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How long will it take to pay off my HECS?

Many Australian graduates often wonder how long it will take to pay off their HECS (Higher Education Contribution Scheme) debt. HECS is a government deferred loan that helps students pay for their tertiary education. In this article, we will explore how HECS works and calculate the time it takes to pay off a typical HECS debt.

How does HECS work?

HECS is designed to ensure that tertiary education remains accessible to all Australians. It is a loan provided by the Australian government to cover the cost of university or vocational education. Unlike traditional loans, HECS does not charge interest. Instead, the debt is indexed annually according to the Consumer Price Index (CPI).

Repayment of HECS debt is made through the tax system. Once a graduate's income reaches a certain threshold, currently set at $45,881 for the 2020-2021 financial year, a percentage of their income is automatically deducted by their employer and directed towards their HECS debt. The repayment rate increases with income, with a maximum rate of 8% for those earning over $134,573.

Calculating the time to pay off HECS

To calculate the time it takes to pay off a HECS debt, we need to consider the repayment rate and the size of the debt. Let's look at an example:

Say for example you are earning $65,000 a year. You have a HECS debt of $12,000. Your employer should deduct 4.5% of your salary (at current 2020-2021 rates) which is $2,925 per annum as an additional 'tax' that's directed towards your HECS debt. At this rate, it's going to take you at least 4 years to pay off your HECS.

It's important to note that this calculation assumes a fixed income and repayment rate. In reality, your income may increase over time, resulting in higher repayment amounts and a shorter repayment period. Similarly, if you make additional voluntary repayments, you can reduce the time it takes to pay off your HECS debt.

Should I make additional payments?

While HECS debt does not accrue interest like traditional loans, it is still wise to consider making additional payments if you have the means to do so. Here are a few reasons why:

• Reduced debt burden: By making additional payments, you can reduce the overall amount of debt you owe. This can have a positive impact on your financial well-being and give you more freedom in the future.
• Quicker debt repayment: Making additional payments can shorten the time it takes to pay off your HECS debt. This means you can become debt-free sooner and focus on other financial goals.
• Save on indexation: While HECS debt is indexed to inflation, making additional payments can help reduce the impact of indexation. By paying off more of your debt earlier, you can avoid additional interest charges.

It's important to note that making additional payments towards your HECS debt is a personal financial decision. Before deciding to make additional repayments, consider your overall financial situation and goals.

In conclusion

Paying off your HECS debt may take several years, depending on your income and the size of your debt. By understanding how HECS works and considering additional repayments, you can take control of your debt and work towards becoming debt-free. Remember to consult with a financial advisor or accountant for personalized advice based on your specific circumstances.

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