Last day for grads to dodge huge HECS debt hike

·2-min read
Julian Smith/AAP PHOTOS

Alarm bells are sounding for Australians still saddled with student debt, with just 24 hours left to pay down their loans before an indexation hike.

Graduates are being warned interest on voluntary study and training loans will rocket to seven per cent after Thursday, compounding the rising cost of living.

While Higher Education Loan Program (HELP) - formerly Higher Education Contribution Scheme (HECS) - debt is interest free, balances are indexed to inflation.

When inflation is in the RBA's target band of two to three per cent, graduates benefit from relatively low levels of effective interest.

But runaway price rises this year could cause HELP balances to spiral, with many Australians tipped to be worse off than when they finished their studies.

A graduate with a debt of $30,000 will see their balance surge by over $2000.

But the more a debtor pays off before the indexation date, the less their balance will grow.

Mark Borg, senior financial planner at MBA Financial Strategists, says paying off student debt is a very prudent investment, given you're essentially saving money after tax.

"If you're saving money by paying off a debt, it's the same as earning money," he told AAP.

"If I was to earn seven per cent after tax, I'd have to earn a bit over 10 per cent, pay my 30 cents on the dollar tax and be left with seven per cent. 

"For me to earn 10 per cent taxable I've got to take a high amount of risk, whereas if I pay my HECS debt off, I'm taking no risk."

Mr Borg says prospective homebuyers should try to reduce their HELP balance as much as possible because lenders take student debt into account when assessing home loan applications.

The Australian Tax Office advises those eager to minimise the effects of the hike to send voluntary payments through before close of business on May 25, to ensure bank transfers clear ahead of the June 1 deadline.

The most recent inflation figures show the consumer price index rose seven per cent for the 12 months to March 2023.

The Reserve Bank predicts inflation will not return to its three per cent target before June 2025.