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:
| Period | Annualised inflation rate (%) |
| 1950-1959 | 6.0 |
| 1960-1969 | 2.4 |
| 1970-1979 | 10.5 |
| 1980-1989 | 8.2 |
| 1990-1999 | 2.0 |
| 2000-2009 | 3.0 |
| 2010-2017 | 2.5 |
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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Thanks Aussie Strategy this has really helped me!!