She's On The Money - Talk HECSy To Me

Episode Date: November 8, 2024

HECS relief or HECS headache? Today, Victoria dives into the details behind the government’s new HECS proposal, including a 20% debt discount and changes to the income threshold for repayments. Sound like a win? Maybe. But as always, the devil’s in the details. Tune in for the full breakdown on what these changes could mean for you now—and for years to come! Acknowledgement of Country By Natarsha Bamblett aka Queen Acknowledgements. The advice shared on She's On The Money is general in nature and does not consider your individual circumstances. She's On The Money exists purely for educational purposes and should not be relied upon to make an investment or financial decision. If you do choose to buy a financial product, read the PDS, TMD and obtain appropriate financial advice tailored towards your needs.  Victoria Devine and She's On The Money are authorised representatives of Money Sherpa PTY LTD ABN - 321649 27708,  AFSL - 451289.See omnystudio.com/listener for privacy information.

Hello, my name is Natasha Nabanunga-Bamblett. I'm a proud Yorta Yorta, Kernai, Wolperi and Awadjeri woman. And before we get started on She's on the Money podcast, I would like to acknowledge the traditional custodians of the land of which this podcast is recorded on Awadjeri country, acknowledging the elders, the ancestors and the next generation coming through. As this podcast is about connecting, empowering, knowledge sharing and the storytelling of you to make a difference for today and lasting impact for tomorrow. Let's get into it. She's on the money. She's on the money.

Hello and welcome to She's on the Money, the podcast that digs into finance news you actually care about in a way you can actually understand. I'm Victoria Devine, your finance friend with all the tea. And today I'm spilling on what's probably the juiciest headline of the year for anyone who's still feeling the very heavy weight of their HEX or HELP debt. Today, I'm going to be chatting with you about an Australian government proposal that could mean a 20% cut on your student loan balance, which sounds very, very good. And let's be real, for most of us, that's not just news, that's life changing. However, my friends, there is actually a lot to unpack here from what these changes actually mean for your repayments

to how they could affect your budget in the long run. So my friend, grab a coffee, sit tight and let's break it down together. All right, so here's the lowdown on the HECS and HELP changes. First, the headline grabber, a 20% reduction on all outstanding student loan balances. If the Labor Government is re-elected, this is going to take effect on the 1st of June 2025 and apply to everyone with a HECS or HELP debt, VET or similar student debt. Let's break down what that actually means with some numbers though, because I'm stats girl and we have done some maths. So first, a 20% debt reduction. Say you're an average Aussie grad with a HECS debt of $27,600. Under this new plan, you're going to get 20% of that balance completely wiped out. So instead of owing $27,600,

you'll see about $5,500 raised from your debt. That brings your outstanding balance down to $22,100, which is not too shabby, right? Or let's say you're getting through your repayments and you only have $10,000 left on your HECS debt. You'll see a $2,000 reduction, dropping your total to $8,000. Now let's sideline a little bit and have a quick chat about the higher repayment threshold that's been proposed. The next change is the repayment threshold, and that's the minimum amount you need to earn before HECS repayments start getting taken out of your pay. It sounds good on the surface, right? Right now, you start repaying your HECS debt once you're earning over $54,435 a year. But with this new plan, that threshold is going to rise to $67,000.

So let's go in with an example. Say you're a recent grad and you're making $60,000 a year. You're currently just above the threshold and would be paying a portion of your income towards your HECS debt every single pay cycle. But under this new proposed system, you'll actually fall below the threshold and won't need to start paying back your HECS until you earn above $67,000. That's extra cash in your pocket right now to help with rent and bills or maybe even just saving up for a big goal, which sounds, as I said, on the surface really good. I have a lot to say and it'll all make sense, but there are a few things that I want to get through before we dive into a deeper a part of the conversation. So let's touch on the cost of living benefits really quickly.

