If you’re an Aussie with a degree, you’re probably familiar with Australia’s student loan system (HECS/HELP). Essentially, you borrow a small fortune to get a degree, and then when that degree gets you work, you use your wonderfully big salary to pay that small fortune back.
The problem is, if you’re a sole trader, you’re entirely responsible for managing your own repayments. And it’s no small sum – if you earn above the repayment threshold ($51,550 for financial year 2023/24), you’re required to pay a set percentage of every dollar you earn towards your student loan debt. Yes, even if you’re still a student (we see you side hustling!).
Australian student loans also come with a weird quirk – they’re annually indexed to inflation. What that means is that your loan is set to grow (maybe shrink, most probably grow) alongside the Consumer Price Index. This can make paying off the balance in full extra tricky, especially if the economy is tracking like a roller coaster.
Because of all this, we thoroughly recommend saving for your student loan repayments throughout the year, instead of leaving it until the very end. And if you have exceptionally high student loan debt (sorrows, prayers), there are a few things you might want to consider when planning your repayments.
Let’s get cracking!
- Student loans in Australia
- How student loans work
- Checking your student loan balance
- Repaying your student loan while overseas
- Should you pay your student loan off faster?
- Automate student loan repayments with Hnry
Student loans in Australia
Once upon a time (1973), local students could earn a degree from Australian universities for free.
This changed in 1986 with a modest administration fee of $250, and then again in 1989, when the then government introduced the Higher Education Contribution Scheme (HECS). To help fund their university education, students were asked to contribute a whopping $1,800 a year towards their tuition (around $4,280.99 in today’s money).
From there, the student loan system was changed and updated regularly in order to remain cost effective. Income repayment thresholds were introduced, fees increased (understatement), different repayment incentives were implemented and then discarded. It was a confusing time for students who weren’t maths/commerce majors.
And then, as if things weren’t perplexing enough, in 2003 the government announced the introduction of a new Higher Education Loans Program (HELP).
HECS was incorporated into HELP, to become HECS-HELP. FEE-HELP was introduced to cover full fee-paying courses, taking over from older HECS-based schemes like OLDPS, PELS, and BORPLS.
(We promise we’re not making any of those acronyms up.)
This is all honestly just skimming the surface, but the bottom line is that a lot of thought and work has gone into Australia’s student loan system – meaning it’s kind of convoluted. And subject to future change, depending on the government of the day.
All this brings us to the present day, where more than 3 million Australians owe more than $74 billion in student loan debt. So really, if you still have a hefty student loan, welcome! You’re in great company.
How student loans work
Alright, we’ve (tried to, briefly) covered the history of student loans in Australia – here’s how it all works in practice.
Compulsory student loan repayments
We’re not going to lie, this is where things start getting tricky.
In Australia, student loan repayments are calculated based on your repayment income. Once you earn above the repayment threshold, you’ll need to pay a percentage of every dollar you earn towards your student loan. This percentage amount depends on your repayment income – the more you make, the higher the percentage.
But unlike income tax brackets, where the percentage of tax you pay applies only to your income within that tax bracket, your student loan repayment percentage will apply to all your repayment income.
(The ATO re-release their repayment percentages every year. You’ll find the full calculation table on their website.)
Compulsory repayments are calculated based on your repayment income, which includes:
- Taxable income
- Reportable fringe benefits
- Total net investment loss
- Reportable super contributions
- Any exempt foreign employment income
The amount due is calculated using your income tax return, and is payable as part of the lodgement of your tax return.
But he did receive a koala plushie as part of his welcome package, so there’s that.
As a contractor, he makes $75,000 annually – well above the student loan repayment threshold. He is required to pay compulsory repayments.
His income puts him in the 4% repayment bracket. But this doesn’t mean he pays 4% on every dollar he makes above the repayment threshold. Instead, he’s required to pay 4% of his total income.
4% of $75k = $3,000, his compulsory repayment amount.
Because he makes $75k, he also has to register for and charge GST – but that’s another story.
Compulsory repayments calculator
Voluntary student loan repayments
If you really want to knock down your loan balance, you can make voluntary repayments throughout the year.
But the important thing to remember is that voluntary repayments don’t count towards your compulsory repayment.
What voluntary repayments do help with is reducing your balance, before your loan is indexed. Speaking of which –
Indexing to inflation
In Australia, student loans are interest free. This means that unlike other kinds of loans, they don’t accrue interest.
But unlike other kinds of loans, student loans are indexed to inflation. What this means is that if the inflation rate rises or falls, your student loan balance rises or falls by the same percentage amount. According to the ATO, this is to maintain the real value of the loan without it being eaten away by inflation.
In theory, this is comparable to being charged a low interest rate. Historically, the annual inflation rate in Australia has sat between 1-3%, which is lower than some interest rates charged on student loans overseas.
