Impact of HECS Debt on Your Ability to Borrow for a Home Loan

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The federal government has introduced a new bill to parliament promising to wipe out $3 billion in HECS-HELP debt, however experts are concerned that student debt is unfairly affecting higher education graduates beyond repayments.

The proposed legislation, which has now been referred to an inquiry, could save the average graduate $1,200 a year through changes to indexation.

The legislation will not return to parliament until October at the earliest and will then need to pass both houses before the changes take effect.

How does indexation work?

Indexation is supposed to maintain the real value of the education you received, so that no matter how long it takes to repay, a student will repay an amount that is more like the actual cost of that education today.

Every year, student debts increase on 1 June, with indexation calculated after the release of the March quarter Consumer Price Index (CPI).

HELP debts were indexed by 4.7 per cent this year (adding $1,272 to the average student debt), and by 7.1 per cent in 2023 (which added $1,758 to the average debt) — the steepest increase since 1990.

The government’s proposal sets indexation at either CPI or the wage price index — the economic measure of wages and salaries in the Australian labour market — whatever is lowest.

The government said the proposed legislation meant a student with an average debt of about $26,000 would have their debt cut by about $1,200.

The relief would come in the form of an automatically applied credit that would reduce the amount owed on an active debt.

The changes will also be backdated to 2023.

Ngaire Bogemann, national president of the National Union of Students, told SBS News that while the proposed changes may bring some relief to students following the 2023 indexation, she believes they do not go far enough.

“The real issue here is you can’t really say you are wiping student debt when what you’re actually wiping is the indexation that you choose to add onto it,” she said.

Bogemann said the union wants indexation scrapped altogether to prevent students from being affected in the long term by their university education.

“We actually need to see indexation as a practice abolished so that the HECS debt you are repaying is nothing more than the cost of the subjects you study during your time at university,” she said.

“It will help students in the long term. You go to get a house loan or a car loan — your HECS debt isn’t going to have 10, 20, 30 years of indexation added onto it.”

How does HECS-HELP debt affect home loans?

While the rate of HECS repayment is determined by income, student debt can affect the borrowing power of Australians seeking a mortgage.

HECS-HELP debt is taken into consideration by lenders who will look at the impact of the debt on income.

According to digital mortgage broker Finspo, maximum borrowing power will reduce by around 10 times the value of annual HECS repayments.

a sold sign outside a block of apartments

According to digital mortgage broker Finspo, maximum borrowing power will reduce by around 10 times the value of annual HECS repayments. Source: Getty / Lisa Maree Williams

How lenders treat student debt

There is also concern from experts and advocates that some financial institutions may be treating student debt like an unsecured loan, placing it in the same category as credit card or buy-now-pay-later debt.

While the Australian Prudential Regulation Authority (APRA) has never issued a directive on how student debt should be assessed by lenders, in 2022 it did publish that HECS-HELP debt should be included in debt-to-income ratios when reporting to the financial services regulator.

Dr Gareth Bryant, a political economist from the University of Sydney, told SBS News this publication from APRA encouraged lenders to factor HECS-HELP debt in as part of their overall lending strategies.

Bryant said treating student debt like other forms of debt “doesn’t really make sense”.

“HECS does reduce your ability to make loan repayments definitely because as you earn more, you’re paying more HECS debt, you have less disposable income to be able to service your mortgage,” he said.

“So, HECS definitely should affect your lending capacity on that basis but it’s not like you have to repay your debt no matter what your circumstances.”

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Bogemann said she has increasingly heard reports from graduates that student debt has affected their borrowing power when trying to buy property.

“HECS debt more and more often is being used by banks and other such institutions to deter people from getting a home loan or from getting a car loan and that’s just another way in which HECS debts are hanging over the heads of higher education students well into their post-graduation lives,” she said.

In the final report of a review conducted by the Australian Universities Accord panel into Australia’s higher education system, the panel recommended that bank lending practices should be reviewed to ensure banks are not treating student loans like other types of debt.

The panel wrote that student debt should not be treated by lenders “in a way that unduly limits peoples’ borrowing capacity for home loans.”

Bryant said issues with student debt have been compounded by other issues such as higher university fees in certain degrees such as arts and humanities.

Bryant said people these issues mean people are left struggling with student debt for longer, leading to increased pressure at already financially challenging times in their lives.

“People are going to have less income basically and at crucial points of their life when you think people are having kids and trying to repay their mortgage and working less because of parental leave,” he said.

“All those kinds of things could hit at the same time that people are still repaying their HECS debt.”