4 Common Questions About HECS Debt, Answered

As we covered recently, HECS-HELP loans (and other student debts) are about to be hit with a nasty indexation rate of 7.1 per cent – due to the awful state of the cost of living right now.

The changes to HECS debt, in particular, have led a lot of Aussies to question what the best course of action is. As we mentioned in our initial piece, there is the option to apply to deter your HECS-HELP repayments temporarily if costs are starting to cause you financial distress. But if you’re not quite in that boat and are just wondering if it’s worth swallowing the rate spike or not, things may feel a little confusing right now.

We should point out that we are not financial advisors, so cannot offer any specific advice for your circumstances, but we do have some simple insight that may help provide a little clarity. For this, we spoke with Brodie Haupt, CEO and co-founder of non-bank lender WLTH, over email.

Here are some common questions about HECS-HELP debt increases, answered.

What does this year’s indexation rate mean for most Aussies with HECS-HELP debt owing?

Haupt explained that “while the RBA’s rate changes have been hitting homeowners hard, many Australians may not realise this has also impacted their student debt”.

Having the indexation rate jump up to 7.1 per cent (from 3.9 per cent in 2022) impacts Aussies with outstanding student loan debt as it causes “them to owe more on their university and TAFE loan repayments. The higher indexation rate means that those with HECS loans will be paying more back in accordance with the Consumer Price Index (CPI), inflation and cost-of-living, than those who paid off their loans in previous years”.

“For example, if a student upon leaving uni has a HECS debt of $28,000 and the indexation rate has become 7.1 per cent, the student’s debt will [now] realistically be closer to $30,000,” he shared.

This is all concerning, Haupt shared, because while this indexation rate is the highest we’ve seen in a decade, “wage growth not matching inflation, and the job market getting tougher, especially for graduates”.

Additionally, “Aussies who began paying off their loans years ago, may also find that their owing amount has changed significantly, and they’ve knocked much less off their debt than anticipated,” he said.

Why do people say HECS debt isn’t ‘real’ debt?

If you’ve heard folks speaking about HECS HELP debt before, chances are you’ve heard comments along the lines of, “But it’s not real debt, so it doesn’t matter”.

We asked Haupt why this form of student loan has built this kind of reputation and if there’s any truth to the claims.

“Some people may not consider HECS to be real debt because it is not subject to the same terms as other loans (they’re not subject to interest, instead they’re indexed to inflation), and it is only repayable when the student earns above a certain income threshold,” Haupt said.

“However, despite these factors, HECS is still a debt that needs to be repaid and will be coming out of your paycheck once you hit the earning threshold.”

He also stressed that failure to pay once you’re earning above the threshold can be met with consequences from the government.

However, it is true that HECS debts are only required to be paid while the person with the loan is living. In the case of death, the remaining owed debt is cancelled.

Does your HECS debt impact your borrowing capacity for a home loan?

With the whole ‘HECS debt isn’t real debt’ idea, some may believe that having HECS HELP debt owing may not play a part in home loan approvals. That is not entirely the case, Haupt shared.

“HECS debts can affect your borrowing capacity for a home loan, given borrowing power is typically calculated by looking at an individual’s income in relation to their current debts and other financial commitments. It does not, however, impact your credit score,” he said.

“HECS debt is seen by lenders to be another financial commitment that could affect your ability to make repayments, and so your borrowing power would typically be reduced based on the percentage of your income that goes towards paying off that debt. However, there are steps you can take to increase your borrowing power whilst paying off a HECS debt, such as cutting up credit cards, closing out personal loans, reducing the number of subscription services, and limiting non-essential spending.”

Should I pay off my student loans in full?

Obviously, this is a question that only applies to folks who can afford to do this. And, again, it’s worth getting personalised financial advice when it comes to any major decision.

But as it’s a question some are likely asking right now, we thought we’d pose the question to Haupt, too.

He, unsurprisingly, shared that deciding to pay down HECS debt depends on a lot of factors.

“Each individual’s financial situation and lifestyle are different, so whether someone pays off their HECS debt in one go or does so in instalments really depends on their capabilities, other outstanding loans and their financial goals,” he said.

“There is no time limit on when you need to pay off your HECS, and given it can’t impact your credit score, you may want to allocate that money towards paying down debts that can compound, especially with rising interest rates, such as car or personal loans that do impact your credit score.

“If you don’t have any major debts and you’re hoping to increase your borrowing power for a home loan, paying down HECS may allow you to unlock more from your lender.”

So, in short, weigh up your options and then chat with a financial expert to see what makes the most sense for you and your bank account.