So what do these changes mean day to day? Obviously, you're going to feel a little bit less pressure when it comes to rent and bills. But let's say you're making $65,000 a year. Currently, you're going to be required to make HECS repayments, which are probably around $2,000 a year, depending on your exact income bracket. With this new threshold, you'd get to keep that two grand in your pocket. And in today's economy, that cash could go towards your rising grocery bills or rent or saving up for your first home. But if you're earning just over that threshold, say $68,000, your repayments will still be smaller than before thanks to the new 20% debt reduction, meaning that your overall balance and yearly repayments are reduced.

Sounds kind of sexy, right? These changes, they do come at a time when the cost of living, it feels like it's squeezing us all so for some this could be a really real relief. By bumping up this payment threshold many of us would have a little bit more breathing room each month before our student debt started kicking in and that 20% reduction that's thousands of dollars that you don't have to worry about anymore. But as with anything money related it's really important to know the details so that you can decide the best way to approach your repayments in the long run. After the break, I'm going to deep dive into the nitty gritty of how these changes actually play out across different income levels. At first glance, lowering the minimum repayment

sounds like a win for your budget, right? But there's a little bit more to the story. Stick around because what seems like short-term relief might actually have a few unexpected twists. All right, my friends, we are back and I'm excited to talk about this. It is time to get into the nitty-gritty of how these changes actually play out across different income levels. At first glance, lowering the minimum repayment sounds great for your monthly budget. Everybody wants a little bit more wiggle room, but when you take a closer look, for a lot of people, it could mean holding onto that debt for much longer. Now, obviously, in true Victoria Divine fashion, we have an entire spreadsheet. I'm going to dive into exactly what that looks like,

though. For incomes at the lower end of the scale, like $60,000 and $70,000, the new minimum repayment requirement is either $0 or it's been significantly reduced. So for example, $450 annually for $70,000 a year. This reduction essentially delays repayment, especially for those earning $60,000 where the debt theoretically would never be paid off under minimum payments alone. Previously, someone who earned $70,000 a year would have made an annual payment of $1,750, which would allow them to pay off their debt if they remained at that income level in about 15.8 years. Now, under this new proposal, the drastically reduced payment of $450 leads to an indefinite repayment timeline, so forever, as it doesn't actually keep pace with the debt growth.

Now, let me talk to my spreadsheet for a hot second. So let's pretend you have graduated, right? So if this comes into effect on the 1st of June, 2025, you'll get your 20% reduction, which arguably is very exciting at this point in time. And then the new monthly minimum repayments will apply, right? So we've done some maths in the background and I have used the number of $30,763 because that is the average HECS debt of somebody in their 20s, right? So this number is what I'm always going to fall back on. As of the 1st of June, 2025, if you get your 20% deposit, that will mean that your HECS debt drops to $24,610. That is now the number that I'm going to be talking about because that's your post 20% discount, right? So historically, if you

earned $60,000, your old minimum annual repayment would have been $600, right? And that means if you extrapolate that out, it would have taken you 46 years to pay that debt off. Okay. So now we go back to this $60,000 income. You now have $24,610, but because of the new minimum monthly repayment threshold, you no longer make any HECS debt repayments, which means hypothetically, you're never going to pay off your HECS debt. Now, is that the worst thing in the entire world? If you never plan on earning over $60,000? Absolutely not. We do have to think of a few things here though. One, if you are ever going to get property, your HECS debt is ultimately going to reduce how much you're able to borrow. But also on the bright side of things, a hex and help debt is the only

type of debt in Australia that dies with you. So it's not going to be passed on to anybody else. It's not going to be taken out of your estate when you pass along. It is something that is going to just cease to exist at the end of your life, which sounds a little bit morbid, but I think it's really important to preface it there too, because a lot of us get really stressed about the idea of carrying debt and then passing debt on, right? Let's jump up, though, because if you're on an income of $70,000 per annum, historically, your old minimum repayment was $1,750 a year, which means it would have taken you 15.77 years to pay off, which is honestly, in the grand scheme of things, not that bad. However, your new minimum monthly repayment as of the 1st of June 2025

will change to $450 per annum, which means you'll never pay off your HECS debt. You will literally be paying off your HECS debt every single year, but because of the average rate of indexation, which I have used the number 2.7 because that is the average rate of indexation historically, it means you're never going to pay off your debt, but you will be paying that debt off every single year. But because of the rate of indexation, you are actually going to accrue more debt each and every single year, even though you're paying off the minimum repayments. If we jump up to $80,000 a year, your old minimum repayment, or as it is right now today, is $2,800 a year. It means that in just under 10 years, so 9.85 years, you will be able to pay off

