As political parties , new figures show paying off a HECS loan may impact graduates’ borrowing power for a mortgage by almost $100,000.
Research from Compare the Market revealed a university graduate on a salary of $125,000 paying off an average HECS debt of almost $26,500 would have a reduced borrowing capacity of $95,900.
Graduates earning $100,000 would be $56,300 worse off in gaining finance if paying off their HECS. The borrowing capacity of those on $75,000 be reduced by $26,800.
This is because banks take a mortgage applicant’s debt-to-income ratio into account before lending them money.
‘The harmless image has started to change’
The federal government announced in October that should Labor win the next election.
The Greens have gone a step further, unveiling a $74 billion plan to scrap all student debt, signalling the proposal would be a key point in negotiations should there be a hung parliament at the election.
Compare the Market economic director David Koch said not paying off student debt could have longer-term consequences.
“Historically, HECS has been seen as a benign debt that you pay off gradually through your salary. There’s no interest on the loan, there’s no deadline, and it’s the only debt written off when you die,” he said.
“But the harmless image has started to change in light of the huge sums added to debt each year due to indexation.”
Indexation levels grew to 7.1 per cent in 2023 off the back of high inflation.
Indexation aims to preserve the real value of a student’s education, regardless of how long it takes to repay. That means that the amount a graduate owes increases along with inflation.
HECS debts are indexed on 1 June each year after the release of the March quarter consumer price index (CPI) — in the cost of household goods and services.
In May, the government announced plans to If its bill — currently before the Senate — passes indexation will be matched at either CPI or the wage price index, whichever is lower.
The wage price index measures median wage changes over time and has increased by 24 to 30 per cent — depending on where you live — over the past decade,
Longer time to pay off
Koch said people were taking longer to pay off their student loans than in previous years.
“When the average time to repay a student debt has blown out from 8.2 years in 2011-2012 to 9.5 years in 2021-2022, most people will continue to pay hundreds or thousands of dollars more due to indexation,” he said.
“Generally speaking, your borrowing power is reduced by the percentage of your income you’re required to pay towards your HECS. Therefore the higher income earners could be more restricted by their HECS debt than lower income earners.
The Independent Tertiary Education Council Australia said the government’s plans to wipe out one-fifth of student debt fell short of genuine reform for the sector.
Labor’s proposal would cost $16 billion and wipe about $5,500 off the average HECS debt.
HECS debt’s tenfold impact on borrowing
According to Digital mortgage broker Finspo, a person’s the sum of their HECS repayments.
“Before deciding whether to give you a loan, lenders look at all the debt you owe and the current repayments you make. That includes things like a credit card, personal loan, car loan, and of course, HECS debt,” it said.
In 2022, the Australian Prudential Regulation Authority updated its lending standards making it compulsory for banks to consider HECS/HELP.
But some are against these standards.
A review conducted by the Australian Universities Accord panel in February asked for “reviewing bank lending practices to ensure banks recognise that HELP loans are not like other types of loans and are not treated in a way that unduly limits peoples’ borrowing capacity for home loans”.
