HECS debts lump students with future mortgage misery, research shows ‘harmless’ debt causing more pain

As political parties squabble over wiping university student debt, 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 student paying off an average HECS debt of almost $26,500 had a reduced borrowing capacity of $95,900 on a salary of $125,000.

For graduates earning $100,000, they would be $56,300 worse off in gaining finance if paying off their HECS, while for those on $75,000, their borrowing capacity would be reduced by $26,800.

It comes as the federal government in October announced it would wipe 20 per cent off university loans, 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.

It prompted the federal government to make changes to HECS indexation, which is now set at either the level of inflation or the wage price index, whichever is lower.

Mr 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 2011/12 to 9.5 years in 2021/22, 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 one-fifth of student debts fell short of genuine reform for the sector.

Labor’s proposal would cost $16 billion and wipe about $5500 off the average HECS debt.

Council chief executive Troy Williams said VET students at independent providers were missing out.

“While this initiative will provide debt relief, with a greater focus on students in high-debt fields such as law, dentistry and medicine, it fails to address the core issues facing future students studying with many independent skills training and higher education providers,” he said.

“For most current and future students with independent tertiary education providers, their debts will continue to be higher than they need to be as the 20 per cent student loan tax remains in place.”