Should I pay off my HECS debt?

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Do you have a HECS debt, or HELP debt? You need to read this because it can potentially save you a lot of money. For those who don’t know HECS was renamed to HELP debt just after 2008, they are basically the same thing.

No one likes reading or talking about finances because it can make you feel overwhelmed and helpless. Ever-growing debt and financial insecurity is an issue we all need to pay attention to. The title of this blog was originally “Financial security is something we should worry about”, but worrying won’t help you. If you have debt, worrying will only make life miserable. You need to pay attention and develop a plan on how to reduce your debt and get better with your finances.

I’m not immune to this either, when I finished my university education I was ecstatic because my dream of graduating as a dietitian and exercise physiologist had come true. I worked damn hard for my degree and I worked to support myself throughout my university education. Granted, I didn’t earn enough to pay for my tertiary education upfront; in fact I only scraped by paying for normal phone bills, food, rent and clothing.

I resided in the fact that after graduating university, I would get a high paying job and my accumulated years worth of study debt would pay itself off. Well, that’s what I was always led to believe. That’s what we are all lead to believe, studying is meant to guarantee you work after graduating. Not just any work, though. A job you can excel in and of course, higher pay.

No one tells you that this isn’t necessarily the case. Although, I do earn more than the average person now, my first 3 years out of university was struggle street and I barely made enough money to scrape by. This is the reality, you have to make your own fortune and still work very hard.

I am not complaining about my situation. I appreciate where I am now and all the lessons I’ve learnt. I would not change the past and I do love what I do. My aim is to open your eyes to these financial issues earlier, so you can get into a better position than what I had been so many years ago.

My story about my HECS debt

After the first year of graduating I jumped straight into private practice. I purchased a pre-existing allied health business, bought a car and accumulated more debt. This was an additional $48,000 worth of debt in fact.

When I would think about how much I owed, a total of $90,000, it would make me sick to the stomach. As anyone in allied health knows, private practice is not big business, and especially in the first year of starting there was no way I was going to pay that amount off any time soon.

Debt makes me feel physically ill, and although we like to think we can be happy and live a normal life with debt, we can’t. Financial health is just as important to mental and physical health. Poor financial health will affect your happiness either now or in the future.

When I finished university in 2009, my then-called HECS debt reached a nice lump sum of $42,000. I stuck my head in the sand for a number of years until one day, 3 years later, I received a letter in the mail from the taxation office.

Over the course of the 5 years post university, my HECS had now reached $43,946. Holly cow… it went up, so much for the HECS debt taking care of itself.

Here is what my life looked like; I worked a 38hour week as a gym club manager earning $50,000 a year, and my private practice, where I worked a 12hour week after hours. The money made in my private practice wasn’t paying my wage, but merely paying for its own $48,000 loan. In my full time work as manager, I didn’t earn enough to reach the income repayment thresholds. I experienced extreme financial and work stress.

My HECS loan was growing and I didn’t even know. I thought because I worked full time and I made sure I ticked the right box on the tax declaration form, everything would take care of itself- it didn’t. I also didn’t realise that even before you finish studying, your HECS debt is still getting indexed every year.

I calculated that over the past 13 years, my debt accumulated an additional $7000 worth of indexation alone. There’s a lot I would do with $7000 and paying interest isn’t one of them.

HECS debt is not an interest free loan

You may not be accruing interest, but you are gaining “interest” in the form of indexation, at an average of 2.8% per year. That’s nothing to sneeze at. It’s especially of interest to you if you have no other loans. You’re paying interest on a loan that you could very easily make additional voluntary repayments and gain a larger weekly income once it’s paid off. Think of paying off your HELP- HECS debt like getting a bonus increase in wage. No more additional compulsory repayments when its all paid for!

Why you need to make voluntary repayments to your HECS debt

The real truth to the matter is regardless of what type of debt you have, even if it’s a low interest rate loan like HECS-HELP or home loan, the interest will eat away at your hard earned dollars. This means you will work longer and harder for a longer period of time till that is paid off. This also means you are reliant on your job, this means you are not free to change careers, study again, buy a house, or go on long holidays. Not unless you want this debt following you around like a bad smell.

Here is what I found out: the percentage of your pay that your employer holds for you, as part of the HECS-HELP repayments, is peanuts. In my experience, the indexation ate into (approximately) 25% of my compulsory repayments.

What is indexation according to the HECS debt rules?

“Your accumulated HELP debt is subject to indexation, which is applied on 1 June each year to maintain its real value by adjusting it in line with changes in the cost of living (as measured by the Consumer Price Index (CPI) figure released in March).”

This means, every year in June, your loan will index at market rate. This is a snap shot of how mine fared and how much extra debt I accumulated:

Year Indexation % Debt Credit Total
2010 1.9 704 41,465
2011 3 1243 42708
2012 2.9 1238 43,946
Pay withholding repayment 3564.38 40,389
2013 2 807.38 41,189

 

As you can see by this snap shot of just a few years, looking into your HEC-HELP debt is a necessity if you are serious about your well-being. No one tells you this when you finish university studies. Your financial health is up shit creek, so to speak, unless you take a long hard look at your debt.

I estimated, using a standard indexation figure of 2.8% per year, and an average compulsory repayment of $3,589, that it would take 16 years to pay off my debt. This is on a base wage hitting the 5% repayment threshold. You may pay it off slightly faster if you have a higher paying job, but not that much faster.

