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HECS-HELP Debt: Does It Affect Your Credit Score?
●July 12, 2021●4 minute read
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If you’ve studied at an Australian university, chances are you have a HECS-HELP loan debt. But having this student debt doesn’t necessarily mean your credit score will be affected.
However, it’s important to understand the ins and outs of HECS-HELP loan debt so you know how it might affect your financial future.
What is HECS-HELP debt?
The HECS-HELP loan scheme assists Commonwealth-supported students with tertiary study costs. It lets eligible students defer university fees until they start earning a particular salary. This means either deferring your full course fees or only a partial amount, depending on your financial situation. To be eligible, you must be:
- Either an Australian or New Zealand citizen, or a permanent humanitarian visa holder;
- Studying at an Australian university;
- Completing all or part of your studies in Australia.
For the 2020/2021 income year, the compulsory repayment HECS-HELP threshold is $46,620. This amount has been slowly decreasing over the past decade to increase the number of people eligible for repayments. To make sure repayments are achievable, though, they are calculated based on your salary.
For example, if you earn $46,620 each year, your repayments are calculated as 1% of this. If you’re earning upwards of $136,740, your repayments are calculated at 10% of your salary.
How is HECS-HELP debt different from other debt?
While you may think of HECS-HELP debt as an investment, it can still be considered a financial liability. While it might not be considered the same as a home or personal loan, it’s still listed as a debt on your financial record. However, there are key factors that make HECS-HELP debt different from other types of debt:
|Zero accrued interest
||While your debt can be subject to indexation (a fluctuating total amount based on rises in inflation and the cost of living), your repayments won’t increase based on interest rates.
|No repayment period
||Your HECS-HELP debt has no repayment date. For example, if you earn under the threshold until you’re fifty, you won’t be repaying your debt until then. If you haven’t repaid your HECS-HELP debt before you die, it gets cleared from your estate – unlike other debt, which is passed on to your estate holders.
||Unlike other loans, HECS-HELP repayments are automatically deducted from your pay before it reaches your bank account. This means you can’t damage your credit score by missing repayments. If you lose your job or your income decreases below the threshold, your repayments are paused.
In the past, advice on HECS-HELP debt has been to write it off as an investment. While this way of thinking is beneficial, HECS-HELP debt is still a financial debt - and it might affect your borrowing power when you apply for a loan or financial assistance.
How does HECS-HELP debt affect borrowing power?
While HECS-HELP debt doesn’t necessarily affect your credit score, it can affect your borrowing power. This is important to understand, especially if you plan on applying for financial assistance in the near future.
When you apply for a personal loan, the lender will check your personal and financial information. This financial information includes your:
- Credit score and credit history;
- Income and employment status;
- Bank statements and spending patterns;
- Existing debts.
When lenders look at your income, they will consider the amount after your HECS-HELP repayments have been deducted. While automatic repayments won’t damage your credit score, you may see tens of thousands of dollars deducted from your incoming salary to account for these repayments. This deduction can be anywhere between 1-10% of your annual salary. This means lenders may offer you a significantly lower loan amount, even if you have no other debts.
How can my borrowing power be improved?
If you’re worried that your HECS-HELP debt will impact your borrowing power, there are steps you can take to improve your chances.
|Know how much you owe
||By having a good understanding of your HECS-HELP debt, you have a better understanding of your financial situation. For example, if you’re earning a stable income and have $5,000 in outstanding HECS-HELP debt, it may be beneficial to pay this off in full. Doing this can improve your chances of approval as it can decrease your debt.
|Live within your means
||While HECS-HELP debt doesn’t hang over your head in the same way that other types of debt do, it’s still important to remember to live within your means. If you have $15,000 in HECS-HELP debt and are applying for a home loan, you should consider your spending habits. Lenders might look unfavourably on applicants with financial debt who spend a large amount on unnecessary items.
|Reduce your credit expenses
||If you have HECS-HELP debt and are applying for a loan, you should try to reduce your other credit expenses. Paying off a credit card early can improve your credit score and reduce the debt listed on your financial portfolio.
|Have a strong evidence of savings
||By entering a loan application process with strong evidence of savings, you prove to the lender that you’re a responsible borrower.
||You should avoid overapplying for loans. For example, if you apply for five different home loans, each application might come with a credit check and leave a hard enquiry on your credit record. However, it doesn’t record the outcome of your credit check. This means that new lenders may see your multiple applications and assume that you’ve been rejected due to a poor credit score.
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Written by Katie Francis
Katie Francis is a Content Intern at Jacaranda Finance. She is currently studying a Bachelor of Business (Marketing)/Media & Communications at the Queensland University of Technology.