Your HECS Debt is About to Get Hit for 6! (or should I say 7)

Young Australians have had a great run over the last few years with HECS Debt Indexation rates. However, with inflation marching upwards this equation is slowly changing:

2023 – X.X%

2022 – 3.9% (oh dear…)

2021 – 0.6% (this was a nice year)

2020 – 1.8%

2019 – 1.8%

2018 – 1.9%

2017 – 1.5%

2016 – 1.5%

2015 – 2.1%

2014 – 2.6%

2013 – 2.0%

The big question is what will that rate be this year:

As reported by The Guardian it is likely to be somewhere between ∼7-7.5%

HECS Debt is always sold as having no interest and only increasing with the cost of living.

Although this is true, HECS Debt will increase at circa 7% and the average variable home loan is below that rate. So it is not exactly an “interest free” loan.

But is it worth paying off this debt early? 

I think it depends on the situation of each person. 

We can see the history of inflation in Australia below as per the ABS:

It is impossible to predict what inflation will be over the next 10-15 years.

Situations Where I Wouldn’t Pay Off More

-I would smash out any high interest debt first (personal loans, credit cards)

-If I had a mortgage on an investment property/PPOR and I was feeling the pinch I would keep the cash handy

-If I was about to buy a house and needed it for the deposit I would not pay anything back (as per Ubank different lenders calculate the value of HECS in different ways)

Situations Where I Would Pay Off More

-If I had no other debt and wanted a better “sleep at night factor” and the debt was giving me stress

-If I was about to buy a house and my lender treated HECS harshly 

The Grey Area

-I must admit I think I fall into this category, and I think a lot of the FIRE community would as well

-Hitting about a 50% savings rate with a lot of the this going into ETFs / LICs, if I pay back my HECS I would be sacrificing buying shares

-This financial year I do not think there is a no-brainer decision, either option should work out okay, it depends a lot on each person’s situation and cash flow position 

The Decision

-I am not going to pay back any extra this year. 

-Although it is annoying having this debt hanging over my head I think the Government are a better person to have a debt with compared to the banks (if I have a future mortgage)

-The terms of the loan are also very favorable, you can literally choose each year whether to pay some off or not (like a cricketer leaving alone anything outside off stump)

-Each year I will check this though and if the rates do ever go sky high (10-12%) I think I would pay a fair chunk off

-The only issue is if inflation is running at 10-12% I assume interest rates are pretty high and therefore there is likely to be juicy term deposit rates / maybe cheap shares.

Update

Well well well no sooner had I decided not to pay off my HECS debt I did a complete back flip, and decided to pay a lot of it off. For me it was a tricky decision, but there was no clear answer so I just smashed it out.

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