Making the Right Financial Move: Paying Off HECS Debt Early vs. Home Loan Repayment

In Australia, the decision to pay off Higher Education Contribution Scheme (HECS) debt early is gaining traction, especially with the 2023 indexation rate reaching 7.1%. For individuals with a HECS debt of $30,000, the indexation resulted in an increase of $2,130. For those grappling with the question of whether to prioritise paying off HECS or focusing on home loan repayment, a careful analysis of interest rates is essential.

As of December 2024, home loan interest rates in Australia hover around the 6.2% mark. Meanwhile, the last HECS indexation rate was 4.7%. However, it's crucial to note that the average indexation rate over the last decade is significantly lower, standing at 2.69%. This implies that you won't consistently face a 7.1% or 4.7% indexation rate every year, especially due to new legislation which bases the indexation rate on the lower of the Consumer Price Index (CPI) and the Wage Price Index (WPI).

To determine the best course of action, consider the interest rates on both your home loan and HECS debt. With the home loan interest rate averaging around 6.2%, it surpasses the average HECS indexation rate by 3.51%. This means that, on average, your home loan is charging you more interest than your HECS debt.

The financial benefit of paying down your home loan becomes apparent when you compare the interest rates. By focusing on reducing your home loan balance, you can potentially save more money in the long run, given the lower average indexation rate of HECS.

However, individual circumstances vary, and financial decisions are not one-size-fits-all. It's essential to consider other factors, such as the total amount owed on each debt, potential tax implications, and personal financial goals. Consulting with a financial adviser can provide tailored guidance based on your specific situation.
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In conclusion, while the recent HECS indexation rate may seem daunting, a closer look at the average rates over the past decade reveals a more nuanced picture. Given the prevailing home loan interest rates, directing extra funds towards paying off your home loan may prove to be the more financially prudent decision for many individuals.

​* Information is correct as of 12 December 2024.