With rising inflation and increased cost of living many people are looking to save money where possible. Those who attended university have been left wondering Why Is My HECS Debt Not Going Down?
What is HECS Debt?
To understand why your HECS debt isn’t going down we first need to understand what is HECS Debt.
In Australia, HECS (Higher Education Contribution Scheme) debt is a system that allows students to defer the cost of their university education and repay it later through the tax system once they start earning a certain income threshold.
It helps make higher education accessible to a broader population by removing the upfront financial burden of tuition fees. The income threshold can vary between each financial year and is influenced by something known as inflation.
Let’s explore the many reasons why someone may have difficulties paying down their HECS debt.
Accumulation of HECS Debt
HECS debt accumulates as students enroll in higher education courses. Each course they undertake incurs a debt based on the cost of that course.
As students complete more courses and advance in their academic pursuits, their HECS debt increases accordingly. The debt continues to accumulate until it is paid off through income-based repayments.
Low Income and HECS Repayments
Income plays a pivotal role in HECS debt repayment. Graduates are only required to start repaying their HECS debt when their income surpasses a specific threshold, which is adjusted annually.
Below this threshold, repayments are not mandatory. The amount graduates repay is also income-dependent, with higher earners repaying a larger percentage of their income.
As a result, individuals with lower incomes may find it challenging to make significant progress in reducing their HECS debt, especially if their earnings remain consistently below the repayment threshold.
Impact of Part-time Work or Unemployment
Part-time employment or periods of unemployment can further hinder debt reduction. When individuals earn below the threshold or are unemployed, they are not making repayments on their HECS debt.
During these times, the debt may continue to grow due to indexation, even if it’s not increasing dramatically. This can lead to the perception of stagnant HECS debt, as it remains largely unchanged during periods of low or no income.
Taxation and HECS Debt
HECS debt is typically repaid through the Australian tax system. Employers withhold the required HECS repayments from employees’ paychecks once their income exceeds the repayment threshold. These withheld amounts are then remitted to the ATO by employers.
Graduates with stubborn HECS debt can benefit from actively seeking higher-paying job opportunities. A higher income not only accelerates HECS debt repayment but also provides financial stability and the ability to meet other financial goals.
Career advancement and negotiation for higher salaries can significantly impact HECS debt reduction. Graduates should proactively seek opportunities for professional development, skill enhancement, and promotions.
When you first graduate from university experience is key for many of us. So once you have that experience you should look to showcase your skills and talents for higher remuneration.
Additionally, mastering the art of salary negotiation during job changes or annual reviews can result in increased income, facilitating more substantial HECS repayments. There are definitely right and wrong ways of negotiating!
Indexation on HECS Debt
One pressing issue facing many individuals in Australia is that their HECS debt isn’t decreasing as expected, even as they enter the workforce and earn an income.
This unexpected stagnation of HECS debt creates financial stress and hinders long-term financial planning for graduates. One factor which has been discussed heavily is that of indexation.
As discussed in my Comprehensive Guide: HECS Debt, HECS debt is indexed. The government implements indexation on June 1st each year, using the Consumer Price Index (CPI) figure released in March.
This gained national attention in Australia as the rate of indexation was set at 7.1%. This meant that many people with significant HECS debts were either not paying down any debt or minimal at best.
An example I use in my Comprehensive Guide: HECS Debt, is a $50,000 HECS-HELP debt balance on June 1, 2023, the government would have applied an indexation rate of 7.1%.
This would result in your new debt balance increasing to $53,550, reflecting a $3,550 increase.
HECS Debt is a natural byproduct for many of us who have attended University. Without it, we would not have been able to attend University as we lacked the financial means to do so.
The HECS debt system allows everyday Australians an opportunity to receive tertiary education. From a Government standpoint, they only seek to preserve the value of the money they lent at the time of that study.
That’s why the HECS debt is indexed and not charged interest. Through the use of indexation, the Government essentially ensures that the debt you incurred 5 years ago is equal to the same amount today with changes in inflation.
That’s why for many of us who have debt, the latest 7.1% indexation came as a shock. However, over the past decade, which included the 2023, 7.1% indexation, the average indexation was just 2.44%.
So with all of this in mind, hopefully, you have a clearer picture of why your HECS debt has shifted in recent times!