How to pay off HECs debt

You’re finally done with your studies and you’re ready to start your career journey. Congratulations! Graduating from college or university is a huge milestone, along with landing your first job as a new grad. 

With your new full-time salary comes the task of repaying your HECS debt if you earn over the minimum threshold. While your employer should set aside a portion of your salary to cover your HECS repayments, you might want to consider making voluntary repayments to pay down your debt faster.

Read on to learn more about how to pay HECS debt, benefits of early repayment and more.

HECS debt basics

Chances are you’re wondering how does your HECS repayment work? Before we get stuck into how to pay your HECS debt, it’s worth understanding the basics of how these student loans work.

What is HECS debt?

A HECS debt, also known as a Higher Education Loan Program (HELP), is a low-interest study loan offered to higher education students by the Australian government. When you sign up for a HECS loan, the government covers the cost of your tuition by paying your education institution directly. Once your repayment income is above the compulsory repayment threshold, you’ll have to start repaying your HECS debt. The amount will be withheld by your employer and come out of your paycheque – you’ll need to let the accounts team at your organisation know or tick the relevant box on your employment tax declaration form.

How is HECS repayment calculated?

Your HECS repayment rate is calculated based on your salary before tax. At the end of each financial year, the Australian Taxation Office (ATO) will calculate your minimum compulsory repayment for the year and include it as part of your income assessment. While HECS debts are interest-free, they are subject to indexation. This means that on the 1st of June each year your HECS debt will be adjusted in line with the cost of living. 

Types of HECS debt

There are five different types of HECS/HELP loans offered by the government. Your eligibility for each loan depends on what it’s being used for and your citizen and residency status. Universities and higher education providers both offer a number of Commonwealth supported places (CSPs), which means that the government subsidises part of your tuition. The remaining portion of your fees is called the student contribution amount.

Here are the different types of HECS debt:

• HECS-HELP can be used to cover your student contribution if you’re enrolled in a CSP.
• FEE-HELP can be used to pay your fees if you’re not enrolled in a CSP, which is known as a fee-paying place.
• SA-HELP can be used to pay your annual student services and amenities fee (SSAF).
• OS-HELP provides assistance towards your expenses if you’re enrolled in a CSP and want to study abroad.
• STARTUP-HELP assists eligible students with course fees when they participate in a Startup Year course.

It’s worth noting that these fee structures can change with the introduction of new loans and policies, or the retirement of others. 

When do you start paying HECS?

The compulsory HECS repayment income threshold is adjusted each year. For the 2023-24 income year, the compulsory repayment HECS threshold is $51,550. So once you start earning over that amount, you’ll be required to begin repaying your HECS debt.

How much HECS do I pay?

Once you hit the HECS threshold, you might be wondering how is your HECS repayment calculated? In short, the amount you repay each year depends on how much you earn. It’s calculated as a percentage of your Repayment Income (RI). This percentage increases as your RI increases, so the more you earn the higher your repayment rate will be. 

To get a better idea of how much you’ll need to contribute towards your HECS debt, you can refer to the ATO’s HECS repayment thresholds and rates table on the ATO website. 

How tax implicates your HECS debt

As an employee, you’ll need to let your employer know that you have an outstanding HECS debt when you sign your tax declaration form before starting your job. From here, your employer should withhold extra tax from your salary to account for your compulsory HECS repayments once you meet the threshold. 

HECS debt repayments aren’t usually tax deductible. With that said, if you participate in self-education or study, you might be able to claim a deduction for specific expenses related to your study, if the education is relevant to earning your income.

What happens when you pay off your HECS debt early?

While you have to make compulsory payments towards your HECS debt once you reach the income threshold, if you’d like to get on top of your HECS debt sooner, you can also make voluntary payments to help reduce your balance faster.

There are several benefits that come with paying off your HECS debt early, including:

• Reducing indexation: although you’re not charged interest on your HECS debt, it’s subject to indexation. So by making additional repayments, you’re able to reduce your debt and the amount of indexation you’re charged.
• Financial freedom: by repaying your HECS debt early, you have the freedom to put those funds towards other financial goals.
• Improved credit score: making additional repayments towards your HECS debt demonstrates responsible financial behaviour, which could help to boost your credit rating. 

How to pay off HECS debt early

When it comes to making additional repayments towards your HECS, you’ve got a few different options. But before you go sinking your extra cash into your HECS debt, it’s important to assess your overall financial situation. If you have higher-interest debts you need to repay, or there are potential investment opportunities you don’t want to miss out on, you might reconsider repaying your HECS debt early.

