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The once-considered ‘good debt’ will see more than 3 million Australians slugged with a 7 per cent indexation on existing student loans, further impacting mortgage serviceability.
While loans from the Higher Education Loan Program (HELP) — previously the Higher Education Contribution Scheme (HECS) — are interest-free they are subject to indexation, which adjusts debts each year in line with inflation.
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For the past 10 years, the indexation rate has hovered about 2 per cent, thus, with the average variable interest rate between 5 and 6 per cent, some students are now choosing to draw down their government debt before 1 June, when the indexation kicks in.
For example, a student with a $50,000 student loan will be hit with an additional $3,500 on their government debt.
The Australian Taxation Office has revealed the total debt shared by more than 3 million Australians has reached $74.3 billion, with one student accruing a debt of $737,070 and the second highest at $495,990.
However, according to research by Futurity Investment Group, the average student loan in Australia, often referred to as HECS or HELP debt, is $22,636 “which has jumped 10 per cent in the past two years”, with the average time to fully repay the debt now at 9.5 years (trending up from 7.5 years).
While the debt is forgiven upon death, it does affect how much a bank is willing to lend for a mortgage.
In some instances, brokers have advised clients to consider paying out their HECS debt to improve their chances of servicing the loans.
Director at Dominion Finance, Suzanne O'Connor, has given such advice where appropriate, after observing student debt affecting her clients’ serviceability, particularly for those earning over $85,000.
“With the recent increase in the indexation rate, we expect that more borrowers will be impacted, and we will work closely with the clients who are impacted to explore all options to manage their debt effectively,” Ms O'Connor said.
However, she is reminding clients that HECS debt is a “good debt as it is an investment in their education and future career”.
“Overall, it is essential for borrowers to consider their HECS debt on their serviceability when seeking a loan,” Ms O'Connor said.
Despite the alarmingly high indexation rate, Ms O'Connor said panic had not hit borrowers yet.
“We are not seeing much concern from clients regarding the high indexation rate about to hit Australians,” Ms O'Connor said.
“This is most likely due to many borrowers with HECS debts not realising that the indexation this year will be so high compared to previous years.
“However, for most clients, any issues they may have with an increased HECS debt are overshadowed by the increase in their interest rates.
“As mortgage brokers, we are keeping a close eye on the situation and will continue to provide guidance and support to our clients as needed.”
Weakening serviceability
On the back of rising interest rates and high inflation weakening borrowers’ serviceability, growing HECS debt is an added burden for borrowers, managing director at the Finance Brokers Association of Australia, Peter White AM, added.
“This is just another ‘thing’ that adds to the difficulties of getting a loan,” he said.
“That said, there needs to be more transparency and greater education of students/people accessing HECS debt so they understand (really understand) what the potential impact is in the future when going for a home loan.”
Founder and senior mortgage broker at Borro, Cara Giovinazzo, agreed, adding that the higher indexed HECS debt is making it “even harder for consumers to service what they could less than a year ago”.
She said clients have been looking at taking additional lending to consolidate their HECS debt “to increase their borrowing capacity” but also to alleviate some pressure from the indexation about to kick in.
“We are showing clients their borrowing capacity with and without HECS. For clients wanting to pay out their HECS because of the high indexing currently being applied, we are consolidating them into a separate split against their home loan, over a short period of time, say 5 years.
“This is helping them pay back the HECS debt quicker as opposed to adding it to a home loan over 30 years, which could end up costing them more in the long run.”
Greens’ call for the abolition of indexation on HECS rejected
While the Greens has been pushing for the government to freeze indexation in student debt, a recent Senate inquiry rejected the proposal on 17 April.
The report said: “While the committee agrees that measures should be taken to ease the cost-of-living burden on Australians, it is unclear whether the measures proposed in the bill will achieve this effectively.
“The committee accepts the evidence of some inquiry participants that the removal of indexation from student loans will not ease the cost-of-living for individuals with a loan in the short term.”
As such, 1 June will see student debt go up.
On the flip side, chief executive at credit agency Credit Fix Solutions, Victoria Coster, said student loans “are not listed on credit reports and therefore have no impact on a consumers credit score”.
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