Can you still afford to ignore HECS-HELP debt?
HECS-HELP debt is considered by many to be good debt since the government doesn’t charge interest and repayments only start once when you pass a certain income threshold.
But balances are still indexed annually in line with inflation, and this year the indexation rate jumped all the way up to 7.1%.
This is a steep increase from previous years. Just 12 months ago, the indexation rate was 3.9%, and in the ten years to 2022 it averaged just 1.97%.
For a uni graduate who owes $25,000, this year’s changes would see almost $1,800 added to their account in indexation.
Who is most affected?
For 2023-24, the amount you’re required to pay each year ranges from nil for those earning less than $51,550 to 10% for those earning $151,202 or more.
This year’s indexation increase will be keenly felt by those on higher incomes, as they have to direct a higher proportion of their salary towards paying off their debt each year.
For someone earning $120,000 (whose annual repayment rate will be 8%), this means $9,600 will be deducted from their pay packet. Of course, depending on how much they owe, this might only sting for a few years before their balance is fully paid off.
The challenge faced by lower income-earners will be quite different. Since their compulsory repayments will be lower, there is the possibility that their balance will increase faster than they are able to pay it off.
Will it impact your home loan chances?
If you’re planning to purchase a home, your HECS-HELP debt will most likely be scrutinised along with any other debts you have.
One thing to keep in mind is its potential impact on your debt-to-income (DTI) ratio. This is a metric used by lenders to ensure they don’t lend you more than you can comfortably afford to pay off. It combines all your debts and divides them by your income, so someone earning $80,000 a year with liabilities totalling $400,000 would have a DTI ratio of 5.
Borrowers with a DTI ratio above 6 are generally considered higher risk, so if the amount you want to borrow already puts you close to this range, your uni debt could be what tips you over the edge.
On the other hand, clearing your HECS-HELP debt now might increase your borrowing capacity but leave you with a diminished deposit. This might mean having to pay Lender’s Mortgage Insurance (LMI), which is an extra cost levied against borrowers with a deposit below 20%.
So for low income earners hoping to get on the property market, there are some circumstances where it might be more advantageous to leave your HECS debt untouched — at least until you can get your home loan application over the line.
Should you pay off your HECS-HELP debt now?
While the recent indexation increase might come as a shock, especially to anyone who hasn’t thought about their uni debt for a while, many observers believe that it will fall in the coming years as the current inflationary storm subsides.
And in any case, there’s the possibility that graduates’ wages will go up too, leaving them better placed to tackle their HECS-HELP debt.
Whether or not you’ll benefit from clearing yours now will depend on your specific financial situation (in particular, the amount you owe and how much extra you can afford to pay). Whatever your circumstances, be sure to weigh up the pros and cons of paying down your HECS-HELP debt and consider seeking professional financial advice before making any major decisions.
Contact Carrick Aland’s award-winning Wealth Planning team on 1300 466 998 or visit carrickaland.com.au/wealth-planning/ for specific advice.
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