HECS debt: Warning to former university students as loan repayments set to soar and interest added

Urgent warning to millions of Australians in debt – with payments on the rise again

  • Just under three million former university students affected by the hike in refunds
  • Annual indexation rates increased from 0.6% to 3.9% this year
  • Graduates will have to repay an additional $923 on top of the average repayment of $23,685
  • The $2.7 billion interest bill comes as students struggle to pay day-to-day expenses

Millions of Australians who are still repaying their student loans will be hit by a further rise in repayments amid the spiraling cost of living crisis.

Millions of former college students will be stung with a $2.7 billion interest bill after annual indexation rates jump from 0.6% to 3.9%.

Soaring interest rates mean that graduates with HECS or HELP debt will pay an additional $923 on top of the average loan repayment of $23,685.

Australians who continue to repay their student loans will be hit by a further increase in repayments (pictured, students at the Australian National University in Canberra)

Millions of former university students will be stung with a $2.7billion interest bill after annual indexation rates rose from 0.6% to 3.9% (pictured, students in Sydney)

Millions of former university students will be stung with a $2.7billion interest bill after annual indexation rates rose from 0.6% to 3.9% (pictured, students in Sydney)

Indexation is a formula applied to student loans that have been outstanding for more than 11 months after graduation.

It maintains the real value of a loan by adjusting it according to changes in the cost of living, which is measured by the consumer price index.

The rate is closely tied to inflation, which hit 5.1% in the March quarter.

The spike in borrowing rates comes as students feel the pinch of the rising cost of living, affecting the cost of gas, groceries and electricity.

Graduates hoping to get a home loan will also be affected, as banks consider outstanding HECS or HELP debt when deciding how much to lend.

Data from the Australian Taxation Office revealed that student debt had more than doubled in the past seven years, with just under three million students owing a total of $69 billion to the government.

Graduates hoping to get a home loan will also be affected, as banks take outstanding HECS or HELP debt into account when deciding how much to lend (pictured, university students in Sydney)

Graduates hoping to get a home loan will also be affected, as banks take outstanding HECS or HELP debt into account when deciding how much to lend (pictured, university students in Sydney)

Students graduating in the next three years could be hit even harder by rising indexation rates after the former Liberal government scrapped taxpayer subsidies for arts, law or business courses from of 2021.

Graduates are required to start making payments on their HELP loans when they earn more than $48,361 – with a minimum salary of just $42,000.

WHAT IS THE INDEXATION RATE?

The indexation rate is a formula applied to student loans that have been outstanding for more than 11 months after graduation.

It maintains the value of the loan based on rising inflation and the cost of living.

The rate has increased by 3.9% since June 1 (compared to 0.6% last year).

Workers spend 1% of their income on reimbursements, with the rate rising to 6% if they earn an average salary of $91,000.

Those earning $142,000 or more lose 10% of their salary to HECS. refunds.

National Union of Students president Georgie Beatty said Australian students were crippled by the rising cost of education.

She said full-time college students working for a home or car loan can feel like it’s an “unreachable dream” and often have to work overtime on low pay.

“Students are struggling with mounting debt on fees that are at an all-time high,” Ms Beatty said.

In May, students with HECS or HELP were warned they would soon be in trouble with the biggest increase in refunds in 10 years.

Therefore, former students can choose to start repaying their debt voluntarily to reduce the total and lower the interest rate.

Experts have said, however, that it would be foolish to pay off HECS debt early, as it is the cheapest loan a person will ever receive.

Experts have said it would be foolish to pay off HECS debt sooner because it is the cheapest loan a person will receive amid rising indexation rates (pictured, University of Sydney )

Experts have said it would be foolish to pay off HECS debt sooner because it is the cheapest loan a person will receive amid rising indexation rates (pictured, University of Sydney )

Pivot Wealth founder Ben Nash told Nine.com.au the indexation rate was concerning as it exceeded current wage growth.

“When you compare it to wage growth, which is 2.4% annualized, you can see it’s struggling at a higher rate than wage growth,” he said.

“So that means people are going to have to pay more of their salary to have the same impact.”

Mr Nash said the figures should not discourage people from pursuing higher education, as the indexation rate is likely to average around 2% over 10 years.

“It’s only slightly positive because the cost continues to rise, but the increases in HECS are not as high as the increases in many other goods and services,” he said.

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Julio V. Miller