Should I Pay Off HECS Early or Invest? (2026)

So, you’ve got HECS debt sitting there, and you’re wondering if you should use that extra cash to pay it down early or put it into the market. It’s one of the biggest money dilemmas, and there’s no single right answer—it depends entirely on your financial life right now. Think of this as a tug-of-war between safety and growth. Paying off HECS feels safe because it’s guaranteed debt reduction, but investing offers the potential for much bigger returns over time. Before making a move, we need to understand the mechanics of both sides. We’ll break down the key factors—like indexation rates and your personal goals—so you can make a decision that actually helps your future, rather than just feeling good in the moment.

First, let’s demystify HECS indexation. This is the inflation adjustment applied to your debt, meaning your balance increases each year to keep pace with general cost-of-living increases. While the rate usually settles between 2% and 4% from 2025 onwards, the government caps it at the lower of the CPI or WPI. This rate is your 'cost of debt.' Crucially, while HECS debt doesn't hurt your credit score, it absolutely impacts your borrowing power. For every $1,000 you *don't* pay off, banks might reduce your assessed borrowing capacity by $3,000 to $5,000 when you apply for a mortgage. Knowing this impact is half the battle. If you are planning a major financial move, this factor needs to be front and centre in your decision-making.

You should strongly consider paying down your HECS early if one or more of these three conditions apply: 1) The indexation rate is unusually high (e.g., above 5% for the year); 2) You are buying a house within the next 1 to 3 years; or 3) Your current HECS balance is relatively small (say, under $30,000). The main reason is the immediate boost to your assessed borrowing power. For example, if you have a $20,000 balance and are planning a house deposit, paying it down could boost your lending capacity by several thousand dollars. If you have a small balance, the effort of paying it off quickly gives you peace of mind and immediate financial stability. For more detail on budgeting for a deposit, check out our guide on saving for a house deposit.

If you have a large HECS balance (like $60,000) and you are 5 to 10 years away from needing a major piece of equipment, like a house, investing is usually the smarter long-term move. The historical average return for diversified investments like ETFs is 8–10% over the long run, which typically outperforms the expected HECS indexation rate. By investing, you are giving your money time to grow significantly, allowing compounding interest to work its magic. You are betting that the market's long-term returns will beat the government's indexation rate. If your debt is large and your time horizon is long, you can afford to let the money work for you. Consider looking into how to start investing with ETFs to build wealth.

To simplify this, think of it as a risk assessment. If your goal is short-term stability (buying a house soon) and the indexation rate is high, paying down HECS is the safer bet because it immediately increases your borrowing power. However, if your goal is long-term wealth (retirement, investment property) and the indexation rate is low (e.g., 2-3%), you should prioritise investing. Never pay off debt just for the satisfaction of clearing it; always tie the action back to a specific financial goal. We recommend using our debt vs. invest calculator to run numbers tailored to your exact situation. Remember, a balanced approach—paying down the minimum while investing the surplus—is often the most sustainable path.

Q: Does paying off HECS help my credit score?

No. Paying off HECS debt will not directly improve your credit score, as HECS is not reported to credit bureaus like credit cards or loans are. However, it significantly improves your borrowing power, which is what banks care about when assessing your capacity to take on new debt.

Q: What if the indexation rate is unpredictable?

If you are unsure of the indexation rate, the safest approach is often to stick to a balanced strategy: pay the minimum required payment on your HECS and dedicate all extra funds to a high-interest savings account or a diversified investment, building a buffer for unexpected costs.