How does financial well-being affect your health?

Financial health is such a popular topic right now many large corporations are now implementing financial wellbeing activities along side of physical well being programs. Well-being takes a holistic view of your health. There are many pillars and facets to what makes someone healthy. For example, you could have great physical health because you exercise everyday, but debt can leave you stressed, upset, worried, unhappy and stop you from doing social activities you love.

Financial stress might even start affecting relationships by arguing about spending habits, inability to buy each other presents or go out on date nights. So many things we just don’t think of automatically. If you want more information on how finances affect your happiness, read this previous blog.

In a study conducted in 2014, researchers looked at life choices that medicine students made post graduation. They found that the amount of accumulated debt due to studies influenced what they choose to further study, when they got married and have a family. Debt plays a significant impact o what you do.

If that doesn’t convince you that debt has an impact on your health maybe this will? A study conducted in 2014 showed that people in great financial debt had poor physical and mental health;

“Individuals with unmet loan payments had suicidal ideation and suffered from depression more often than those without such financial problems. Unpaid financial obligations were also related to poorer subjective health and health-related behaviour.” 

In other words paying off your debt HECS-HELP or otherwise does wonders for you health.

How to pay your HECS loan faster

This is what I found out; the Australian government rewards you for making voluntary repayments. This means making additional payments outside of the normal amount your employer holds on your behalf. For every voluntary repayment of $500 or more you pay, you get a discount of 10%. For example if I pay $500, they add an addition $50 to this payment off your loan. That’s a big incentive worth paying attention to.

The unfortunate thing, my fellow readers, is that in 2017 that bonus payment is reducing to only 5%. Which really sucks for everyone who still has accumulated debt!

It makes sense though, if you’re into politics and have kept your ear to the ground and eyes peeled on the budget, you would know that HECS- HELP debt has been debated and talked about – enough for me to freak out about my loan. Who wants to waste their money paying interest? Not me!

It’s no secret that Australia is in debt up to its eyeballs and the government has been looking at ways to reduce this debt. One huge sinkhole in Australia’s ever-accumulating national debt is everyone’s HECS- HELP debt. So much so that there was talk about deregulating university fees. In lay terms this would mean making the cost of attending university 4x greater than currently and unaffordable to most low to middle class people.

Another proposed way of obtaining HECS- HELP debt was chasing people up with debt who had moved overseas to work. Currently, if you work off shore, you don’t have to repay fees till you return to Australia. The Australian Government is implementing arrangements for the repayment of HECS- HELP debts by offshore Australians earning above the repayment threshold. University deregulation was not passed in parliament, but somewhere down the line the bonus will been halved. It’s only a matter of time before something else gives. My advice is work on reducing your debt sooner rather than later.

How I paid off my HECS debt

I read the book Rich Dad Poor Dad by Robert Kiyosaki back when I was a teen. One thing I remembered from this book was to always put away a percentage of your earnings in savings. In addition, almost everyone spends what they earn. What I mean by that is, we can always chase a forever-growing pay packet. People typically earn more, and then subsequently also spend more.

How I tackled this was I set up an automatic payment where 50% of my wage went to paying loans. As soon as my wage hits my bank account, a day later 50% of that amount goes into an automatic repayment to my HECS debt. I learned to live with the remaining amount of money left in my account. I could only spend what was in my account, so I learned to spend less.

Some weeks it was really tight, but I could only spend what I had, so I made do. I am glad to say as of today I have finally paid off my HECS debt and I finished paying off my business loan a year ago. The financial stress has reduced significantly; I no longer feel I am doomed. I can change jobs and take time off, if I want, with and due to my savings. I am finally debt free!

What they don’t teach you about finances at university 

No one teaches you how to become financially savvy (unless you study finance). No one gives you advice on paying off your HELP- HECS debt. We as a society don’t talk about this. Intelligent health professionals like myself turn a blind eye to matters like these that are really important. As health professionals we bang on about exercising, eating right and meditating, but thats only half the battle.

Health is not only our physical and mental selves, it also includes our finances. People have committed suicide over financial stress, relationships have broken down over financial stress. It’s time we all look at where our money is going and make some important decisions that could potentially change your life for the better.

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2 Comments

  1. Hi Gabrielle

    I too am an Australian health professional who shares many of your same views. I didn’t come across your article until afterwards and I wish I had read this sooner.

    I made the big call to pay my HELP loan in full, today. While everyones financial situation is different and many people may take a different approach to the subject matter – I am glad to have cleared this hurdle.

    Going on a tangent kind of. The reality for a young hard working person like me who aims for a career with financial independance has gotten more bleak more difficult each day. I too thought that higher education was a step in that direction so that I could, you know, get on with life stuff – marriage, family, home ownership (putting down roots to coin a phrase).

    Even if I chose not to pay off my HELP loan, the housing unaffordability in Australia has left me in total despair and I am unable to raise a 20% deposit to even consider prospects of home ownership anytime in the near future. Considering that it will only take me 3-4 years to return my bank balance to what it was, paying off the HELP loan was to me, a viable option.

    I really wish that one day I will have the opportunity to open a small business of my own. Unfortunately in my line of work it may never happen.

    • Hi David,

      Agreed it’s a big financial step, that not many people can afford I realise, but good on you for doing it. Yes it is quite tough in Australia with housing prices I agree. One can only hope the housing bubble crashes or at least stops a further increase in price.

      Thanks for commenting David I really appreciate it 🙂