In Australia, there is a Federal Government run education support scheme commonly known as HECS with a full title of the “Higher Education Contribution Scheme”. Over the last couple of years there has been a growing concern about HECS and the ability of graduates to pay off the loan associated with the scheme.
This is part of the Higher Education Loan Program known as HELP.
Conditions of Application
To get a HECS-HELP loan there are a number of conditions to be met including, but not limited to:
- Being an Australian citizen or a New Zealand Special Category Visa holder or a few other visa types.
- Having enough balance on your HELP loan.
- Being enrolled with an education provider that is part of the scheme.
- Meeting the completion rates.
How Does It Work?
On meeting the conditions of application, the Government will lend the student the funds to pay for the course they are taking. Repayments only start when the applicant reaches an agreed earnings threshold. When repayments start, the borrower can pay into the fund via their payroll system. It’s a great way for students to be able to learn and to get a career in their chosen field – long gone are the days when the Government simply funded the courses!
What Could Possibly Go Wrong?
The first concern is that – unlike other loans – there is annual indexation applied, although the debt is technically interest free. Next, the repayments only start when the borrower reaches the agreed earnings amount, so what happens if they struggle to get a job that covers the debt? Well, that means that the debt simply rises each year! On the 1st of June, the outstanding amount is indexed, which means that a prevailing CPI rate is applied to the balance, which last year (2023) was 7.1% and is expected to be 4.8% this year. So even though the loan is “interest free” it still rises if the borrower is not careful.
How to Pay Off the Loan?
There are two ways – compulsory and voluntary payments are available. The compulsory payments are lump sums that are part of a tax return and the voluntary payments can be made at anytime. Now, the timing of the compulsory payment is key – the indexation occurs in June and the payment is made any time in the new financial year starting in July, at least one month later. That timing means that the balance has risen before the payment has been made, so the balance will not reduce as much as expected!
Good Debt v Bad Debt
In my view, a HECS balance is bad debt. Why? Because having a HECS debt hinders your ability to borrow for a home loan, yet a personal loan doesn’t – which makes it good debt. This is because the HECS debt is connected to your earnings and not your discretionary spending. So in effect, a lender will reduce the income when doing their servicing calculations.
Financial Strategy
It is important to consider a future financial plan if you have a HECS debt. Is it worth paying it off quickly? Or using a debt consolidation strategy that coverts it to a similar length personal loan? If the plan is to buy a home to live in, this is a very real decision to make, based on the amount of finance needed to make the purchase.
Madison Wells Pty Ltd Can Help!
Through our finance arm, Astute St Leonards, we can crunch the numbers and even introduce you to a financial advisor if needed. We are focused on helping you find the right property at the right price and at the right time!
