What Happens If I Never Pay My HECS Debt

After Graduating, as Australians, we all have wondered what happens if we never pay our HECS debt. Managing this financial obligation is a burden especially since you just started earning a decent amount. As soon as you start earning $51,550 annually, you get to face the reality of HECS repayment.

Unlike traditional loans, HECS-HELP offers several benefits, including no interest charges and repayments tied to your income. However, if left unpaid, your HECS debt can still lead to various financial problems. Also, it will affect your borrowing ability for a house or car.

Let’s help you understand the reality of HECS-HELP non-payment. If you have ever questioned What if I don’t repay it? What are the consequences? Read further to decide and get answers.

HECS-HELP Loans – What to Expect If You Don’t Pay

2023-2024 Repayment Threshold: Who Needs To Pay

In the 2023-2024 financial year, managing your HECS-HELP loan repayments is a wise step. For the 2023-2024, you must start repaying your HECS debt once your annual income reaches $51,550. If your income is less than the given threshold, you won’t have to make any repayments.

Your HECS debt will remain until it is fully repaid and will increase each year due to indexing for inflation. This means that the total amount you owe can grow over time. Unlike other debts, there are no penalties, fines, or legal consequences solely for not repaying your HECS debt. However, the debt will remain until it is fully paid off and will also continue to increase.

Consequences of Non-Payment

Default Assessments and Penalties

If you don’t file your tax return and include HECS debt in it, the ATO (Australian Taxation Office) can estimate how much tax you owe. They use the information they have (your Loans like HECS) and may add a 75% penalty if you give false information. If this happens repeatedly, the penalty can go up to 95%.

You will also have to pay interest charges on the amount you owe. This is about 10% per year of the total amount. There may also be an additional interest charge of around 6% per year on any HECS (student loan) debt you have. And you can’t just correct it later; you need to formally challenge the ATO’s estimate with proof.

Increased Debt Due to Financial Penalties

Over five years, if you owe $100,000 in HECS debt and don’t pay, you could be penalized around $7,000 per year. With added penalties and interest, this could increase your debt to around $100,000 from an original debt of $35,000 if you wait for the ATO to issue their estimates instead of filing your returns. So, it’s better to pay the HECS-HELP Debt amount every year to avoid an increased amount.

Difficulty Getting Loans

If you don’t pay your HECS debt, it will be harder to get loans for things like buying a house or a car. Lenders will see your HECS debt as a liability. Just know that HECS-HELP debt doesn’t affect your credit score in any way but will show up as an obstacle.

Rising Debt Due to Interest and Indexation

Your HECS debt increases each year due to indexation, which is applied on June 1st. In 2023, this rate was 7.1%, up from 3.8% the previous year. This indexation increases the balance of your HECS debt annually, affecting the total amount you owe. Although this rate might be lower in the future, it’s important to pay off debts with interest before June 1st to avoid increases.

Automatic Wage Deductions

If you don’t pay your HECS-HELP debt, the Australian Taxation Office (ATO) can take money directly from your wages. This means they will cut the amount you owe from your paycheck before you get it.

Setting Up Payment Plans

If you file your tax returns yourself, the ATO is less likely to penalize you. You’re allowed to give an explanation for your delay and set up a payment plan without interest. You might also get previous interest charges removed.

Mandatory Repayment of HECS Debt

You can’t cancel your HECS debt. Once you have a HECS debt, you have to repay it unless you qualify for special circumstances. When you do your taxes, the ATO will know how much you owe, and you will need to pay it then to avoid penalties.

A Tip From Us

Paying your HECS debt on time, especially before June 1st, can prevent it from increasing and help maintain your ability to borrow money in the future.

Making the Decision – Should You Pay Off HECS Early

It makes sense to plan your repayment around mid-May. Indexation, which is the process of adjusting your HECS debt for inflation, is applied on the first of June every year. By making a payment before June 1st, you can avoid an entire year’s worth of indexation.

