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Salary Sacrificing And Your HECS-HELP Debt
If you’re one of the many Australian graduates with lingering degree debt from the Higher Education Contribution Scheme (HECS) or Higher Education Loan Program (HELP) that began in 1989, finding ways to pay down your remaining debt faster is more important than ever.
Salary sacrificing offers a potential solution, but there are some issues to consider. Even if you don’t actually salary sacrifice your HECS-HELP debt itself, it’s critical to understand that entering a salary sacrificing (salary packaging) arrangement for other payments may affect the repayments you need to make for your HECS-HELP debt.
We’ll explain why in a moment.
What is salary sacrificing?
Salary sacrificing (or salary packaging) enables you to reduce your taxable income so that you owe less income tax each financial year.
Put simply, both you and your employer agree that you will receive less income before tax. In return, your employer pays for certain benefits of similar value for you. The benefits replace what you would receive as salary.
Seek financial advice before entering a salary sacrificing agreement and ensure it suits your circumstances. This is important because salary packaging can increase the gross value of your salary. This increased value is known as ‘adjusted taxable income’ – and the flow-on of this can impact your HECS-HELP repayments.
Recent changes to HECS-HELP debt
From 1 June this year, another obstacle was put in the homeownership path of young Australians already struggling with cost-of-living increases.
That’s when university HECS-HELP debts became indexed to inflation, automatically increasing by 7.1%. It was a decision that saw many young graduates scrambling for ways to tighten their budgets.
While cutting back on discretionary spending and shopping around for a better deal with your energy providers can help create some extra surplus for your household budget, employees who explore salary sacrificing as a way to help clear their HECS-HELP debt may be on to something.
Clearing HECS-HELP debt can increase your borrowing power
Any credit application you make must now include your HECS-HELP debt (buffered as per APRA’s standard lending requirements). So, for a graduate on a salary of $69,000, with $22,000 of HECS-HELP debt, your 2023 borrowing capacity has dropped from $409,558 (without HECS-HELP included) to $394,558 (with the 1 June change that includes your HECS-HELP debt).
To claw back that lost $15,000 in borrowing power, paying off your debt faster is a smart move that may help you get into the property market sooner, before house prices rise even further.
Salary sacrificing is one way to repay your debt faster, but if you're not careful it can affect your repayment schedule. This can place you under more financial pressure, not less. Get advice from your accountant and find out if salary sacrificing is a good financial strategy for you.
Salary sacrificing HECS-HELP debt
Understanding the impact of ‘adjusted taxable income’ matters, as this is the figure the Australian Taxation Office (ATO) uses to calculate your HECS-HELP repayment each year.
Beware of fringe benefits tax (FBT)
Common fringe benefits include:
cars
goods
shares
payment of your expenses for loan repayments, school fees and childcare costs.
Talk to your accountant to make sure what you end up paying in FBT is not outweighing the positive of salary sacrificing your HECS-HELP debt.
The bottom line
The compulsory repayment HECS-HELP debt threshold for the 2022-2023 financial year is $48,361. Once your earnings surpass this figure, your repayments will increase as your income does. If you salary package as part of your employment, your taxable income will be adjusted upwards – and that means being assessed to make higher HECS-HELP debt repayments.
If you choose to make a voluntary contribution towards your HECS-HELP debt through salary sacrificing, you can repay an amount without paying tax on it as earnings, but you may still have to pay FBT.
Salary sacrificing does have benefits, but how much it will help you depends on your income and your debt level. Talk to your accountant/tax agent before committing.
Go deeper: HECS-HELP Debt Indexation to put Australians further out of reach of home ownership
