Should YOU pay off your HECS-HELP debt before indexation? Now with a calculator.

Every time the indexation rate is released this question is always asked. This year in particular it is expected that there will be a very high indexation rate (3.9%). By making a voluntary contribution before 1 June 2022, you will be able to dodge the annual indexation. This tool will help you decide whether it is a good idea or not.

I have built a calculator here. This should will show you your repayment schedule (with some assumptions), and the interest rate of this loan.

Instructions: input your HECS-HELP Debt and Repayment Income in the orange cells, and it will calculate how much this loan's interest rate is.

To interpret the results, if you can get a better return somewhere else (e.g. in a mortgage, or in the share market), then you should keep the loan. If not, then you should voluntarily pay it off early.

For a quick rule of thumb:

  • If you are scheduled to pay it off in full this year (2022) definitely pay it early. It is probably even worth borrowing money to pay off early if you time it right.
  • If you are scheduled to pay it off in about 2 or fewer years, probably pay it off
  • If you are scheduled to pay it off in about 5 or more years, probably don't pay it off
  • In between it is sort of an edge case, have a look at the tool and decide

Appendix/Questions:

What if I have already had many deductions throughout the year from my payroll?

A common misconception is that these payments influence your debt throughout the year. They do not, it is only when you submit a tax return that the payment is actually deducted from your loan. If you have already deducted a large amount, but still should pay off the loan before indexation, you should pay off the loan voluntarily, then submit your tax forms asap to get a large refund.

Wait I though HECS/HELP was the cheapest loan you could get, what is the deal with these high interest rates?

This is still true for the long run.

The short term is different. Because interest on HECS/HELP is charged all in one go, and since we are about to reach that point, it is as if you pay an extra batch of interest upfront. Over the long term this doesn't matter. But if you are borrowing for a short time, paying 1 fewer interest payment is a big deal.

Complaints about the government/fairness/other r/Australia ramblings

While this year the rate is very high, the two year average is pretty fair: it was 0.6% last year and 3.9% this year. The two year average is ~2.2% which is pretty much in the expected range. Nothing has changed, HECS/HELP is still a cheap loan and good deal for students studying something useful. Smart AusFinance citizens are just able to do some money juggling to get a couple of percent return this year.

What about partial payments?

This is beyond the scope of this tool, I think someone else should be able to figure out a good trick to calculate it.

In general, the thing that you want to dodge is the June 2022 indexation, if you can't pay it off mostly in full, it probably isn't worth it.

What is the methodology

This compares how and when you have to make repayments vs if you were to pay off the loan now.

What about inflation/income growth?

I have ignored inflation for simplicity and lack of materiality. Inflation will increase your repayments due to wage growth, but also decrease your repayments due to increased thresholds.

Your assumptions suck I can do better

Download a copy and change the yellow cells, you can also add inflation back in if you desire or do more complicated things such as varying your income over the years.