it’s important to understand indexation as it relates to debt. Most people have an understanding of different types of interest rates like variable and fixed, and indexation is related to this idea. While there is no interest applied to HELP loans, indexation works similarly to a variable interest rate, which is tied to a specific benchmark. In Australia, HELP loans are indexed using the Consumer Price Index (CPI). This means when the CPI rises, so does the index rate and vise versa.
Indexation is added to your student debt on 1 June of each year. This is done to maintain its value based on the changes in the cost of living. However, these debts aren’t indexed until they’re 11 months old. That means this will only happen if your debts are outstanding for 11 months or more.
Have Indexation Rates Changed?
Now that you know how indexation works and why it’s important for HELP Debt. Have these rates changed significantly in the past few years? Usually, they remain relatively unchanged. If anything, they’re prone to rise to reflect the increase in the cost of living.
However, in 2020, the CPI fell 1.9% in the June quarter. This was the largest fall in the 72-year history of this price index. This fall was due to the financial situation surrounding the COVID19 crisis, and CPI and interest rates are only expected to fall as the pandemic continues.
What does this mean for HELP debts? Because HELP indexing is based on the current CPI for each year, it’s possible that loan debts could fall. Though this would only be a minor shrinkage in student loan debts, this is an unusual situation all around. Only time will tell the long-term effects of the CPI change, but it’s likely to have an impact on all higher education loan balances.
How Do I Know How Much to Pay?
It’s easy to learn just how much you need to pay on your HELP loans each year. After you file your tax return, the ATO calculates your income for the year. This is when you’ll learn how much your compulsory repayment is based on the current income thresholds.
Remember that the income repayment threshold changes yearly. These changes are based on the current cost of living, inflation, and so on. The amount you paid previously might not be the same each year. Always check the ATO website for the latest information.
Student Loan Repayment Tips
Carrying debt is never fun, and it can take a large emotional toll on your wellbeing if you’re not careful. While student loans are a trustworthy way to afford higher education, it’s normal to wish to escape your loan repayment as soon as possible.
That being said, if you have existing debts or other loans to worry about, student loan repayment can be challenging. This is especially true when you factor in changing income thresholds, repayment percentages, and so on. Follow these best practices and tips below to stay on top of your HECS-HELP repayments.
1. Begin your repayments earlier
Though you don’t need to start repaying your HELP loan until you reach the income threshold (usually around $45,000 yearly in income), there is no reason you can’t begin repayment sooner than that. There’s no discount for paying early or paying more than the minimum.
You can automate these payments from your bank account, making your repayment as simple as possible. Remember, no amount is too small. Even if it’s only $25 a month, this is equal to $300 a year and will add up over time. By the time you do reach the repayment threshold, you’ll already have an impressive head start.
2. Keep an eye on your payments
Once you do qualify for your repayment under the income threshold, keep an eye on your payments. HELP repayments are taken out of your regular payslip through higher tax so we won’t need to pay them off by yourself.
If you find yourself unable to pay for any reason, don’t fret. Instead, take advantage of deferring your repayments.
If you can’t pay on time for any reason, you can apply to defer or amend your repayment. To do this, you need to prove that making these repayments will cause serious hardship (like if you lost your job or face unexpected problems), or that you’re currently the victim of a natural disaster, death, serious illness, or other difficult situation. To apply, visit the ATO website.
3. Create a plan for extra payments
While paying a percentage of your income each year is a good strategy, you can take things a step further by making your own plan for extra payments. Calculate how much you currently earn and find out when you would be able to take out extra money towards your HELP debt (maybe those slow months without holidays or birthdays?).
The average Australian student takes within 8 to 12 years to repay their loan, but that’s not a hard and fast rule. For example, if you have $10,000 in debt, you might wish to repay that debt in 7 years. This would take a payment of around $1,400 per year or $120 per month. Though optional, you could also put in some extra money or a bonus you get over the years towards a debt-free future faster.
4. Find a side hustle
If you’re unable to earn enough with your full-time job to afford your debt repayment plan, consider starting a side hustle. This could be anything you do in your extra time to earn a bit more money. From driving for rideshare to creating online downloads, all of these small tasks pay off in a big way.
Putting aside an extra $100 a month might not seem like a lot, but it’s a great stepping stone to more financial freedom in the future. Not only can this build your emergency fund, but it also prepares you to boost your earning potential no matter what challenges come your way.
5. Avoid other debt
Last but not least, the best way to manage your HELP loan repayment is to avoid taking on other types of debt you can’t afford. While there are key differences between good and bad debt, it’s best to avoid this altogether if you can. Racking up credit card balances, personal loans, and more only adds to the repayment stress.
Nobody wants to carry loans around long-term. While student loans are considered good debt, it could quickly spiral out of control if you continue taking on more than you can afford. Instead, consider creating a budget and looking for smart ways to make your money work for you not just today but into the future.
Understand the Role of Your HELP Debt
If you have HELP debt, odds are you have a few questions about indexing and repayment. Luckily, there isn’t much you need to worry about. Not only are indexing rates in the consumer’s favor, but this is unlikely to impact most people’s long-term repayment goals. Ultimately, it’s important to stay mindful of how much you owe as well as your repayment strategy.
Are you struggling with student loans or other types of debt? You don’t have to create a plan on your own. Debt Busters has over a decade of experience helping Aussies of all backgrounds manage their loans, repayments, and more. Connect with a member of our team on 1300 368 322 for expert and personalised help today.