Indexing and repayments
Now we’ve covered how indexing and repayments work, let’s talk about how they work in conjunction.
The last weird quirk of the Australian student loan system is that your compulsory repayment is due after your loan is indexed for the year. What this means is that if inflation has gone up, your loan balance will increase before you reduce it with your compulsory repayment.
This usually isn’t too big a deal, but if the inflation rate skyrockets, it’s definitely something to bear in mind. Making voluntary repayments before indexation could save you quite a bit down the line.
Her student loan was fairly hefty when she started her working life, but by 2023 she’d managed to knock it down to the final $10,000 owed. She planned to repay it all at the next compulsory repayment due date.
But before this happens, all Australian loans were indexed at 7.1%. She now owes the full $10k, plus an additional 7.1%, which is $710.
Cat pays off $10k as planned, but is left with the $710 as a new final loan balance. If she’d paid the $10k as a voluntary repayment before indexation, she would now be loan free.
She also still has to explain to her friends and family what actuarial science is, and what an actuary actually does.
All in all, it’s been a nightmare.
Checking your student loan balance
You can find a full breakdown of your student loan balance, as well as how much you’ve already repaid, in your myGov account.
💡 If you’re not registered with myGov, it’s fairly straightforward to get set up!
You’ll be able to see how much indexation has added to your loan balance over the years, as well as whether or not your compulsory repayments have been making a dent or not.
But if this is the first time you’re checking your numbers, we recommend steeling yourself – there’s a chance your loan balance may be higher than you think.
If you’ve been very unlucky with inflation and your working situation, you may discover that your loan balance hasn’t gone down, or has actually gone up since graduation. In which case, it could be a useful exercise to see if making voluntary repayments will help manage your balance.
And if it helps at all, you’re not alone.
Repaying your student loan while overseas
Now for some good news! Repaying your student loan if you live in another country is actually relatively straightforward.
If you’re heading overseas for 183 days or more in a 12-month period, you’ll need to update your contact details accordingly and submit an overseas travel notification within seven days of leaving Australia.
You’re then required to report your worldwide income to the ATO through your myGov account before the 31st of October each year. Based on this, the ATO will calculate how much you owe in student loan repayments using the same system as for local borrowers.
💡 If you don’t make the 31st October deadline, you may be charged a penalty fee. Be sure to lodge on time!
Should you pay your student loan off faster?
Outside of the compulsory repayments, should you be proactively paying off your loan?
We’re going to satisfy no one with our answer – it really does depend (sorry!). When asking yourself this question, there are a few things you need to consider for yourself and your situation.
1. Inflation and value
If inflation is low and steady, your loan shouldn’t increase by much year on year (unless you owe a hefty amount).
But if you know that your loan is set to increase by a lot due to indexation, voluntary repayments can help offset this. It’s money out of pocket now, but it’ll save you potentially thousands of dollars in loan increases.
2. Applying for a mortgage
Student loans can impact the amount a bank will let you borrow when buying a house. If you plan on getting your own place soon, it may be worth seeing if you can lower your student loan balance.
We recommend talking to your bank about it first though, before you go dipping into your deposit!
3. The % pay cut
If you earn above the repayment threshold, a set percentage of your earnings are required to go towards your student loan. Once you pay your loan off, you’ll have a few extra thousands (potentially) to play with every year.
Imagine what you could do with those extra funds?
4. Your risk tolerance
If you have a high tolerance for risk, you may be more inclined to put your money into high-reward investments, that have the potential to net you significant gains (or significant losses).
But if you have a low-risk appetite, it might be more important for you to pay off your “low risk” student loan before anything else. After all, as we’ve seen recently, no one can accurately predict the inflation rate!
5. Overseas admin
If you’re heading overseas for a long period of time, you’ll have a bit of extra admin to deal with, as well as handling all the local tax implications.
It’s not a big deal, but paying off your student loan means one less piece of admin to think about. Say goodbye to the ATO, and hello to the European/Asian/American sun, sand, and surf (or whatever it is you’re doing outside Australia).
6. The mental load
Many ex-students are grateful for the education they were able to undertake, but still feel burdened by the weight of their student loan. If this is the case for you, nothing can compare to the weight off your shoulders once you’re done paying it off.
Don’t forget to throw a massive shindig when that loan balance hits $0. You’ll have earnt it.
Automate your student loan repayments with Hnry
Look. You’re busy. We get it. You don’t need to be reading yet another article about money you owe the ATO. Which is why we really recommend you start using Hnry.
(Yes, we’re biased; hear us out.)
Hnry is an award-winning tax and financial administration service for sole traders. For just 1% of your self-employed income, we will completely sort out your compulsory student loan repayments, alongside your:
We also lodge your annual tax returns, as 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.