How To Avoid Indexation on HECS

With HECS-HELP debts set to rise by more than 4.7% due to indexation this year (2024-25), many university students are feeling the pressure to avoid growing their debt unnecessarily. While it’s lower than last year’s 7.1%, the upcoming indexation on June 1 could still add a lot to your student loan. After such a big increase in 2023, people want to clear their HECS debt fast, and who can blame them?

But the good news is that if you make a voluntary payment on your loan before June 1, you can reduce or completely avoid indexation. Making voluntary payments before the indexation date is one of the best ways to pay down your debt more quickly whilst saving money! 

Even the Australian Taxation Office (ATO) suggests making voluntary payments by May 27 so that they’re processed before indexation kicks in. Read on for more about how to avoid indexation and whether making extra repayments is right for you.

Australian students under the Higher Education Contribution Scheme (HECS) need to start paying their HELP debt off through their taxes if they earn over $51,550 a year. As the amount you pay depends on your area of study, all courses are divided into different pricing bands. 

For example, a full-time nursing or education student in 2024 might pay around $4,445 per year. Meanwhile, law students are at the higher end, paying up to $16,323 annually. So, first see how much you owe, by using our HECS-HELP Calculator. 

With more Australians choosing to get a degree, over 3 million people now owe money through HELP loans, with the total debt sitting at more than $74 billion. Instead of paying it slowly, our guide offers a better solution that can help you avoid indexation, so let’s get into it:

So, why is avoiding indexation so important? That’s because indexation adjusts the amount you owe (in this case HECS debt), based on changes in the cost of living (in this case, CPI value). So, if the cost of living increases, the balance of your HECS loan will also increase. To know how CPI and indexation work together, check out this detailed guide on HECS indexation and see how it affects your balance.

In February 2024, the Australian Universities Accord Final Report suggested some possible changes to how HELP loans are indexed. They might link it to lower figures between CPI and wage prices. But any changes from this report could take years to start. Also, it’s hard to predict how much indexation will rise in the future. Take a look at how it has been changing:

However, we do know that it will keep going up. Therefore, the best move is to pay off your debt early to avoid these extra costs from indexation.

HECS-HELP debt can be repaid before indexation if it’s paid through a method called a ‘voluntary payment method‘. A lot of people do not realise there are, in fact, two methods to pay off your HECS HELP debt. One method is the compulsory payment method which is the easy and automatic way but here’s why it is not the best.

If you have a HECS debt of $10,000 and you’ve paid $6,000 in compulsory repayments, you might think you only owe $4,000. However, the original $10,000 will still be affected by indexation. So, if the indexation rate is 4.7%, your debt will increase by $470. Here’s how you can use other ways to avoid indexations:

1. Make Voluntary Payments The Right Way (Best Way)

Unlike compulsory payments, voluntary payments reduce your debt right away. If you pay your whole HECS debt amount before June 1, it will lower your balance immediately. However, this only helps if you pay off your entire debt before June 1. If you only pay off half of it and still owe money by June 1, indexation will be added to the remaining amount. You can make voluntary payments anytime through the MyGov portal.

2. Withhold Tax to Pay Off HECS Faster

People who don’t have savings or can not make voluntary payments can ask their employer to withhold more tax than required from their paycheck. Normally, your employer takes out a set amount of tax based on your income to cover your HECS-HELP repayments. But you can ask them to take out extra tax, and this extra amount will go straight toward your HECS-HELP debt.

Think of this like paying extra on a loan. This will save you from larger increases at the end of each year because of inflation. 

3. Using Salary Sacrifice

Australians may have heard of salary sacrificing for superannuation, but did you know you can use it to pay off your HECS-HELP debt as well? Salary sacrifice means you agree with your employer to lower your salary in exchange for extra benefits (like putting a portion of your salary on your HECS debt). This helps you pay off your student loan faster and lowers your tax bill since you earn less on paper.

4. Save Money to Deal with Indexation

Another way to manage your debt is by using a high-interest savings account to save money before indexation hits. Instead of letting your employer take out the compulsory HECS payments, you can ask them to skip it. 

Then, when you get paid, put that money into a high-interest savings account. After a year on June 1, when indexation applies, you’ll only feel a small difference in what you owe. 

For example, if over the year, the money earns interest (let’s say 5.5%), and when indexation happens (usually around 7%), you’ll only feel the difference between the two (about 1.5%).

See these pros and cons to decide if you should pay HECS debt all at once or not:

Pros & Cond