The good and bad news on Australian student loans

There is some good news and some bad news for the three million former university students with a HECS/HELP debt.

The good news is that repayments will still be calculated from your income so you are unlikely to notice any cash flow difference unless your income has risen.

The bad news is that the high inflation rates from the past year are now going to be used to index the size of your loan, which will now rise by 7.1% on 1 July.

That means that while repayments won’t change, it will take longer than expected to clear the debt than before the inflationary surge which also boosted the cost of living dramatically.

Student loans normally the cheapest

In general terms, HECS/HELP debts are thought to be some of the cheapest and easiest to service loans around, given that inflation generally rises more slowly than wages over time.

That changes a little when you get a sudden “pop” of inflation like Australia and the rest of the world saw after the COVID stimulus programs and era of money printing finally had the usual effect of devaluing money by reducing purchasing power.

While there has been a fair bit of misinformation about the jump in student loans from 1 July, there is still an opportunity for those with some extra savings to reduce their outstanding debt level before the indexing happens.

Of course, that won’t apply to many people with no savings who instead face the reality of paying back their student debt over a longer period so that they can clear the larger amount.

HECS-HELP loans are quite unusual because they do not charge interest and instead have been indexed to inflation since 2018.

Rates have been as low as 0.6%

With mostly low inflation since then, the annual increase in loans has been between 0.6% and 1.9% but rose to 3.9% in 2022 as inflation began rising.

Now that inflation is falling, the increase this year is likely to be the highest for some time, which is why it provides a better than usual time to reduce the amount of the loan outstanding.

As usual, the calculation of whether to make an extra debt reduction payment before 1 July depends very much on individual circumstances, with plenty of other potential destinations for those savings such as an interest-bearing deposit, extra super contributions, the First Home Super Saver (FHSS) scheme, or a property deposit.

An added thing to note about repaying student debt in Australia is that it is a one-way street – once an amount is repaid it cannot be redrawn.

When repayments kick in

For those who don’t have the option of paying down their debt, the 2022-2023 HECS-HELP repayments kick in for Australians earning at least $48,361, rising from 1% of your income to 10% if your income is above $141,848.

Hopefully, this year will be a bit of an inflationary outlier for indexing HECS/HELP debts and they will go back to rising well below interest rates in future years, although predicting future inflation rates is always difficult.

For those with student debts that don’t have the means to pay down any of their outstanding loan before it is indexed upwards, the good news is that over the long term their loan is probably still going to be significantly cheaper than if it had been a conventional interest-bearing loan.

Plus, the cost of undergoing their university education is likely to have risen – perhaps substantially – since they completed their course and their income is also likely to be higher due to their tertiary studies.

So don’t entirely swallow the rhetoric that this year’s loan indexation is a massive financial hit.

It might be annoying and frustrating but over time the loan will still reduce, with a chance of once again becoming cheaper than a conventional interest-bearing loan if inflation returns to more normal numbers.