the entirety of your HECS debt. However, your new minimum monthly repayments as of the 1st of June 2025 will be $1,950, pushing your years to pay that debt off up to 15 years and six months. At the end of the day, this means that you are ultimately going to be paying more indexation over that period of time and it is going to stay with you even longer. This obviously extrapolates out all the way up to incomes of $179,999 because anything above $180,000 means that there will be absolutely no change. But I think you're starting to see my point. And my point is even with a very attractive 20% discount and the fact that your minimum monthly repayments are dropping, it sounds all really good because we all want cash in our back pocket to spend on bills and rent like life

is tough, ultimately this debt is either going to never be paid off under this new scheme or it's going to take significantly longer, which is going to impact your ability to create wealth over the long term, which to me is the most concerning part of this, right? Because ultimately my job is to help you create wealth and keep wealth and put you in the best possible financial position. And I think there's been a lot in the media about this being super positive. Who doesn't want a 20% discount on their HECS. I know I'm going to welcome that, but that doesn't actually mean that you're in the best possible position. The other thing that slightly frustrates me is this is a one-time discount. So right now, if you're at university or you're planning to start university,

you're not going to benefit from this at all. And those calculations that I used were based on that 24,000 figure, not the 30 plus thousand figure. It's going to take you even longer to pay off your debt with lower minimum repayments. So to summarise all of this, what does it all mean? For those in lower and middle income brackets, the new system gives you arguably immediate relief by lowering repayments, which can help with current cost of living pressures. But on the flip side, sticking to these minimum repayments could mean carrying that debt for years longer than you might have under the old rules. And that doesn't sit well with me. Maybe the extra breathing room is exactly what you need right now. And it's not a bad thing to say, Novi, I don't even care about

having this debt for longer. I need a little bit of wiggle room in my budget. Girl, I get it. I really do. And that's great. But if you're thinking long term, you might decide to chip away at that debt a bit faster to free yourself up sooner. It all depends on what your values are and what you're working towards. Importantly, you need to remember that this isn't a one size fits all solution. It's about understanding how these changes impact you personally and making a choice that aligns with your own goals and values. And over the last week, my DMs have absolutely blown up with people going, V, I'd love to see the stats. V, I'd love to see the numbers. V, this doesn't sit with me well. I know the idea of a 20% discount is really good, but what does this mean for me

holding debt for longer? You weren't wrong. I've done the numbers and it does put you in a worse off wealth position in the long term. When we posted about the news on Instagram on the She's on the Money account, a lot of you were really quick to ask why the new rate of indexation that was announced hasn't been applied yet. And fair enough, because it's super confusing. But here's the down low. While the government announced that they'd lower the indexation rate, the actual legislation to make it official hasn't been passed through Parliament yet. That means that right now, the old indexation rate is still in effect and we're all waiting for that final stamp of approval. If it does pass, the ATO will apply that lower rate retroactively and anyone eligible could see

a credit or a refund, which is kind of attractive. So hang tight and we'll keep you updated as things develop. At She's On The Money, we are all about giving you the tools to take control, even when changes come flying at you. If you found my breakdown helpful, please be sure to subscribe. I am literally here to make the money stuff easy for you and I want to say that I want to make it fun along the way but right now this doesn't feel that fun so I hope you have a beautiful weekend if you have any questions always slide into our dms and if you've listened this far I'm going to upload the spreadsheet of all of my working out to the website so you can download it and have a little bit of a snoop see you later guys

the advice shared on she's on the money is general in nature and does not consider your individual circumstances she's on the money exists purely for educational purposes and should not be relied upon to make an investment or financial decision if you do choose to buy a financial product read the pds tmd and obtain appropriate financial advice tailored towards your needs. Victoria Devine and She's On The Money are authorised representatives of Money Sherpa PTY LTD ABN 321 649 27708 AFSL 451 289.