If you sailed through your university degree without giving a second thought to the HECS-HELP debt you were racking up in the process, it’s safe to say you’re not alone.
But while your uni days might now be a thing of the past and your focus is on making plans for the future, you may be left with growing concern that your student debt will rear its ugly head.
HECS-HELP loans assist eligible Commonwealth-supported higher education students to pay for their studies. And while this is a helpful and often necessary program for many tertiary students in Australia, it’s oftentimes overlooked as a genuine debt.
The reason for this likely comes down to the ways in which a HECS-HELP loan differs from loans provided by commercial lenders, including the following:
For the most part, it can be easy to disregard your HECS-HELP debt as it’s generally deducted from your salary before your take home pay reaches your bank account.
But if you find yourself in the market for a finance product, such as a personal loan, car loan or a home loan, you may wonder if your student debt could impact your credit score and borrowing potential.
Generally speaking, Australian university graduates with a HECS-HELP debt won’t find themselves at risk of defaulting because repayments are directly deducted from their salary. Plus, if they lose their job, their repayments are put on hold. As a result, the debt won’t impact their credit score like a commercial loan could.
When you apply for a loan, the bank or lender will likely assess your gross income, deduct expenses and liabilities, and calculate how much you can afford to borrow off your net income.
Even if your HECS-HELP loan is the only debt you have, it is still considered a liability. It reduces your net income by between 1 per cent for those earning $46,620, and 10 per cent for those earning upwards of $136,740.
This means that you are likely to have greater borrowing power, or be able to borrow more money, once your HECS-HELP debt has been paid off.
If you do still have a HECS-HELP debt, there are actions you can take to potentially improve your borrowing power and help boost your chances of getting approved for the loan you want.
If you earn a salary of $100,000, for example, and you’ve only got $2,000 owing on your HECS-HELP loan, it might be worth paying off the remaining amount in full, and then issuing proof to your lender. The reason being is that the lender will still see your debt as 7 per cent (the repayment rate) of $100,000 (the repayment income), which is $7,000. Eliminating this liability, if your finances allow, will likely improve your borrowing power, which may be particularly important for higher value loans such as a home loan.
This may seem like an obvious one, but it’s important to be aware that banks will often go through your statements very thoroughly, and frivolous spending generally won’t make you seem very responsible or disciplined as a saver. On top of this, it may add to your expenses and bring down your net income, affecting your borrowing power along the way.
If you have a credit card with a considerable amount of available credit, it might be an idea to reduce the limit. For example, you may have a credit card with a $10,000 limit, but only $1,500 worth of debt on it. Even though your debt is technically only $1,500, your lender will actually consider this a $10,000 debt since you could essentially use the remaining $8,500 credit at any given moment.
Having an excellent credit history is an important part of your financial health. Borrowers with good credit scores typically have more finance options and more competitive rates available to them. So, it goes without saying that it’s always a good idea to consider your credit score.
Even though having a HECS-HELP debt doesn’t directly affect your credit score, the fact that it can limit your borrowing power means that a strong credit score can really assist with securing your preferred loan.