The good and the bad of HECS debt

November 15th 2019 | Categories: Debt Management |

According to research by Goldman Sachs, the Millenial Generation are our digital natives. They are social and connected with new technology. They also have less money to spend, are encumbered with debt, and have different priorities.

One of the debt challenges many Millenials face is a Higher Education Contribution Scheme (HECS) debt. As this article shows, it can creep up on you if you don’t keep track. It can also provide a pathway to the career of your dreams.

Here we explore the good and bad. Madi Plummer is a Marketing specialist with Invest Blue, and she shares with us her experience with study, the value of the outcome, and the lesser-known side of HECS debt.

Why a HECS Debt?

Starting university in Australia is an exciting and prosperous time. You’ve decided on a career path and are ready to follow your passion! This is, even though you may realise your true calling three degrees later.

The best part is the Australian government provides financial support through the Commonwealth so you can start your studies without any financial outlay. That’s right you don’t have to pay anything upfront, you don’t even pay interest! “Just sign at the dotted line here. You have a cooling-off period at the start of each semester” Great right! and away I signed.

Without this privilege, going to university would be off the cards for many as they simply couldn’t afford it. That would have a drastic impact on the development of Australia. I would not be in this position today and I certainly wouldn’t be writing this article if it wasn’t for my HECS loan so don’t get me wrong, for that I am truly grateful. However, I do wish I was given more information on my debt upon leaving university, and even better than that, a guide on how to manage my debt.

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The Truths & Myths of HECS Debt

To enlighten and delight you here are some things I’ve heard about HECS debt over the past few years:

• You don’t pay for it if you don’t end up working in that industry (wrong)
• You don’t pay for it if you don’t meet the threshold (wrong)
• Your debt doesn’t have any impact on applying for a home loan (wrong)
• There is no interest on your HECS debt (correct)
• Your debt dies with you (correct)
• HECs debt is good debt (correct)

As true, false and laughable as some of these statements may be, this is all I heard. Even researching prior to writing this article, I was shocked to find little information on HECS debt after the sign-up stage.

Hindsight and HECS

Now here are some things I now know that I wish I knew earlier:

• CPI (Consumer Price Index) Indexation is applied to your debt to maintain its real value by adjusting it in line with changes in the cost of living, for this year this was 1.9% (that’s more than the current home loan rate!).
• That CPI may sound like nothing major, but it adds up fast!
• There is 25% loan fee for students who took on study prior to January 1st 2019.
• If you don’t meet the income threshold at the end of a financial year, any payments you have made that year are returned to you in your tax return. Have you ever wondered why one of your tax returns was larger than expected? If I had known this I would have returned my tax return as a voluntary payment towards my HECS as opposed to using it elsewhere.
• You can check your HECS debt on my Gov.
• Payments taken from your salary are only paid at tax time each year. So, don’t bother checking yearly progress until after tax time!

Now the second last dot point may seem to be the most obvious one of all, however we all know how much we paid for our course, and there’s no interest, so why would we think to check how much we owe unless we thought we had a killer year paying it off?

When I did go in and check my HECS debt, the last thing I expected to see was that it had increased by over $10,000 in the five years I had been out of university as a result of CPI and a 25% loan fee, This, I was none the wiser to.

Folly or Fair?

You may be reading this thinking I am foolish for not doing enough research after University, however, the truth is, most won’t. My friends and I were under the assumption that if we tick the box declaring we had HECS debt on our Tax File Number (TFN) Declaration Form and could see the HECS payments coming out of our pay, we were by all means on the right track. We were being responsible about our debt and were free to carry on pursuing our career.

You may also be thinking “well obviously you haven’t reached the threshold so think about getting a higher paid job!” This, however, isn’t the case for myself or my friends at all. Remember most people leave university in their twenties a time where travelling, self-discovery and potential career change is at an all-time high, not to mention you may be part-time employed, trying to raise a family or looking after loved ones. There is never a one size fits all policy when it comes to finances.

Talk about HECS

I personally don’t believe anyone is to blame, I do however strongly believe more attention around Consumer Price Index (CPI) needs to be raised. With repayments deductions starting at only 1% and an unmeasurable figure placed on CPI, often sitting above 1.8%, how are some meant to keep on top of the debt? Is there a point in which it will stop increasing?

Take for example a HECS debt of $25,000. This year the recipient will have been charged a CPI rate of 1.8% equalling to $450, which doesn’t seem like a lot, however without payments over five years, and compounding CPI, this HECS loan could be as high as $27,332 (assuming CPI of 1.8% across the five years). For those with HECS loans over $50,000, that is not uncommon these days, you will be looking at CPI upwards of $900 a year.

I encourage those of you with a HECS debt to please to check it. Share this information with your friends with a HECS debt, as I can guarantee you there will be some surprises. This is a grey area that more people need to be aware of, so please share the message!

Do you want to know how to keep on top of student debt? Are you ready to start a conversation? Tune in to the next blog post of this series where I raise the issue with one of our financial planners to discuss their tips and advice on how to best manage and pay off your student debt.

Are you looking to achieve financial security? Contact us or book an appointment with an adviser to talk through your dreams and goals for the future and how to map out your best possible life. The first appointment is complimentary. You can check out our process here.

Financial Advice is only a phone call away. Set yourself on a path to financial freedom. Contact us or ask us a question today.

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What you need to know

This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.