To repay or not to repay: your HECS debt and inflation
HECS debts have been all over the news lately. That’s because most of them are about to take a major leap – thanks to inflation.
Should you rush to repay yours or is it better to wait? Here, we take a look at your options.
Why are HECS debts rising? 👆🏼
HECS debts don’t come with interest. But, that doesn’t mean they don’t increase. In fact, they’re indexed to inflation. This means that, every year, on June 1st, your HECS debt goes up at the same rate as inflation.
From the mid-1990s to 2020, inflation was fairly low hovering at around 4%. So, you probably didn’t notice much of a change in your HECS debt. But, this year, things are different. Inflation is around 7%. This means that some debts will take a serious hike.
For a debt of $100,000, a 7% inflation rate would mean an increase of $7,000 to $107,000. Meanwhile, a debt of $50,000 would grow by $3,500 to $53,500.
What should you do? 😬
Depending on the size of your debt, you could be looking at an increase of several thousand dollars. That’s no small amount. It’s enough to top up your super, knock a bit extra off your home loan, invest in some shares – or even take a holiday.
So, if you’re in a position to repay, then now is a good time. Whether you can afford a few grand or enough to wipe out your debt, you’ll reduce the extra amount you’d otherwise have to pay because of inflation. Just be sure to get in before 1 June.
What if you can’t afford it?
Not in a position to make an extra repayment? It might be better to hold off. This is especially the case if you have other debts.
That’s because other debts come with interest – and in most cases they’re more expensive in the long run than debts indexed to inflation. Usually, you’re better off repaying the debt with the highest interest rate first, then working your way down.
Alternatively, consolidate all your debts. This means rolling them into one. You’ll probably be able to score a lower interest rate – and you’ll have just one monthly repayment to make (instead of many to juggle).
The good news 🗞️
It’s not all doom and gloom. Inflation doesn’t impact your regular repayments on your HECS debt. That’s because they’re determined according to your earnings.
So, even if you can’t make an extra repayment before June 1st, an increase in your HECS debt won’t change your financial situation on a weekly basis.
To wrap up … 🌯
HECS debts across Australia will soon jump in line with inflation. If you can afford an extra repayment, get in before June 1st. If you can’t, focus on repaying whichever of your debts comes with the highest interest rate.
Either way, your regular repayments won’t change – unless your earnings do.