Student loans, like any other debt, can be hard to shake. Here are my top tips for putting them behind you.
Debt is just a fact of life for most of us. With almost two in three Australian adults carrying some form of debt, it can often feel like trying to push a boulder up an endless mountain. While credit cards and Buy Now, Pay Later debts get all the headlines, higher education debts like HECS-HELP are just as prolific.
With the growing burden of student loans, it’s no wonder many Aussies are looking for better ways to clear their HECS debt. The good news is there are a few strategies – and a helping hand from the latest Budget – that can deliver some much-needed support.
Good news with higher-education debt relief
The 2024 Budget announced a major change to help more than three million Aussie graduates. A proposed cap on the HELP indexation rate will effectively wipe out around $3 billion in student debt. Even better, it’s backdated to be effective from 1 June 2023. Subject to the passage of legislation, it’ll ease much of the annual pressure on those with a sizable HECS/HELP debt.
While your debt won’t disappear overnight, the burden will become more manageable. Reducing the indexation rate slows the growth of your debt. Until now, many graduates have found their HECS debt is growing faster than they can pay it off, thanks to the high indexation linked to inflation. If these new measures are passed through legislation, you’ll have a better chance of seeing your payments make a real dent in the principal balance, rather than just covering the increasing interest.
While no interest is charged on your HECS the indexation of the debt at 4.8 per cent means not only does it continue to grow but also compounds. So there is a real incentive to pay it off early, particularly if you’re not earning more than the 4.8 per cent on savings accounts elsewhere.
Plus paying it off early is good for your credit rating.
Tips to pay off your HECS debt faster
While we wait for the wheels of government to slowly turn, there are some smart strategies you can adopt to accelerate how quickly your HECS debt is repaid.
1. Make voluntary payments whenever you can
Making voluntary lump-sum payments on your HECS debt can be done at any time via BPAY. While HECS debts don’t accrue interest in the traditional sense, they are indexed annually, so any extra repayments you make will directly reduce the principal. Even small, regular voluntary payments can make a big difference over time.
2. Start early
If you’re still studying or only recently graduated, it might seem tempting to ignore your HECS debt for a while. But starting to pay off your debt early – even if your voluntary payments are small – can slow down your debt and stop it from becoming overwhelming later on in life. The sooner you start chipping away, the less impact indexation will have on it, and the faster you’ll see it go down.
3. Look into salary sacrificing
Another option is to use salary sacrifice. You might already know how it can grow your superannuation even further. It’s an arrangement you set up with your employer to funnel a portion of your pre-tax income elsewhere – only instead of sending it to your super, you can make additional HECS payments with it. The advantage here is twofold: you reduce your taxable income, which might push you into a lower tax bracket, and you make larger repayments toward your HECS debt without affecting your take-home pay as much as you might expect.
4. Increase your repayments as your income grows
As you climb the career ladder and your salary rises, think about also increasing the proportion of your income that goes towards higher-education repayments. Since your mandatory repayment rate is linked to your income, higher earnings will automatically mean higher repayments. But you can go even further by voluntarily contributing a higher percentage of your salary than the minimum amount required.
5. Think laterally
If you have the time and the motivation, you might want to dip your toe into a side hustle to earn some extra cash. Since it doesn’t affect your regular take-home pay from your main job, you can funnel any profits directly into your HECS debt.
Another pastime that has the potential to generate more money is investing. While there are certainly risks that you could end up losing more money than you invest, if you do have a good run then you can put some of those profits into HECS repayments. Just be mindful that earning more money through a side hustle or investing could also push you into a higher tax bracket.
Paying off your HECS debt faster might seem like an impossible task, but with the right approach it’s entirely achievable. While relief from the government is hopefully on the horizon, in the meantime you can apply some practical strategies to take control of your HECS debt and work towards financial freedom. Since every little bit counts, why not start today?
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