HECS Debt is Bad Debt!

Hi Scott,
 
I understand that HECS debts don’t attract a traditional interest rate, but mine goes up like 25% a year, which is way worse. Also, I believe that there was a rule change and HECS debts now no longer die with us, which means our poor kids could be left with nothing.

Sarah
 
Hi Sarah
 
I’m taking it that you didn’t study statistics at uni … your HECS debt has not gone up by 25% in a year!
 
HECS debt is designed to keep up with ‘today’s dollars’ by increasing the debt by whatever the Consumer Price Index (CPI) does each year. No one gave a toss about this until 2023, when a bout of high inflation increased HECS debts by a massive 7.1%.
 
In response to that bill shock, HECS debts will soon be matched to whichever is lower out of the CPI or the Wage Price Index (WPI). And once legislation is passed it will be backdated, which would bring down the 7.1% in 2023 to 3.2%, and the 2024 rate of 4.7% to 4%.
 
The other thing to know is that the wage you need to earn before you start making repayments is increased every year, and there are plans to make the repayments more in line with marginal tax rates.
 
Finally, you do not have to pay off your entire debt when you cark it (and nor do your kids).
 
The executor of your will is required to file all tax returns up to your date of death. If your annual HECS repayment is owing, it’s paid from your estate. Any remaining HECS debt is then written off by the Government.

Scott.

Is HECS Still a Good Debt?

Scott,

My son has two degrees but hasn't found work in his field. He is employed full-time but doesn’t earn enough to pay off his $85K HECS debt. It feels like a noose around his neck, and at 33, he’s convinced he’ll never own a home because of it. His self-esteem is plummeting, and as a parent, I’ve decided to pay it off. Schools push kids to go to uni, but now he wishes he had done a trade like his brothers. I just want young people to know—don’t be fooled by “interest-free” HECS. It adds up every year with inflation!

Megs
 
Hi Megs,
 
Well done for being in the financial position to come to your son’s emotional rescue.
Sadly, I think buying a home now depends on the Bank of Mum and Dad. Yet for the kind of people Paul Kelly sings about (‘they got married early, never had no money’), well, I think they’ve really hit the skids.
 
Anyway, do I think HECS is still a good debt?
 
Yes I do.
 
Look, the reason most people choose to go to university is so they can eventually get a well paying job.
 
Sure, it’s not as fair as, say, when Albo went to uni, he got to study being a student politician for free. However there is no interest charged on the loan, no repayment deadline (and it’s written off when you die), and the repayments only increase in line with your income.
 
That being said, you are 100% right: it is yet another piece of lead in the saddlebags of young people trying to buy their first home. Especially since 2022, when the government regulator changed the lending laws to require banks to take into account your HECS debt.
 
Here’s what that looks like:
 
Someone earning $80,000 a year, making HECS repayments of $3,200 a year, will have their borrowing capacity reduced by $32,000, according to Flint Mortgage Group. In other words, your annual HECS repayment reduces the amount a bank will lend you by a factor of ten.
 
(Note: Labor’s latest election vote bribe promises to cut your HECS debt by 20%, So vote one Albo, the battler bought up in housing commission, who now lives in a clifftop mansion, and gets to sit at the pointy end of the Qantas Club).
 
In that regard, it may be worth paying down your HECS depending on how much you need to borrow. However, that being said, that may also mean you need to factor in Lenders Mortgage Insurance (LMI), which insures the bank, not you, and will cost thousands of dollars over the life of your loan.
 
Still, I think the lesson for your son is a simpler one:
 
Don’t spend $85,000 studying two degrees that you can’t find employment for. I mean, what the hell did he study … Middle Eastern pottery?

Scott

HECS Freedom for First Home Buyers!

Scott,
 
You stuffed up last week in your column on higher education. The big headline from that report was that banks should NOT be allowed to take your HECS debt into account when you’re applying for a home loan. The report blasted this practice as unfair (as a young couple with HECS debt ourselves, I’d say greedy). You should have done so too!

