How to Make the Most of those HECS Billions

One of the biggest promises of the last election – to slash 20% off all HELP/HECS student loans – has passed the Senate and is on the way to being backdated to before June 1.

That is a massive relief for the approximately three million people who will have their student debt reduced by an average of $5,500, with total debts to fall by $20 billion.

There’s more great news—because the debt reduction has been backdated to before the indexation is applied, the loan increase due to indexation will also be smaller than anticipated.

Other Positive Changes

The way the indexation is worked out has also changed so that it will now be based on the lower of the wage price index (WPI) or the consumer price index (CPI).

That is a marked difference to the 2023 indexation, which reached a significant 7.1% due to the spike in inflation and will instead be 3.2%.

There has also been a change in how and when student loans are repaid.

The income threshold at which you are required to start having debt repayments taken out of your pay has risen from $54,435 a year to $67,000.

This is both good news and potentially bad news—you keep more money in your pocket for now because of smaller repayments but will potentially have your student debt and indexation payments for longer, increasing the total paid back over the life of the loan.

Dealing with a Windfall is Important

So, how should you treat such a windfall, given that the whole idea of the change is to allow those with (HELP/HECS) debts to increase their borrowing power and potentially work towards home ownership earlier?

That is the $20 billion question.

Well, the first and most obvious way is to ramp up savings for buying a first home and look to increase your creditworthiness as much as possible.

The changes in themselves are a big confidence boost but they are unlikely to increase borrowing power dramatically, depending on how your potential lender treats student debt.

If you are saving towards a property purchase it might be worth seeing a mortgage broker who is well placed to find an appropriate loan provider and who can offer the most suitable loan.

There may be some lenders who “look through” the student debt and don’t include it in their loan calculations, particularly if the student loan is getting close to being paid off.

Home Ownership Investment Alternatives

What if buying a property is the last thing on your mind, as is the case for a large number of younger people who may prefer to remain flexible about travel and perhaps living overseas?

Well, the good news is that these changes are no less significant for you, delivering you the chance to launch into a short or long term investment strategy using the extra cash flow and lower repayments.

Even if a property purchase is not on your immediate horizon, there are still smart ways to make the most of these changes.

For the short term, building up an emergency fund and some savings in a high interest savings account are both worthwhile ideas.

Paying down any credit card or other high interest debts is also an obvious first step and it may even be worth considering clearing your HECS/HELP debt faster which will further increase free cash flow down the line.

Debt-Swapping Possibilities

For those who are in a more financially adventurous position, there is merit in swapping “bad debt” for “good debt”, in this case student debt for investment debt.

While HECS/HELP loans are traditionally viewed as fairly cheap debt because of the way they are repaid, replacing the forgiven student debt with an investment loan such as a margin loan on shares or buying a lightly geared ETF can increase your asset base and potentially make interest costs tax deductible.

Those investments can also be property based – there are plenty of direct Real Estate Investment Trusts (REITS) listed on the ASX and also some more diversified ETF’s that contain a range of those REITS.

Whatever, you do, making good use of a windfall is a really important part of your financial education.

Usually, we only get a few windfalls during our lives and making full use of them as long-term investments and improving your financial foundations rather than frittering them away on lifestyle creep or consumer goods is a goal worth pursuing.