As the cost of higher education continues to rise and borrowing power declines, younger Australians face a tricky financial decision: should they prioritise repaying their HECS/HELP debt or invest in other financial goals, like entering the property market?
For more general information about understanding HECS/HELP loans, please view our previous blog: Handy HECS hints for students.
The HECS/HELP loan:
HECS/HELP loans are unique compared to traditional debts. While considered interest-free, they are subject to annual indexation to account for general inflation. Following legislated government adjustments this year, from 1 June 2023 this indexation rate is now based on the lower of the Consumer Price Index (CPI) or Wage Price Index (WPI).
This indexation rate is generally lower than typical mortgage interest rates. For most, HECS/HELP remains one of the cheapest debts to carry, often making it financially strategic to treat HECS/HELP repayments as a steady, income-based commitment rather than rushing to pay it off. This allows individuals to direct their savings towards other priorities, such as building a home deposit to invest in the property market.
Why might it be beneficial to pay off HECS/HELP?
That said, having an outstanding HECS/HELP debt can impact borrowing power. Lenders consider the compulsory repayment percentage of a borrower’s income when calculating loan eligibility. Therefore, the amount of the debt doesn’t typically affect borrowing power, only the compulsory repayment rate. For instance, even a modest annual HECS/HELP repayment can reduce borrowing capacity by tens of thousands of dollars. This can be a significant factor for those looking to buy in competitive housing markets or when interest rates are high.
Whether it’s better to focus on repaying HECS/HELP or saving for a home depends on individual circumstances, such as income, financial goals, and the current property market. It is important to understand and consider many factors such as the amount of your HECS/HELP, annual compulsory repayments, HECS/HELP indexation, property prices, borrowing power, mortgage repayments and interest rates. Carefully weighing the trade-offs between HECS/HELP and home ownership is key. For personalised advice on managing your HECS/HELP debt and achieving your financial goals, our team is here to help.