After a long wait, it's been confirmed that millions of Australians will receive a refund on their HECS debt.

Back in May, 2024, the government announced plans to cut around $3 billion in student loans — a change that's finally coming into effect, with parliament passing the changes to HECS-HELP.

How will it work? The average HECS loan balance of $27,000 is set to incur a refund of about $1200, thanks to changes to HECS indexation coming into play in June next year, which will now be calculated on either the Consumer Price Index or Wage Price Index, whichever is lower.

For those who currently have an outstanding HECS debt, the changes will come into effect automatically. And, if you've already paid back your loan in full, you can expect to see a refund reflected in your next tax return.

In light of these changes, now feels like the perfect time to brush up on your knowledge of Australia's HECS system. I used to work in the finance industry, and if you are feeling confused by our current financial systems and policies, you're not alone. Many aspects of finance are often kept deliberately occlusive. The best way to fight back is by staying aware. Here's everything you need to know about HECS and HELP in Australia.

HECS isn't charged interest - but that doesn't mean it's fee-free

You may have been told when you first signed up for your HECS debt that HECS does not accrue interest. And this is technically true. Technically.

When you take out a HECS debt, you will not be charged interest - but you WILL be charged indexation.

What is interest?

Interest is a fee that can be compounded daily and generally charged monthly on any money you owe. The rate of interest is set by the institution you are borrowing from. This might be a bank, a credit union or a private lender. If you have a variable interest rate, the interest rate you pay will rise and fall in line with the official interest rate (or cash rate) set by our central bank, The Reserve Bank of Australia.

What is indexation?

Indexation is an annual adjustment applied to outstanding debt. It's designed to "adjust" your debt to the real value of money. We know that $10 in 1970 was considered a lot more money than $10 in 2024. In fact, $10 in 1970 is equivalent to $137 today. This is because of inflation.

Historically, inflation in Australia has sat around the 2-3% number. So each year, roughly a 2% fee is added to your debt balance in order to adjust your debt in line with inflation. But, after COVID lockdowns were abolished, inflation in Australia skyrocketed, reaching a high of 7.8%. In 2023, the rate of indexation for that year was 7.1% - so a 7.1% fee was applied to all HECS debt more than 11 months old.

How is indexation determined?

The indexation figure can be calculated after the inflation or CPI data for March is released each year. It's determined by looking at financial data from the last two years - essentially it measures how much prices increase in one year compared to the previous year.

If you want to go into the nitty gritty, this is the simplest explanation I have for the actual calculation. Section 140-10 of the Higher Education Support Act 2003, says that indexation is calculated by adding the index numbers for the last four quarters ending in March, and diving this sum by the same sum from the previous year. The "index number" is the all groups consumer price index.

Based on this, we know that the 2024 number is 4.7%.

How is your HECS debt paid back?

Your HECS or HELP debt is paid back when your income reaches a certain level. If you earn less than $51,550, you don't need to make repayments. But if you earn more than this, you will be required to pay between 1% and 10% of your annual income each year toward your debt. The percentage is on a sliding scale relative to what you earn, with people on $52k paying back 1% and people on $152k paying back 10%. Your employer will organise the repayments for you.

The problem with this system is that it disadvantages lower income earners who always feel the pinch CPI and inflation more than higher income earners.

Take a person earning $60,000 with a debt of $25,000 in 2023 - let's call her Vanessa. Vanessa was required to repay 2.5% of her income. Which is $1,500. But in 2023, her indexation bill would have been $1,775.

This means that all the repayments made in the 2022-23 tax year don't even cover the fees she was charged, let alone chip away at the original amount.

Since indexation is 4.7% in 2024, Vanessa will have another $1,187.93 applied to her debt. Based on the new repayment thresholds for 2024, her compulsory repayments will be $1200. After adding indexation and then her compulsory repayments, Vanessa's debt will be $25,262.93.

$263 more than the debt was two years ago. Even though Vanessa has technically paid off $2,700 - all thanks to indexation.

Can you avoid indexation?

The only way to do this is to pay your HECS off in full a week before the indexation date of 1 June. If your loan balance is zero, you will not be charged indexation.

Why is the indexation applied to the balance of your loan before your compulsory payments are?

This particular point can make people with HECS debts feel like they're spinning their wheels. There are many current discussion around how this system is wholly unfair. But there is a reason why.

The true amount of HECS you need to repay in a year cannot be determined until you file your tax return. This is because your compulsory payments are relative to your "taxable income" - not what's on your payslip.

Your employer will take your HECS payments from your income, and they will be held. After you've lodged your return, the correct amount you need to repay will be calculated, and then taken from the money that was held. If you have a lot of deductions and your taxable income ends up being lower than what you earned, some of money collected to pay your HECS could be returned to you.

Tax returns are not due to be filed until 30 June each year. And even if you filed on the due date, it takes a few weeks for the tax office to process your information. As such, your repayments cannot be applied to your loan until July at the earliest.

Indexation will apply to the balance of your loan at 1 June - if the debt is older than 11 months. And because tax returns are not due until at least a month later, this balance will not include the compulsory repayments you've made in that tax year.

Can I make extra HECS repayments? Should I pay my HECS off early?

Of course you can, but whether you want to will be determined by your own individual circumstances.

If you make extra contributions straight to your debt, which you can do via BPAY, indexation will be calculated on the loan balance including these payments. Extra repayments could reduce the amount of indexation added to your loan.

Before deciding to make extra repayments, you should consider what will be most financially beneficial to you.

Some sources say that if you have a debt where the fees or interest charge is LESS than 6%, you might choose to invest your money instead as average investment returns are generally 6% or more depending on the market conditions. But if your debt is accruing fees or interest at a rate HIGHER than 6%, you might like to pay the debt down first.

This year's indexation will be in the 4-5% range.

Some people may consider paying their HECS off early as a HECS debt could affect how much money you are allowed to borrow for a home loan or car loan.

You will need to choose a path suited to your personal circumstances. Don't take financial advice from anyone other than a professional. It is a good idea to consult a financial advisor before making big financial decisions.

How can we bring indexation down?

Under the present system, the only way to decrease the indexation figure is to reduce inflation or CPI.

This is where things get very complicated. Inflation or CPI is a measure of how much prices have increased compared to the same period in the previous year.

CPI measures everything from grocery prices and hotels rates to insurance costs and rental prices. If bananas, flights, car insurance and your Friday night takeaway dinner all cost 5% more in April 2024 this year compared to April 2023, then the inflation figure for April 2024 is 5%.

When you dig a little too deep into this, it's baffling that just because supermarkets decided to charge $20 for a lettuce and car insurers doubled your payments, now HECS debts are require to be increased too.

Instead it's more productive to look at how to bring indexation down.

If we can bring inflation back down to a smaller number, the rate that HECS debts increase will be smaller too.

As an individual, the best thing you can do to lower inflation is to vote with your wallet. If you see groceries with unreasonable price increases, don't buy them. If your health insurance has gone up, compare other policies to see if you can get a better deal. Pick a more affordable holiday destination this year. If consumers refuse to pay high prices, supermarkets, airlines and insurers will be forced to drop them.

The RBA also attempted to reduce inflation following two straight years of interest rate increase, putting immense pressure on anyone with a home loan. The problem here is that, while roughly 60-70% of Australians own a home, only half of those people have a mortgage. The rest own outright. With only 30-35% of Australian susceptible to interest rate increases, they don't have as much of an impact as they might have had in the past. Unfortunately, this is the only tool the RBA has to fight inflation.

If you're interested to follow along, the Australian Bureau of Statistics will publish the March quarter CPI on 24 April in its latest releases section.