Note: The ATO have recently announced that when these changes become law relief will be back dated to 1 June 2023. You can lodge your tax return as per normal, and they'll sort the rest.
For those of you who have recently paid off their loan, the ATO says you may receive a refund for any excess amount you've already paid.
The Albanese government is changing the rules around how HECS-HELP (HECS) loans are indexed. If their legislation passes, from now on, loans will be indexed to either inflation (the Consumer Price Index, or CPI), or wage increases (Wage Price Index, WPI), whichever is lowest in any given year.
Best of all, they’re backdating these changes to partially cover last year’s astronomic rise. Whoop whoop!
But how does this work in practice? And what does this mean for you, exactly? So glad you asked.
A quick refresher on HECS indexing
Your HECS loan is technically interest free, but it does come with an interesting catch.
Basically, because inflation eats into the value of money, you need more money today to buy things than you would 10 years ago.
Similarly, your $50,000 student loan from 10 years ago is worth around $65,000 today, assuming an average annual inflation rate of 2.6%.
To make sure you’re paying back the true value of your student loans, the government back in the day decided that loans would be indexed to inflation. What that means in practice is that loans increase at the same rate as the Consumer Price Index (CPI).
In theory, this is supposed to be manageable, especially in years when wage increases outpace inflation. But last year, inflation went up by 7.1%, meaning everyone’s HECS loans rose 7.1% as well. It’s essentially like having a 7.1% interest rate applied to your loan – not fun.
💡Another thing that makes student loans harder to pay off? When in the financial year indexation is applied. For more info, check out our guide to paying off your student loan.
The proposed indexation rules
What the government wants to do is change the indexation rules, so HECS loans will be indexed to either the CPI or WPI, whichever is lowest.
For example, the CPI in June 2023 was 7.1%, so all HECS loans went up by 7.1%.
But the WPI for the same period was far lower – 3.2%. If these rules had been applied back then, the 3.2% rate is what HECS loans would have been indexed to.
Backdating the new rules
The good news is that the government is proposing to backdate the new rules to June 2023 – but they can’t retroactively go and apply a lower rate to all student loans in Australia.
Instead, they’re planning to apply a one-off credit to your loan balance that will effectively lower that 7.1% increase to approximately 3.2%. Here’s what that looks like in practice:
| Your HECS debt balance (at 1 June 2023): | Your estimated credit for 2023 and 2024: |
|---|---|
| $15,000 | $670 |
| $25,000 | $1,120 |
| $30,000 | $1,345 |
| $35,000 | $1,570 |
| $40,000 | $1,795 |
| $45,000 | $2,020 |
| $50,000 | $2,245 |
| $60,000 | $2,690 |
| $100,000 | $4,485 |
| $130,000 | $5,835 |
*Numbers taken from the Department of Education calculator.
The Department of Education also has a very handy calculator you can use to figure out how large a credit you’re eligible for. Seriously, how good!
If you actually paid off your loan in full post last year’s indexation, don’t worry – your credit could be paid straight back to you.
The $3 billion headline
If you’re keeping up with this thrilling development, you’ve probably noticed all the headlines about the government “wiping out $3 billion” in student loans.
Well, technically, yes they are. You could look at it that way. You could also think of it as them deciding not to collect $3 billion that they could have collected.
Either way, the idea behind the credit scheme is relief for borrows already hit with the cost of living. But the important thing to remember is that it’s not money back in your pocket (unless you paid off your loan last year, you beauty) – it’s money you no longer have to pay down the line.
So what now?
Well, technically these changes haven’t been made law yet. It’s just been announced as a plan in the works. To go ahead, the relevant legislation will have to pass through parliament once the 2024 budget is released.
If it does go through, come June of this year, student loans will be indexed with either the WPI or CPI, whichever is lower. We don’t know what that rate will be yet, we’re still waiting on the final results. It’s like the most consequential, yet boring reality-show finale imaginable.
In the meantime, keep paying off your loan! Or, if you’re a sole trader, use Hnry and we calculate and pay your student loan repayments as you earn!
In fact, for just 1%+GST of your self-employed income, capped at $1,500+GST a year, we we will also completely sort out all your tax and levy bits and bobs, including:
- Income tax
- GST
- Medicare Levy
- Superannuation contributions (optional)
We also lodge your annual tax return for you – it’s all part of the service.
Whether you’re just starting out, or an industry veteran, Hnry is designed for all sole traders. We make sure that you never know the horror of an unpaid tax bill – ever. And that’s a big deal, believe us.
Forget your student loan exists. Join Hnry today.
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