Many young Australians are paying off a Higher Education Contribution Scheme (HECS) or Higher Education Loan Program (HELP) debt every month. Some of them have found that salary packaging is helping to get rid of that debt quicker. Unfortunately, most people are in the other group, who either believe that you can’t engage in salary packaging when you have a HECS/HELP debt, or that doing so is confusing, and leaves you with less money every month and an additional debt come tax season.
This article will put everything straight once and for all when it comes to salary packaging HECS debt. In it, we’ll cover the questions you probably have about salary packaging with a student loan, the benefits, and the process. By the end, you’ll see that not only does salary packaging benefit you every month, but it actually helps you pay off your debt quicker. So, let’s get straight into it.
1. Salary packaging doesn’t work if you have HECS/HELP debt
This is the most common misconception when it comes to salary packaging and HECS/HELP debt. And you can understand why. Financial issues are complicated and people often find it easier to bury their heads in the sand, so they don’t have to face any of it. But salary packaging HECS debt is as simple as it is possible. And there are a wealth of benefits too.
In fact, your experience will be exactly the same as the normal salary packaging process, where you’ll be able to pay reduced income tax (because of salary packaging) and receive extra pay at the end of a month. But there’s another amazing benefit that few people have realised. Because when you salary package with a student loan, your monthly debt repayments will usually increase every month. While most people may see this as a negative, all that really means is that you’re putting more money towards your debt every month. Meaning you’ll pay your loan off quicker.
2. Salary Packaging increases my HECS/HELP repayment so I have less cash
This is a common misconception, because when you salary package you end up assigning more money to your HECS debt every month. So while it may seem like you have less cash every month, what is actually happening is that the ATO is assigning more of your money towards paying off your loan for you.
Here’s how it works. When you make use of salary packaging, you receive more ‘benefits’ because you’re taking home more money at the end of every pay cycle. So the ATO takes your salary amount, adds fringe ‘benefits’ and ends up with your adjusted taxable income.
Your adjusted taxable income is used to calculate how much you pay on your HECS/HELP loan every month. The more you salary package, the higher this number will be. But that doesn’t mean you’re left with less cash. As we saw before, what it means is that you’ll already have saved money from salary packaging in the short term. Plus, because your monthly repayment is higher, you’re paying off your loan quicker. So the money is all yours, some of it is just being channelled into paying off your loan.
3. Salary packaging has no effect on the HECS interest rate increase.
The reality is that more and more young Australians are using salary packaging to overcome the recent interest rate increase on their student loan. In fact, they’re using the increase to their monthly loan repayments to pay off their loan quicker – so that they can start saving and building their financial futures.
On the 1st of June 2023, HECS/HELP debts increased by 7.1% because of inflation, which is unfortunately forecast to become more like the norm each year as interest rates rise after a long period of very low rates. This left the majority of young people in our country in a tough position. But salary packaging can actually be a more effective way of getting rid of that debt.
But remember, the more you ‘benefit’ from salary packaging, the higher your adjusted taxable income is – and the higher that is, the more your monthly loan repayment is. So you end up paying off your debt quicker and overcoming the interest rate increase more easily – and all using the savings achieved from salary packaging.
4. It’s going to leave me with massive tax debt, come tax season.
No one wants to end up with a debt for unpaid HECS/HELP repayments at tax time. But avoiding it is easy. You can do that by making sure that your employer is deducting an amount for your HECS/HELP loan from your post tax income before you get paid, and that they’re deducting the correct amount. Remember, when you start benefiting from salary packaging your monthly repayment may go up, so ensure that your payroll department is allocating the correct amount to your HECS/HELP debt every month. Employer’s processes differ, but you’re most likely going to need to fill out the ATO’S Tax Declaration form or a Withholding Tax form. Speak to your employer’s finance department, and follow their process. This will mean that you’ll be benefiting from salary packaging, and paying off your HECS/HELP debt quicker – with no nasty surprises come tax season. Easy, right?
Building your financial future, your way
If you’re willing to follow the process to set everything up at the beginning, then salary packaging with a HECS debt could mean a world of benefits. For starters, you may have more money at the end of the month. But you’ll also be able to pay off that student loan quicker too. You’ll also be beating the interest rate hike. And finally, it puts you in control of your finances, and empowers you to get rid of that debt so that you can step into your future more financially secure and way more financially educated.
It’s always best to bring on a salary packaging expert to help you along the way. Now that you’re all clued up on the benefits of salary packaging while paying off your HECS/HELP debt, get in touch with a member of CBB The Salary Packaging People today. We offer guidance from start to finish, including supplying estimates, payroll services and any other support you may need to get your salary packaging journey started. So get in touch with us today – your future self will thank you.