What’s indexation and how does it impact my HECS debt?

Estimated reading time
 6 min

In this article

• What is indexation and how does it effect your HECS
• Understanding the CPI and WPI (and how it relates to HECS)
• Tips for helping you pay off your HECS debt faster

If you’ve been paying off your student loan, you might’ve noticed that it’s slowly been increasing bit by bit (oh, HECS!).

So why does a HECS debt increase when payments are coming out of your salary? It’s all got to do with a little thing called ‘indexation’.

If you’ve never heard the term before, then not to worry – we’re here to break it down and give you easy tips on how to pay off your HECS debt.

What’s indexation?

Indexation means that the price of something is adjusted based on the changes to an external factor. In this case, your student loan (HECS-HELP) is adjusted to match the changes of the Consumer Price Index (CPI). The CPI is a value that shows how prices for certain goods and services Australians pay for (like housing, groceries, transport, and education) have changed over a specific period. It’s a term that gets thrown around whenever we talk about inflation or interest rate rises because it helps policy makers and economists assess the living and economic conditions in Australia.

Indexation is applied to your HECS debt every year on June 1. In 2023, student debt increased by 7.1 per cent in line with changes in the cost of living as measured by the consumer price index (CPI). In other words, your loan has been impacted by a big (and we’re talking big) inflation year.

But in the 2024 Federal Budget, the Australian Government^disclaimer decided to shake up the HECS debt system by introducing a new law to make paying off your HECS debt fairer for Aussies – to that we say huzzah! If this new law is passed in parliament, HECS indexation will be based on either the CPI or the Wage Price Index (WPI), whichever of the two is lower.

The WPI measures the change in wages and salaries for jobs in Australia. It’s designed to reflect the growth (or decline) of these prices without other influences, such as the type of work people do or how long they work for. Like the CPI, the WPI can help policy makers and economists understand the Australian economy.

So, what does it all mean for your HECS debt?

If the new law gets passed, you’ll automatically receive a credit on your HECS debt for the 2023 and 2024 indexation, which should reduce your HECS debt. Now you might be thinking, ‘less words, more math please!’, so here’s a quick breakdown of how the credit system will work:

• The indexation rate applied on 1 June 2023 was 7.1 per cent (the CPI), but with this new law that figure will be reduced to 3.2 per cent (the WPI).
• The indexation rate applied on 1 June 2024 was 4.7 per cent (the CPI), but will be reduced to 4 per cent (the WPI) if the law is passed.
• If your loan increased from $25,000 to $26,775 in 2023, then increased again to $28,033 in 2024 (for example), then you’ll receive a reduction of about $1,200. This means that, in this example, you’ll have around $26,833 on your HECS left to pay.

  Hot tip:

Use the Government’s handy HECS indexation credit estimator to see roughly how much you’re shaving off your HECS-HELP balance.

If your debt is a little on the hefty side or if you’ve ever wondered how to pay off HECS debt faster, don’t panic. We’ve prepared some ideas which could help you get on top of your loan or pay it off sooner to try and minimize the impact of HECS indexation in the future.

Remember, do your research and consider your circumstances as a whole in order to work out what suits you and your objectives. Seek independent financial and tax advice.

Some ways to pay off HECS debt faster

1. Make voluntary payments

If you’re wondering how to avoid indexation on HECS debt, then making extra payments can really shave some years off your student loan. While the mandatory HECS–HELP payments kick in once you earn above the $54,435 threshold^disclaimer, you can make voluntary payments anytime through the myGov portal with BPAY. Consider using some of your tax refund to pay off your loan, so it doesn't feel like it's taking away from your spending money. Income thresholds can change, so it’s good to keep on top of what they are every year.

2. Increase withholding tax

You can ask your employer to increase withholding tax beyond the mandated repayments rates to be allocated towards additional HECS-HELP repayments.

3. Salary sacrifice

Many people associate salary sacrifice with superannuation, but you can actually use it for paying off HECS-HELP debt too. By talking to your employer, you can nominate an amount you’d like to transfer each pay cycle from your pre-tax salary to your student loan to speed up the repayments. So, instead of seeing it as a ‘sacrifice’, this could be a way to get a financial head start on your repayments. You should also be aware of fringe benefits when setting up this type of agreement, so you might want to seek a tax adviser around the tax impact and a financial advisor as to the impact on your overall financial position before locking anything in.

  Brain hack:

When it comes to paying off your HECS debt, you might not even think about it because it’s covered through salary sacrifice. So why make voluntary payments when you can spend your hard-earned cash on something that makes you feel good now? This mentality is what we call hyperbolic discounting, which is our preference for immediate rewards over future ones. Even though your HECS is getting deducted from your salary, it’s still a debt you’ll have on your plate. So why not do future you a solid and give paying off your HECS debt a bit of a hand? It doesn’t have to be all in one go either – little contributions can go a long way to a HECS-free life.

What’s next, HECS?

The best thing you can do to prepare is to keep an eye on your loan and the CPI and WPI every year around July. If it looks like another indexation increase is in store, remember paying off HECS through salary sacrifice or voluntary payments can reduce its overall impact. And if you want more advice on how to pay off HECS debt early, then reach out to your bank if you need help adjusting your budget or navigating a big change.