An Overview of HECS Debt
Welcome back to Finance Students’ Association’s Millennial Money series, where we discuss personal finance topics affecting the everyday lives of university students. Today we are going today discuss HECS debt. This is a term that most university students have likely come across and hopefully, we can further explain exactly what this means and the mechanics of how HECS debt works.
What is HECS Debt?
For an individual with a commonwealth supported place (CSP), the cost of a subject can be broken down into two components: the government student contribution. HECS debt is an interest-free loan provided by the Commonwealth government to support students to pay for the student contribution of their studies.
It is also important to clarify exactly what is meant by interest-free in this scenario. HECS debt is interest-free in the sense that we are not required to make regular interest payments as we would for a mortgage or bank loan, all payments go towards reducing the principal (the part we borrowed) of the loan. However, the principal amount is indexed (i.e., increased) with the inflation rate of a given year, and therefore the amount owed can increase over time, making it more difficult to repay. In this sense, it is not quite as free as it first seems.
How is HECS Debt Repaid?
The repayment scheme is somewhat like the progressive tax system, in other words, the amount you repay increases with your income. For example, in the current year, anyone earning below $47000 is not required to repay any HECS. Between $47,000 and $54,000, individuals are required to pay 1% of every dollar earned over $47000. Anyone earning over $138,000 is required to pay 10% of every dollar over this amount.
There are two main things we would like for you to keep in mind. Firstly, like the amount owed, the repayment threshold also increases year on year depending on inflation to ensure low-income earners aren’t unduly affected. Secondly, these are compulsory repayments and there may be benefits to making additional voluntary repayments should you be in a stable financial position.
Recent Changes to HECS: How Does it Affect Me?
For students starting in 2021 onwards, there were changes in the student contributions, increasing the cost of commerce, law, and humanities subjects, while decreasing the cost of STEM subjects. The purpose of this change was to encourage more people towards STEM degrees which are perceived as being more job-specific. Whether this is an effective and appropriate way to achieve this objective is a whole other topic that we won’t delve into here.
The other significant change which occurred at the start of this year is the introduction of a cap on the amount of HECS debt that an individual can accumulate in their lifetime. There is now a limit of seven years of full-time study (56 subjects) starting from this year. After seven years, these students will be required to pay their contributions upfront.
Conclusion and More Information
Hopefully we have helped you understand a bit more about HECS debt and how it works. If you’re interested in finding out more and or going into more depth than what we could cover here, we recommend the following sources:
Official Government Information: https://www.studyassist.gov.au/
Student Contribution Amounts: https://www.studyassist.gov.au/help-loans-commonwealth-supported-places-csps/student-contribution-amounts
HECS Debt and Credit Score Information: https://www.finder.com.au/what-a-hecs-or-help-debt-means-for-your-home-loan-application
Also, be sure to lookout for next week’s article where we talk about Superannuation.
The Finance Student's Association is not a financial adviser, the views expressed within this article are those of the authors and do not represent the views of the Finance Student's Association. All images and references in this article are for fair and educational purposes only. The content in this article is not intended as legal, financial or investment advice and should not be construed or relied on as such.