Student Loans Significantly Reduce Borrowing Power for Mortgages

A man walks past a bank advertising home loans in Melbourne, Australia, on Feb. 7, 2023. William West/AFP via Getty Images

HECS debt could reduce borrowing power for a mortgage, according to new research from Compare the Market.

The research found that a university student on an annual salary of $125,000 (US$80,800) with a student debt of $26,500 had a reduced borrowing capacity of $95,900.

Graduates paying off their HECS on an $100,000 (US$65,000) salary would be $56,300 worse off applying for a loan. Meanwhile, the borrowing capacity of those on an $75,000 income would be reduced by $26,500.

Economic director of Compare the Market, David Koch said not paying off student debt could have longer-term consequences.

“When the average time to repay a student debt has blown out from 8.2 years in 2011/12 to 9.5 years in 2021/22, most people will continue to pay hundreds or thousands of dollars more due to indexation,” he said.

In general, borrowing power is reduced by the percentage of income you must pay towards your HECS, Koch said.

“Therefore, the higher income earners could be more restricted by their HECS debt than lower income earners.”

Growing Concerns around HECS

Koch said that historically, HECS has been seen as a benign debt that you pay off gradually through your salary.

HECS loans have had a harmless appearance because they do not accrue additional interest on top of indexation—where the loan is adjusted in accordance to inflation—and are written off when you die.

However, Koch said attitudes towards HECS have started to change because of the huge sums added to the debt each year through indexation.

Due to high inflation, indexation levels rose to 7.1 percent in 2023. The rise prompted the federal government to alter HECS indexation, setting it at the lower of the consumer price index or wage price index.

Yet, the recent election promises of the Labor and Green parties demonstrate that HECS debt is still a notable concern of the Australian public.

For example, the federal Labor government announced it would reduce university loans by 20 percent if elected, eliminating $16 billion of debt by June 2025.

This would correspond to an $5,520 cut for someone with an average student debt of $27,600.

The Greens aim to take it further, proposing a $74 billion plan to eliminate all student debt.

People study at the University of Technology Sydney campus in Sydney, Australia, on April 6, 2016. (Brendon Thorne/Getty Images) 

Sector Reform Needed

The Independent Tertiary Education Council Australia said the federal plan to remove one-fifth of student loans is insufficient compared to genuine sector reform.

Additionally, the Council’s chief executive, Troy Williams, said VET students at independent providers were missing out.

Williams said the initiative will provide debt relief focused more on students in high-debt fields such as law, dentistry, and medicine. He said it fails to address the core issues facing future students studying with many independent skills training and higher education providers.

“For most current and future students with independent tertiary education providers, their debts will continue to be higher than they need to be as the 20 percent student loan tax remains in place,” he said.

AAP contributed to this report.