No matter what generation you were born in, you’ve certainly heard the term ‘HECS’, ‘HELP’ or ‘HECS-HELP’. HECS is an incentive run by the government to allow people of all socio-economic backgrounds the ability to attend TAFE or University without paying fees upfront, instead paying them later once they start generating an income. It’s an amazing incentive and commonly referred to as one of the most generous student loan schemes in the world.
So how does HECS work?
Introduced originally in 1989 by the Hawke government, the first iteration of HECS charged students $1800 upfront with the rest to be paid once their salary exceeded a threshold level. Later in 1996, the Howard government switched HECS to a three-tiered system, charging fees on the basis of the perceived value of courses.
In it’s third reincarnation, HECS debts post-2005 were officially called HECS-HELP. HECS-HELP loans are different in the sense that the loan amount is paid directly to the University on behalf of the student, by the government.
After 2007, HECS became known as Commonwealth Supported Places (CSP) which allowed 7 years full-time (16 years part-time) at CSP rates. These were known as student learning entitlements (SLE) and after that period lapsed, the student had to either take a post-grad FEE-HELP load or study at full-fee rates.
From 2012, SLE’s were abolished and students are now able to study more than 7 years full-time, or equivalent part-time and still receive HECS-HELP. From 1 July 2018, the income level at which HECS-HELP repayments start has been reduced from $55,000 to $42,000.
An advantage of HECS in previous years was the upfront payment discount. When HECS was first introduced there was a 15% discount for paying upfront. That increased to 25% in 1993, was reduced to 20% in 2005, reduced again to 10% in 2012 and completely abolished in 2017.
Along with the upfront payment was the voluntary repayment bonus where the government would match a percentage of your loan. In 1995 it was 15% for $500 or more contributed, that was reduced to 10% in 2005, to 5% in 2012 and completely abolished in 2017.
Together with HECS, SA-HELP allows students to defer their student services and amenities fees onto their HECS/HELP loan. It makes sense to apply for both if you’re going to go down the HECS debt repayment route.
For simplicity, i’ll be referring to HECS-HELP as it’s more commonly known name, HECS, throughout this post.
How to apply for HECS Debt Repayment?
Your TAFE or University should provide you a Request for Commonwealth Support and HECS-HELP form either in-person or online. You will need to fill in the forms and submit your Tax File Number (TFN) before your University’s census or administrative date. It’s worth noting that you have 6 weeks from the census date of your course to correct your information if you realise you’ve got any errors.
Once those forms are submitted and you’re approved, it’s all smooth sailing from there. All payments will be deferred until you’re eligible to pay them.
How to check HECS debt balance?
You have three options to check your HECS debt;
- Contact the ATO on 13 28 61, you’ll need to provide your TFN to them so make sure you’ve got it on hand before you ring them up.
- Through the MyGov website, you’ll first need to link your account to the ATO and then you’ll see your debts appear under the ‘Loan Accounts’ tab.
- On the MyUniAssist website, you’ll need your CHESSN number which your Uni can provide. Note: MyUniAssist doesn’t update as your HELP debt is paid off.
When do I need to pay off my HECS?
HECS repayment is based on an income threshold system. Your repayment rates are proportionate to your income and the more you earn, the more of the debt you pay off per year.
On 1st July, 2018 the income threshold will be reduced to $42,000 and the following table reflects that change.
|Repayment Rate||Income Threshold||Yearly Payment on $30k Debt|
Should I Pay off my HECS early?
Now that you have a good understanding of the history of HECS, how to check your balance and know how much you’ll need to repay each year.. it’s time to talk about paying your HECS debt off early. It’s a common question and one that I can understand. It’s empowering to be in control of your debt and be debt-free and with the rising debt levels individuals and households have these days, it’s only natural to want to pay it off ASAP.
Here’s why it’s a bad idea.
Remember earlier when I said that HECS debt is commonly referred to as one of the most generous loans in the world? There’s good reason for that. HECS is an interest-free, inflation-adjusted loan, meaning that it’ll only increase an average of 2.5% a year to adjust for inflation. Compared to the average credit card interest rate in Australia which is 16.92% you can see why an interest-free loan is so appealing.
As you can see from the previous table, it’s also a very fair loan, starting off as a minimal repayment whilst you’re on a lower salary and slowly increasing with each pay rise.
If we assume a historical rate of inflation of 2.5% and we factor in that certain banks, such as RAMS, are offering savings interest rates of 3.00% you can straight away see that you’re going to be better off by at least 0.50% by just chucking that money in the bank instead of paying off your HECS debt.
Now whilst interest is a guaranteed return, if we were to take on more risk and invest that money in a Vanguard Australian Shares Fund that has returned 8.27% after fees over the last 20 years, you’ll have (8.27-2.5%) 5.77% more than you would have if you paid off the debt early.
Note: If you’re going to invest into ETFs, ensure you’re using a broker with low brokerage fees.
Furthermore, in the event of an emergency, any money invested into the stock market or other investments can be withdrawn, whereas money paid to HECS is gone forever.
|Year||Time to pay off HECS debt on $66,941 (5%)||$30k Invested in Bank Account @ 3.00% - 2.50% Inflation (0.50%)||$30k Invested in Index Fund @ 8.27% - 2.50% Inflation (5.77%)|
As we can see from the table above, by paying your HECS debt off upfront, you would cost yourself $1,534 if you kept the money in a bank account giving a 3% savings rate, or $22,571 if you get a 5.77% return in an index fund after inflation.
Some people like to pay their debt off ASAP for peace of mind purposes. However, if you plan to invest that money wisely, you’ll be far better off financially than if you were to pay off the debt early, especially given that there’s no longer a discount for paying off the debt upfront.