Should You Pay It Off Early

The decision depends on your financial conditions. If you have money in the bank earning less than the expected 4.8% indexation rate, it might make sense to use that money to pay off your HECS debt. Additionally, if you’re planning to buy your first home, paying off your HECS-HELP debt can improve your credit rating and increase your borrowing capacity.

Paying off your HECS-HELP debt isn’t straightforward. The money your employer deducts from your paycheck doesn’t reduce your debt until you file your tax return and it’s processed.

To avoid the annual increase in your debt due to indexation, try to find the money to fully pay it off by the end of May. This will save you from having to pay the increased amount. When you file your tax return in July, you’ll also get a refund for the deductions your employer made–So, it’s a win-win to make voluntary repayments if you can.

Voluntary Repayments

You can make voluntary repayments at any time to help reduce your HECS balance. This can be easily done through MyGov Australia by making a voluntary repayment to your HECS-HELP debt.

Best Time to Make a Voluntary Repayment

If you plan to pay off your entire loan with a voluntary repayment, it’s best to do so before you lodge your tax return or declare your worldwide income. Making a voluntary repayment before the indexation date on June 1st can reduce your overall debt amount.

There is No Major Risks in Not Making Voluntary Contributions. Your debt will increase with indexation but there will be no problem with taxes.

Assessing Pros And Cons: To Pay Or Not To Pay

Figuring out whether to pay off your HECS debt or not to pay it involves some important points to think about. Not paying HECS debt can work if your HECS debt is small, the interest added to your debt (indexation) doesn’t increase too much, and you can invest your money wisely.

However, recent economic changes suggest it might be smarter to pay off your HECS debt quickly, as it could become too big to handle due to rising costs. Here are the pros and cons of paying your HECS-HELP

PROS

Increased Borrowing Power: Clearing your HECS debt can improve your borrowing capacity, making it easier to secure loans for significant purchases, like a home. This is because your debt-to-income ratio improves, which lenders view favourably.
Mental Peace: Being debt-free can provide substantial mental relief, reducing stress and financial anxiety.
Potential for Backpay: If you paid off your HECS debt last year, you might be eligible for an indexation credit. According to the Federal Education Minister’s office, once the legislation passes and the Australian Taxation Office (ATO) processes the credit, individuals who have fully paid their HELP loans could receive a cash refund if they have no other tax liabilities. This could result in a pleasant tax return.
Guaranteed Returns: Instead of investing more money, Paying off your HECS debt can give you a guaranteed return. This is a secure financial move compared to other investments

CONS

Missed Investment Gains: By paying off your HECS debt instead of investing, you lose out on potential earnings from investments.
Better Use for Your Money: Your money might be better used to pay off other debts with higher interest rates, like a mortgage. HECS debt doesn’t have traditional interest or high interest rates like mortgages, just indexation. So, it’s better to pay your other higher interest-rates debts first.

Conclusion

In short, deciding not to pay off your HECS debt comes with some benefits but also a lot of risks. Think carefully about the current economy and your personal finances before making a choice. While there aren’t immediate legal consequences, your debt sticks around until you pay it off completely.

Yes. Since 2017, your overseas income has been included in calculating your “worldwide income for overseas levy.” If your total income exceeds the repayment threshold, you must repay your HECS debt.

Yes. You are liable for the course fees if you withdraw after the census date, except in rare circumstances.

Your HECS debt is cancelled when you die. Any outstanding repayments will be settled from your estate.

Yes, lenders consider all your financial information, including HECS debt, during an affordability assessment. Your HECS debt is treated like other debts, such as personal loans or credit card debts.

To avoid indexation, ensure full payment is received before June 1. Make your payment by May 31 to allow time for processing. Indexation will apply if your payment isn’t processed in time.

Inam (CPA)

Qualified CPA, with a background in accounting and finance, I bring a wealth of knowledge and experience to My Tax Daily. Having worked with diverse clients across various industries, I understand the intricacies of individual tax laws and regulations. My commitment to making complex tax information accessible and understandable for everyone drives my writing. My content is rich in expert tips and latest tax information, curated to simplify your financial and taxation affairs.