How your HECS-HELP debt affects your borrowing capacity
While student HECS and HELP loans in Australia are interest-free, they are indexed every financial year based on a cost of living index.
The recent outbreak of high inflation means millions of Australians with student loan debts are facing a 7.1% increase from 1 June, up from 3.9 per cent the previous year.
Your HECS-HELP debt is an important piece of information that banks take into consideration when assessing your application for a home loan, so it’s important to understand yours.
If you’re a bit vague about all the details, it’s worth reading on to see how indexation will impact you.
The Higher Education Loan Program (HELP) is a federal government scheme that offers loans to students so they can afford their university and higher education courses.
Most university courses fall under the banner of a Commonwealth Supported Place (CPS). With these, the federal government covers some of the student’s university fees, while the student covers the rest – known as the ‘student contribution amount’.
Your HECS-HELP loan can be used to pay the ‘student contribution amount’. It can’t be used for things like accommodation, textbooks or your dormitory’s mini bar supply.
You can check the balance of your HELP debt, the indexation amounts and your voluntary and compulsory payments through myGov or by contacting the Australian Taxation Office (ATO) directly.
HECS-HELP debts are interest-free, but the amount of the debt is adjusted on 1 June each year in accordance with an annually determined inflation factor.
And because the cost of living and inflation has gone through the roof, the latest annual indexation factor is higher.
The 2022-23 HECS-HELP debt indexation factor for 2022-23 is 7.1%. To put it in perspective, in 2022, it was 3.9%. In 2021, it was 0.6%. Big difference, right?
Another way of looking at it is like this:
When you apply for a home loan, lenders will look at your HECS-HELP debt when assessing your loan application.
While this type of debt is different from credit card debts and personal loans, you still need to make repayments on your student loan and this ultimately affects your income and borrowing capacity.
Once you earn over a certain threshold, your employer will deduct a percentage of your income to go towards your HECS-HELP debt. The more you earn, the higher the repayment rate.
You can find more about the HELP repayment rates and thresholds here.
These PAYGW (pay as you go withholding) amounts are only applied after you do your tax return. So, if you were to jump online and look at your HECS-HELP debt today, your PAYGW payments wouldn’t have been applied yet.
You can make voluntary payments towards your HECS-HELP debt through myGov. Once processed, voluntary payments are credited directly against the loan balance by the ATO.
If you wanted to pay your loan balance off in full before indexation is applied on 1 June, you’d need to do so as soon as possible (taking into consideration bank processing times).
It is recommended to talk to your accountant or financial advisor about whether making voluntary payments is right for you.
Whether or not you are considering buying a property, it’s important to understand your HECS-HELP debt and how this year’s higher indexation could affect you.
If you’d like to find out more about how your HECS-HELP debt might be treated by lenders, get in touch and we’ll explain.
