For many Australians, HECS-HELP debt is a reality of higher education. While it allows students to study now and repay later, many professionals wonder whether they should prioritise paying off their HECS debt or focus on building investments.
With HECS indexation currently at 4% in 2024, property and investment markets presenting opportunities, and home ownership being a key goal for many, it’s an important financial decision. Here’s what you need to consider.
Understanding HECS-HELP debt
HECS-HELP is an Australian government loan that helps students pay for their tertiary education. Unlike traditional debt, it does not accrue interest, but it is indexed to inflation each year on 1 June. In the May 2024 Budget, the government announced that HECS indexation would be based on the lower of the Consumer Price Index (CPI) or the Wage Price Index (WPI), reducing the impact of inflation on HECS debt. As a result, HECS indexation was applied at 3.2% in 2023 and 4% in 2024.
Repayments are made through the tax system once your income exceeds the minimum repayment threshold (currently $51,550 for 2023-24). The more you earn, the higher the percentage of your income that goes towards repaying your HECS.
The case for paying down HECS early
Paying off HECS debt early might make sense in some circumstances. Here’s why:
- You avoid inflation-driven increases – Although indexation rates are relatively low compared to historical highs, they still apply to outstanding balances. Paying off HECS early can prevent further indexation costs.
- Peace of mind – Some people prefer being debt-free and find psychological relief in clearing liabilities, even if it’s not the most financially optimal choice.
- Freeing up future cash flow – Paying off HECS early can mean fewer automatic deductions from your salary later, giving you more take-home pay in future years.
- Career breaks or moving overseas – If you plan to take time off work or move abroad, you may want to clear HECS before your income drops or before overseas repayment obligations apply.
- Improving borrowing capacity – Lenders consider HECS repayments when assessing your mortgage eligibility. Reducing or clearing your HECS balance may increase the amount you can borrow for a home loan.
However, HECS remains a relatively low-cost debt compared to other financial obligations, making early repayment less urgent than before.
The case for investing instead
Investing surplus funds instead of paying down HECS could lead to greater long-term financial growth. Here’s why:
- Investment returns may outpace HECS indexation – With HECS indexation currently at 4%, the Australian share market has historically returned around 7-10% per year on average, making investing a compelling alternative.
- Tax benefits from investing – Investing in assets like shares, property, or superannuation may provide tax advantages that voluntary HECS repayments do not.
- Superannuation strategies – Making additional contributions to super can be highly tax-effective, particularly for higher-income earners who can benefit from concessional contribution limits.
- Liquidity and financial flexibility – Investing surplus funds gives you more control over your money. HECS is automatically deducted from your salary based on income, so paying it down voluntarily may not always be the best use of extra cash.
- Building a property deposit – If buying a home is a priority, directing funds toward a property deposit instead of HECS repayments may improve your loan approval chances and home-buying timeline.
Given the current HECS indexation, the case for investing over paying HECS early is stronger for those looking to maximise returns and build wealth.
Considering a mortgage or loan
Another factor to consider is how HECS debt impacts your ability to secure a home loan or other financing. Lenders take HECS repayments into account when assessing your borrowing power because it reduces your disposable income. This can affect your loan eligibility, as a higher HECS balance may reduce your borrowing capacity, especially if you’re looking to buy property. Lenders also assess your total financial commitments, including HECS, before approving a mortgage, which can impact your loan servicing ability.
Additionally, there is a trade-off between paying down HECS or saving for a deposit. Given current indexation, saving for a home deposit may be a more strategic financial move than paying off HECS early. If buying property is a goal, it’s important to weigh up the impact of your HECS debt and get professional advice on structuring your finances for the best loan terms.
Who should prioritise HECS repayments?
The decision to pay down HECS early depends on your financial position and goals. If you are planning a career break, maternity leave, or a move overseas, paying off HECS early may be beneficial. Similarly, if you have already built strong investments and want to clear debt for peace of mind, or if you are close to finishing repayments and want to eliminate salary deductions sooner, prioritising HECS repayments could be the right choice. Additionally, if improving your borrowing capacity to secure a mortgage or other loan is a priority, reducing HECS debt may be advantageous.
On the other hand, investing may be the better option if you have strong investment opportunities available or if you are in a high-income bracket where HECS will be repaid quickly regardless. Those looking to maximise tax-effective strategies, such as super contributions or property investments, may find investing more beneficial. Additionally, individuals who value liquidity and financial flexibility or are saving for a home deposit and need to prioritise loan eligibility may choose investing over early HECS repayments.
Given the current indexation, the balance is now tilted further towards investing as a more effective wealth-building strategy.
A strategic approach
The best approach often involves balancing both priorities. Here’s how to make an informed decision:
- Assess your financial position – Understand your current debts, cash flow, and investment opportunities.
- Consider tax implications – Weigh up the benefits of voluntary HECS repayments against tax-effective investing.
- Monitor inflation and government policy changes – HECS indexation rates will continue to fluctuate, so staying informed is crucial.
- Evaluate borrowing goals – If home ownership is a priority, consider how your HECS debt affects your mortgage eligibility and loan application process.
Deciding whether to pay off HECS debt early or invest instead isn’t straightforward — it depends on your personal financial situation. With HECS indexation currently at 4%, paying off HECS early is now less urgent, making investing and wealth-building a stronger priority for many Australians.
If you’re unsure what’s best for you, speaking with a financial adviser can help you develop a tailored financial strategy that maximises your wealth-building potential. We can help you determine the most strategic approach based on your income, financial goals, and risk appetite. Get in touch with our team of financial advisers today to discuss your options and make informed financial decisions that work for you.
Parker is passionate about helping clients kick their financial goals and live a great life. Read his full bio here.
