As a financial advisor here in Australia, one of the most common questions I get from uni graduates is whether they should focus on paying off their HECS-HELP debt quickly or invest that money elsewhere. Let’s break down this financial conundrum together.
Understanding Your HECS-HELP Debt
HECS-HELP debt is unique compared to other loans. It’s indexed to inflation (CPI) rather than accruing interest, and you only repay it once your income reaches a certain threshold ($48,361 for the 2023-2024 financial year). Repayments are automatically taken through the tax system as a percentage of your income.
Unlike credit cards or personal loans, there’s no aggressive interest compounding against you – it simply grows with inflation.
The Case for Paying Off HECS-HELP Early
There are several compelling reasons to pay off your HECS-HELP debt early. Being debt-free provides psychological benefits and financial freedom, while also protecting you against periods of higher inflation when indexation could be substantial. Some lenders consider your HECS-HELP debt when calculating your borrowing capacity for mortgages, and the system offers flexibility to make additional repayments anytime without penalties.
The Case for Investing Instead
On the flip side, investing your money instead of making extra HECS repayments has significant advantages. Long-term investments have historically outperformed inflation, and starting your investment journey earlier allows more time for compounding growth. There are tax-effective options like salary sacrificing into super that might deliver better outcomes, and building an emergency fund provides essential security before accelerating any debt repayments.
What’s Right for You?
Several factors should influence your decision: your income trajectory (higher incomes mean faster compulsory repayments anyway), risk tolerance (investing carries some level of risk compared to debt reduction), housing plans (reducing HECS might improve borrowing capacity if buying property soon), other debts (always prioritise higher-interest debts like credit cards before HECS-HELP), and career stability (less stable income might favor building investments as a safety net).
A Balanced Approach
For most Aussies, a mixed strategy often works best:
- Build an emergency fund of 3-6 months’ expenses first
- Contribute enough to a super to maximise any employer matching
- Pay off high-interest debts completely
- Split additional funds between investing and extra HECS repayments
- Consider making larger HECS repayments when receiving bonuses or tax returns
Bottom Line
In most cases, mathematically speaking, investing while letting HECS-HELP repay itself through the tax system makes more financial sense. The potential investment returns typically outpace the indexation rate on your HECS-HELP debt.
However, personal finance isn’t just about math—it’s also about mindset. If being debt-free is a major psychological boost for you, there’s genuine value in that too.
Remember, the best strategy is one that you’ll actually stick with and that aligns with your broader financial goals and values.
Written by Michael Andrew Bankier