For those with student loans, you may or may not know that these loans are indexed each year. This means that they are increased to reflect the increased cost of living. So whilst they are technically interest free, they still can cost you.
Now that we have had record inflation – it is likely that this index figure will be the highest in ten years. Potentially this could be 6-7%.
What does this mean for you?
If you have a $50k student loan, this loan will increase by $3.5k if the index rate is 7% on 1 June 2023.
Now often we get queries about student loans being paid throughout the year through your salary and why this isn’t reflected on their student loan balance. Whilst your employer may be withholding the additional tax throughout the year, until you lodge your tax return, it does not reduce your debt.
So if you had $10k left on your student loan and your employer has withheld an additional $10k so far this financial year (ends 30 June 2023), your student loan will still be indexed on 1 June and cost you an extra $700 in what you have to pay back.
How can you stop this? In the above example, if you had the cashflow to support it, you could make the $10k payment ahead of 1 June and pay out your student loan and simply get the additional tax back as a tax refund when you lodge your tax return.
It may be worthwhile, especially cashflow allowing, to get these debts down ahead of 1 June 2023.
If you have prior year tax returns outstanding, prioritising these for lodgment before 1 June 2023 may also bring down the loan amount that will be indexed. In doing so preventing further increases to the loan balance.
Lastly, it is important your employer is aware of your student loans. If your employer is aware of your student loans this will ensure they are taxing wages correctly during the year so there are no nasty surprises at tax time with a tax payable amount for the compulsory student loan repayment figure.
As always, get in touch with any questions.