Ultimately, the current income-driven repayment model offered by the government allows you to pursue higher education without having to foot the bill straight away. There’s no obligation to pay it off early. If you do decide to pay off your HECS debt early, you have two main options:

1. Lump sum payments: you can make lump sum payments towards your HECS debt throughout the year via BPAY or credit card.
2. Salary sacrifice or packaging: you can also organise a salary-sacrificing arrangement with your employer in addition to your compulsory repayments. It’s worth noting that when you enter into a salary-sacrificing arrangement, your employer could be providing a fringe benefit to you, so it’s important to understand the potential financial and tax implications before entering into this type of arrangement.

Maximising your income to repay your HECS debt 

Trying to pay off your HECS debt early on a junior salary isn’t always easy, but there are a few things you can do to try and boost your income. 

Strive for those pay rises

Career advancement and promotions often come with pay raises and bonuses. If you’re comfortable living off your current salary, you could potentially put these extra earnings towards paying down your HECS debt. 

Start up a side hustle 

If you’re after something that could provide you with a quicker return, why not consider freelancing or taking up a side gig? Even doing a weekend shift around your main job can help you earn a bit of extra cash that you can put towards your HECS debt.  

Look into investing

Some people can generate additional income through investments, which they can then put towards their HECS debt. But don’t forget: increasing your income could push you into a higher tax bracket, so it’s important to be aware of the potential tax implications before maximising your income.

How much do you need to earn to pay a HECS debt early? It’s important to find a solution that works for you and your circumstances. Sometimes making voluntary contributions isn’t even an option and the only thing you need to do is meet your compulsory repayments.

HECS debt repayment challenges

For many people, paying off your HECS debt early is easier said than done. There are often several significant hurdles that come with making voluntary HECS repayments.

One of the biggest challenges is simply being able to afford additional HECS repayments on top of your existing living expenses. For many people, it can be difficult to find the funds to be able to make voluntary contributions towards their HECS debt. If you’re struggling to make ends meet, repaying your HECS is probably the last thing on your mind.

Before deciding on voluntary repayments, spend a bit of time reviewing and assessing your financial situation. It could even be worth getting some professional financial advice to help point you in the right direction.

Government assistance programs for HECS debts

The HECS-HELP program is a form of government assistance in itself. It allows you to undertake higher education while deferring your fees until a time when you’re earning enough money to be able to repay your debt. 

In addition to receiving HECS assistance offered by the Australian government, some students may also be eligible for scholarships or grants offered by their educational institution. You should be able to find more information on the scholarships and grants available on your university or college website.

Domestic students might also be eligible to apply for scholarships for indigenous students or a Research Training Program.

Examples of repaying a HECS debt early

There are two ways of repaying your HECS debt: compulsory contributions and voluntary contributions. When you earn over the Repayment Income threshold, your employer should withhold additional tax from your salary to cover your compulsory contributions. At the end of the financial year, the ATO will calculate your annual compulsory contribution based on your Repayment Income and include this figure on your income tax notice of assessment. 

For example:

You're a 27-year-old full-time employee with a current HECS debt of $11,500. You earn $76,000 a year, so your repayment rate would be 4% based on the 2023-2024 HECS repayment rates. 

That means that at the end of the 2023-2024 financial year, you’d be required to make a compulsory payment of $3,040 towards your HECS debt, which is the equivalent of $116.92 per fortnight. 

If you choose, you could make additional voluntary repayments in the form of lump sums or salary sacrificing.

Tips for staying motivated to pay off your HECS

Even if you’re on track to pay off your HECS debt early, it can take years to chip away at your student loan. Chances are your motivation to make voluntary repayments will waiver during this time, so here are a few handy tips to help keep you motivated.

• Set goals: break your HECS debt down into smaller, more manageable goals. Having clear objectives provides a sense of purpose and can help you to stay motivated.

• Create a budget: take the time to create a detailed budget of your income, expenses and debt repayments. That way you can make more informed decisions when it comes to your finances.

• Track your progress: keep a record of your debt-reduction progress. Creating a visual tracker can be a great way to see your progress, especially as you get closer to your final goal of being HECS-debt-free.

• Celebrate milestones: reward yourself when you reach certain milestones. This acts as positive reinforcement for your saving efforts.

• Seek support: share your goals with friends or family to help keep you accountable. Having a support system and a bit of extra encouragement can make the journey a lot more manageable.

Planning for the future

Paying off your HECS debt can provide a sense of financial freedom. When you no longer have to make contributions towards your HECS, you can put that money towards other financial goals, like investment opportunities or to top up your savings. Plus, there’s also the sense of satisfaction that comes with finally settling a significant debt. 

It’s up to you how you pay off your HECS debt: you can opt to pay it off early or you can just make the compulsory repayments. There’s no obligation for you to make voluntary payments, particularly if it will put you under financial stress. However, if you do pay off HECS early, you’ll be free to put your extra earnings into more exciting things.