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Why your HECS debt could stop you getting a mortgage

hecs help debt uni student loans mortgage

My kids will start their working lives with a big chunk of debt accumulated from the cost of their university courses. They aren’t alone.

Over 2.7 million Australians have debts from their higher education qualifications. Total loans reached $54 billion for the 2016-17 financial year, according to the tax office, with the average debt around $20,303, up from $19,396 the year before.

Just how much debt depends on what they study. One of my kids had fairly low university fees of around $20,000 because the government at the time encouraged the study of science and reduced the fees to make it more attractive.

The other one, who is studying a double degree, will finish university with a daunting $41,000 debt after five years.

Certainly, as the cost of degrees climbs, the number of debts above $50,000 is rising, reaching 159,475 in 2016-17, up from 125,650 the year earlier. A further 14,046 have debts above $100,001, up from 10,996 in 2015-16.

Government student loans don’t charge interest but they are indexed to the CPI when your debt is more than 11 months old and this is applied on June 1 every year. Many experts will tell you that indexation means your debt is not going up but in an era where wages are not rising – even in line with inflation – it can mean that people are not getting ahead of their debt.

Private student loans do charge interest. One company, Study Loans, lends up to $15,000 and charges between 12% and 17.8%.

Increasingly Australians aged in their 30s are carrying student debt.

There is a view that HELP debt doesn’t really matter because it isn’t expensive like credit cards, personal loans or car loans but as the banks tighten lending to first-home buyers the debt is taken into account.

It can be an impediment when you apply for a home loan because a HECS/HELP debt is treated like any other liability because it reduces your income and your servicing potential. It lowers your borrowing capacity and increases your risk profile.

To rein in more of the debt, the government has toughened its stance. The bonus for paying off your HELP debt voluntarily was removed from January 2017. And the income thresholds for starting to repay the money have come down.

If you earn more than $51,957 in 2018-19, you have to start repayments, down from $55,874 in 2017-18. From July 1 this year, the minimum repayment threshold will fall again, to $45,881, with a 1% rate. There are 17 thresholds and repayment rates up to a top of $134,573, where you have to pay back 10% of your income.

The tax office calculates your compulsory repayment for the year and includes it on your notice of assessment.

Unfinished business

Over 50,000 students start a degree but don’t finish it. While some may have enjoyed their university foray, often they incur debt and regret, according to a report by the Grattan Institute researchers Andrew Norton and Ittima Cherastidtham.

There are deadlines for dropping out without incurring fees. Parents should take note of these (available on the university website) so that their kids don’t incur fees for subjects that they are unlikely to finish.

The Grattan researchers say the risk of dropping out can be foreseeable. It is more likely among part-time students with people enrolled in three or four subjects a year – half as many as a full-time student – having a 50% likelihood of completing their course in eight years.

Students who enrol full time have about an 80% chance.

Also students with an ATAR below 60 are twice as likely to drop out of university as those with an ATAR above 90.

Health subject students are more likely to complete their course than those in information technology, STEM fields (science, technology, engineering and mathematics), humanities and agriculture. And people who study off campus have a slightly higher risk of dropping out.

Checklist

• Do your sums to understand how much your tertiary course will cost.
• Do you qualify for a scholarship? Most universities offer scholarships that are bequests from former students to help defray the cost.
• Consider using any savings to pay off your HELP debt.
• Keep track of your HELP debt online via the MyGov website. This is also where you make repayments.

Written by Susan Hely

Susan Hely

Susan has been a finance journalist for more than 30 years, beginning at the Australian Financial Review before moving to the Sydney Morning Herald. She edited a superannuation magazine, Superfunds, for the Association of Superannuation Funds of Australia, and writes regularly on superannuation and managed funds. She’s also author of the best-selling book Women and Money.

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