HECS/HELP debt is a commonly discussed topic in today’s climate with rising costs of living, raising the question, should you make only the compulsory repayments to your HECS debt or should you make additional voluntary repayments.
It is common that many only make the compulsory repayments, but with recent increases in HECS repayments due to CPI, not interest, some are asking the question where they should direct their earnings to.
Commonly understood, no interest is charged on the loan, however it is indexed by CPI. Which theoretically, functions similar to interest being added. As CPI has jumped, indexation applied to loans was 7.1 per cent in the recent financial year.
The 7.1 per cent indexation came as a shock to many Australians, and it meant that unless you were earning more than $112,985 your loan was increasing even after your compulsory repayments had been made.
As everyone’s financial situation is different, there is no certain yes or no as to whether it is more beneficial to pay off your HECS with voluntary repayments.
A couple of things to note if paying down your loan include your plans:
- There is no redraw function for HECS repayments, what this means is, once you have made payment, you cannot redraw funds paid to the loan. If you did need to have available funds for your day to day living, other personal loans, rent, mortgage, the lack of redraw function may be a hindrance.
- The CPI is applied as of the First of June each year, what this means is making fortnightly voluntary payments from July to April would make little difference in comparison to a large once off deposit at the start of May, allowing your money to work for you and generate interest throughout the year while lowing the amount subject to CPI
On a positive note, the CPI is looking to decrease in the coming year, meaning a smaller hit to HECS debt amounts.
Did you know, if you have a HECS debt and no other expenses such as rent, mortgage, personal loans or credit cards, you can claim this against the living expense cap?
To find out more, contacy your friendly Client Experience Officer to learn more.
