HECS indexation increasing by 7%, but what does that mean?

The Australian Tax Office has confirmed that student loans will be increased and indexed at 7%.

Higher Education Loan Program (HELP, commonly called 'HECS debts') is a type of interest free government loan many Australians use to pay for university.

Every year the government indexes the loans and raises them to meet inflation and the current value of the Australian dollar.

Despite popular belief, this indexation is not a form of interest. After all, HECS is an interest free loan. Instead, the value of that money follows inflation which is calculated annually.

How is the annual indexation calculated

The indexation is calculated by using the Consumer Price Index (CPI)--essentially the calculation of the change in the value of goods and services. This is also known as inflation.

Remember how two years ago eggs were $3 and now are $6? Examples like that are used to calculate the CPI, inflation, cost of living and eventually the HECS index.

So, as the currency value changes, so does the value of your HECS debt.

For example, if you took out a $20,000 student loan a couple of years ago, the value of that $20,000 has changed. And the government wants the loan to be repaid to the same spending power so it can lend it to students again doing the same exact course you did a couple of years ago. 

Again, this is very different from charging you interest. Interest is a fee you are charged for borrowing money expressed as a percentage of the total amount of the loan. 

The government is not charging you for borrowing money, as mentioned before they just want to be paid back the real value of said money.

While many people find it unfair, especially when wages have not kept up with inflation, being indexed annually isn’t as bad as being charged interest. (Take it from an American with a US student loan!).

Even though 7% is a big jump, there have been many years where HECS’ annual index was less than three percent. Have a look at the below:

Indexation through the years - via ATO

Take note that the new index will be applied on 1 June 2023. 

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