The looming financial new year heralds an unwelcome extra cost for thousands of people who currently have HECS-HELP debts. This is because every unpaid debt is going to automatically increase when it’s indexed on June 1. In previous years, the HECS indexation rate was relatively modest.

But thanks to soaring inflation, this year’s indexation rate is set to hit more than 3 million Australians hard. Here’s what you need to know.

2023 indexation rate soars

Unlike most forms of debt, study and training loans like HECS-HELP debt don’t attract an interest rate. Instead, an indexation rate is applied to loan debt every year which considers inflation and changes in the cost of living. An indexation rate of 7.1% will be applied to HECS-HELP debt and other study and training loan balances from June 1, 2023.

What is indexation?

Indexation means that the price of something is changed in correspondence with an external factor. In this case, the price of something is your student debt and the external factor is the Consumer Price Index (CPI). Each year your student loans increase based off the CPI percentage — which is a set of figures released by the Australian Bureau of Statistics (ABS) every three months to track the cost of living.

The result is that, from June 1, most Australians with an outstanding student loan debt will see their balances shoot up by hundreds or even thousands of dollars if the indexation rate does come in at 7.1%. For example:

  • a $10,000 loan balance would increase by $710
  • a $25,000 loan balance would increase by $1775
  • a $50,000 loan balance would increase by $3550

It’s worth bearing in mind that the indexation rate applied to the loan balance, and the repayment rate by which someone will have to pay it back through compulsory contributions, are two different things though. Repayment rates are determined by income, starting at 1% for lower income earners and steadily rising to 10% for those on higher incomes.

How can I pay off my HECS-HELP debt? There are two ways:

  • Voluntary
  • Compulsory

Voluntary payments can be made at any time through the myGov portal. Click here to find out more: If you voluntarily pay off you whole loan, you will avoid indexation only if the entire loan debt is paid off. Indexation will still apply to outstanding amounts still owing by June 1.

Technically the cut off date for repayments is May 31 — this coming Wednesday but the ATO has anyone opting to make a voluntary payment should make payments before the cut-off date to make sure you avoid extra indexation because of how long it can take for the payment to be processed.

Compulsory payments are taken from your wages once you earn over the $48,361 threshold. These payments aren’t deducted from your overall debt until after you’ve submitted your tax return.

What happens to compulsory payments if you pay off the whole loan?

Compulsory loan payments are garnished from your salary and held by your employer. When you lodge your tax return, the gathered monies are applied to your loan balance and your debt reduces. If you are in the fortunate position to be able to pay off your entire debt before tax time then don’t worry, you will get most of if not all of your compulsory payments back, according to the ATO.

“If an individual pays their loan account in full prior to lodging their tax return, their compulsory repayment will be nil, and as part of the normal Tax Return processes, any balance of PAYG amounts remaining, after applying against the tax and other assessment liabilities, is refunded,” an ATO spokesperson told ABC News recently.

HECS-HELP debt – Impact on Borrowers

Home buyers who are saving for a deposit are asking whether they should pay down HECS to save on the indexation cost and questioning how that will impact their finance for their future purchase.

HECS impacts finance in multiple ways. The best way to proceed is very much a case-by-case basis.

Borrowing capacity

Banks include HECS as a commitment, generally calculated at the ATO threshold rate as a percentage of income – which is tiered and varies from nil for low-income earners (up to $48,360) to 10% for those over $141,848, e.g. someone on $60,000 would have a commitment of $1,500pa (2.50% of income) included in their loan servicing calculation.

Banks generally allow a maximum debt to income (DTI) ratio of six times. If HECS is included in the debt, it could take a borrower over the threshold.

Available deposit

HECS is generally highest for younger borrowers trying to get into the market and that’s the time when building a 20% deposit is the main challenge for them. Clearing HECS debt is often simply not an option as it would deplete their hard-earned deposit and potentially put them into lenders mortgage insurance (LMI) territory, which erodes any savings from paying out HECS.

How can we help?

If you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email –  or arrange a time for a meeting so we can discuss your requirements in more detail.

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