The income threshold for repaying university fees has dropped to just $45,881. Here’s what you need to know

Hecs debt repayment changes: why more people will be forced to pay off student loans

On Monday, the Hecs (Higher Education Contribution Scheme) repayment threshold fell by more than 11%.

From now on, anybody earning over $45,881 a year will have to start repaying their student loans – effective immediately. It was the largest percentage drop in the threshold in more than 20 years and the second largest drop in the history of the scheme.

Two years ago, the repayment threshold was $56,000, but Australia’s Coalition government lowered that to $52,000 last year as a budget-saving measure, and it has now been lowered again.

How much will I have to pay?

It’s a common misconception that you only start paying your Hecs debt once you graduate. In fact, you start paying it the moment your income goes over the threshold.

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If you’re just over the cut-off, you will have to pay 1% of your total income. And that’s pre-tax, not after.

So if you earn $45,881 before tax – which is more like $39,000 after tax – you will pay $459 a year ($9 a week).

As you earn more income, that percentage goes up.

At $55,000, you will pay 2% – which is $1,100 a year ($21 a week).

At $75,000 you will pay 4.5% – which $3,375 a year ($65 a week). The maximum is 10%, for those over $135,000. The full table is here.

And remember: that percentage is of your income, not your debt, and it applies to the total of your earnings. This makes it different to the bracket-based system of income tax.

This means, in rare cases, you can get a raise that pushes you into a higher threshold but end up paying more in Hecs than you got in your raise, because the new rate applies to the totality of your income.

For example, if you are on $52,500 a year, you pay 1%, which is $525. If you get a $500 raise to $53,000, you enter the 2% bracket and have to pay $1,060. An increase of $535 that erases your raise.

How many people will be affected?

An estimated 136,000 people will be affected by the lower threshold.

To put $45,881 in context, the median wage is roughly $55,000, according to the ABS’s most recent statistics.

And the minimum full-time wage is $38,500 – only $7,000 below the threshold.

The median full-time wage is $68,640 and the median part-time wage is $27,500.

If I get a pay rise or start working more, will I have to start paying my Hecs immediately?

Probably. It depends on your employer.

Most people pay off their Hecs using the same PAYG system they use to pay taxes. This means your employer estimates your final yearly income and takes tax and Hecs payments out of your payslip at that estimated rate. If they take too much, then you get it back through a tax return.

So if you start earning a weekly wage high enough to hit the threshold ($882 a week), it’s very possible that Hecs will start coming out, and probably higher than a 1% rate.

It’s complex – but a formula has been published by the Australian Taxation Office here.

Say you work part-time for six months at the median part-time yearly salary of $27,500, which is below the threshold. That’s $582 a week, and you won’t be paying Hecs. But then you take extra shifts for the next six months, and move up to the median wage of $55,000 a year, which is $1,057 a week.

You will start paying 2% Hecs, which means $21 a week will immediately be deducted from your pay.

But adding your wages up for the whole year, you only made $41,250 – which is below the repayment threshold. The $21 a week you were paying in Hecs will be credited back to you.

“If too much has been withheld, any credit available will be refunded as part of the normal return process, provided no other primary tax liabilities exist including other government debt (ie Centrelink and child support),” says the ATO.

And if you work intermittently – and get larger payments, for example, over Christmas – you could pay more Hecs for those weeks.

When you start at a new job, there’s often a box you can tick to say you have a Hecs debt. The ATO recommends you do that so your work can start estimating and factoring those payments into their PAYG.

Wait … do I have a Hecs debt? How can I check it?

The acronyms can be very confusing – and have changed in recent years.

The official term for your student debt is a Help debt (Higher Education Loan Program). Help is an umbrella term designed to capture everything. The new rules apply to Help – ie everything.

Within Help is Hecs-Help, which is the most common kind of debt and is what you most likely colloquially call all student loans.

Hecs-Help is for commonwealth-supported places, which is most undergraduate courses and a few postgraduate. There is also Fee-Help (for full-fee courses, ie most postgrad), Vet Fee-Help (for vocational colleges) and OS-Help (for when you study overseas or are on exchange).

A Hecs debt is effectively an interest-free loan. It is indexed to the consumer price index – so the amount goes up every year, but not more than inflation. This means it shouldn’t cost you more to pay off your Hecs over a long time.

You can check your Hecs debt on the MyGov website – and it should be down at the bottom of your tax return. You can also contact the ATO.

But remember: there is no time limit to pay it off. Previously, you didn’t need to pay it if you moved overseas, but that loophole was closed in 2016.

Can I reduce or cancel my debt?

In special circumstances, like tragedy or severe financial difficulty, you can also have some of your Hecs debt cancelled or at least delayed.

If you failed a subject (due to special circumstances), or had to withdraw from it due to illness or other circumstances, you can apply to your university to have the debt for that subject cancelled.

But if you’ve completed the course, or if you failed it without a special reason, you still have to pay for it.

Becoming bankrupt won’t wipe your debt, either.

But if paying your Hecs will cause you “serious financial hardship” you can apply to the ATO to defer your payments or reduce them. This can include if you are affected by death, illness or a natural disaster.

And finally, if you went to a vocational college and got a Vet Fee loan, you could have your debt reduced too. This was after revelations that many vocational colleges were defrauding the Vet Fee system and were pressuring students to sign up, or lying about the cost.

If that happened to you, you can apply for financial redress.

• This article was amended on 3 July. A previous version said the the repayment threshold fell to the lowest it had ever been.