Louise
 
Hi Louise,
 
Nah.
 
I read the recommendation and I thought it was … daft.
 
Look, I’m no friend of the banks, but I’m on their side on this one.  
 
After all, who are a bunch of academics to dictate a bank’s lending practices?
 
If the banks are looking at your expenses and drawing a red line around your HECS debt, it’s because they know it’s a factor in you being able to repay them … and that it’s a non-negotiable expense that scales up the more you earn.  

Scott.

Have You Changed Your Mind on HECS?

Hi Barefoot,
 
My hubby has $85,000 in HECS debt, and I’m wondering what your thoughts are on the HECS-HELP debt saga. The Greens are trying to freeze the indexing to inflation. You have always suggested that we don’t rush to pay off our HECS-HELP debt because it’s an ‘interest-free loan’, but I am wondering if you still think the same way now.
 
Tania
 
Hi Tania
 
Look, I hate inflation like the Greens hate fossil fuels (and Barnaby Joyce).
 
Both the Labor government and the coalition Barnabeyed the Greens proposal to freeze indexing student debt inflation. Now the whole concept of inflation can be a really hard one to get your head around … but HECS debt lays it bare in all its brutality:
 
For many years the indexing has been bugger all (in 2021 it was 0.6%) – yet this year it’s a whopping 7.1%. So your husband’s debt will be indexed up by $6,035.
 
So, have I changed my mind: should you make extra repayments?
 
Well, that’s obviously totally up to you. However, I’d flip the Greens’ advice and pay back any bank debt (that attracts an interest rate) first before you repay any HECS debt.
 
What I think the Greens are picking up on is how the current economic climate is screwing people on low incomes (which includes students). Rents have increased at the fastest pace since 2010, and the cost of most things is skyrocketing.
 
But despite all that, given that HECS is an income-contingent loan (i.e. you only start repaying it once you earn $48,361), I’d be more inclined to put your money in Mojo as a buffer, than make a voluntary extra repayment to the government.

Dude, I’m HEXED!

Hello Scott,

Looks like I’m one of three million (presumably young) Australians pooping their pants about the recent announcement of a HECS index increase to 3.9%. I’ve got a whopping HECS debt of just over $53,000 (for my two degrees which currently see me sitting in a casual position earning $26.50 per hour). In the past you’ve advised to focus on other debts or investments, rather than HECS. Does this still stand?

Lina

Hi Lina

You’re right, inflation has increased the cost of everything, including the indexation amount on HECS.

In 2021 it was just 0.6%, this year it’s 3.9%, next year … who knows?

That being said, it’s still the best debt you’ll have: your repayments are contingent on your income and, while it is tracking inflation, it’s not attracting a commercial rate of interest.

Now I don’t have a full picture of your financial situation, but it makes sense to prioritise other (higher rate) debts over your HECS.

Finally, you need to look at your return on investment:

You spent $53,000 on your education and your (admittedly short-term) return is a casual position earning $26.50 an hour?

Now that is something worth pooping your pants over.

Scott.

“I Don’t Need Your Help but Wish to Criticise You …”

I don’t need your help but wish to criticise your answer to “Should I Pay My HELP Debt?” Your first response should have been “of course”, but you treated the subject as most recipients do, with a dismissive attitude on how to avoid it. As an older Australian, I need to tell you: it’s a loan and recipients have a responsibility to pay it back. Emphasising that it dies with you also indicates your attitude. Poor form for a self-proclaimed responsible purveyor of advice.

Gordon

Hi Gordon,

Thank you for your criticism.

So your basic premise is this: ‘If you owe a debt, it’s your duty to pay it off as soon as possible.’

However, that is not the premise of the Government.

They have set HECS-HELP up without a commercial interest rate, and with repayments based on your income.

And they’ve discontinued the discount for repaying early.

It’s almost as if they don’t want you to repay early!

These bloody kids get a good deal, right?

Maybe. But, Gordon, remember that as an older Australian you had free university. And you also had affordable housing.

Young people today have neither.

Scott