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