Don’t take on too much HECS debt

Having the government bankroll your tertiary education in Australia is often called out as being the “best loan you can get”. And that’s certainly true when you compare Australia’s HECS-HELP program to the more complex, crippling student loan program in the US. On the other hand our university tuition structures are not nearly as generous as those offered by some of the Scandinavian countries, where university is more heavily-subsidised by the government and often completely free of charge (beyond generic administration fees). Australia’s system therefore probably strikes a bit of a middle-ground and teaches young Aussies at an early stage in their lives that there’s no such thing as a free lunch.

To young students currently undergoing university studies or to those about to embark on a multi-year journey of the mind, there are a few things you should know.

Choose your studies wisely

If you’re an Aussie citizen enrolled in a commonwealth supported place (CSP) program, you’re already in a very privileged position. You get access to courses at subsidised rates and you’re permitted entry into the HECS-HELP program simply by virtue of (for example) your citizenship. The HECS-HELP program allows you to take on five or even six-figure debts for most tertiary courses. But that doesn’t necessarily mean you should. Or at least, it doesn’t mean you should, without purpose.

From a young age, pop culture teaches you to “follow your dreams” and to pursue academia and lines of work that are conducive to achieving those dreams. That’s all fine but dreams change, and living expenses are forever. So a blanket statement like “follow your dreams” with absolutely zero qualifiers is probably not good advice. Certain university courses lead to high paying jobs and certain university courses do not. This is linked to the monetary or innovatory benefit that university graduates offer to society. It all comes down to the simple laws of demand and supply that software engineering graduates for example are currently on the higher end of the graduate payscale than graduates of the performing arts. Software engineers are in high demand at the moment and probably will be for the foreseeable future whereas graduates of the performing arts have been (unfortunately) exiled to the “gig economy”. A place with no reliable, consistent source of income, little-to-no superannuation benefits, and near-zero prospects of being loaned any money to buy a house.

I’m not at all trying to discourage you from pursuing a course of study simply because it’s unlikely to lead to higher pay and better job security. Money isn’t everything. I am however asking you to appreciate that you’re taking on a 5 or 6 figure loan for your studies and that you will eventually be forced to pay that debt back. So I’m simply asking you to carefully think about whether you’re sure your choice of study is right for you before you take on that debt. I should note that the Australian government is absolutely trying to discourage you from pursuing courses which are likely to lead to lower pay and less job security. This was the primary motivation for the government’s decision to dramatically drop teaching, nursing and mathematics course fees by between 40%-60% and hike humanities and communications course fees by a staggering +110% in 2021. The government is an agent of taxpayers after all and it is indeed in the taxpayer’s interest to have the debt repaid as quickly as possible.

Yes the loans are interest free but that doesn’t paint the whole picture

It’s true that the HECS-HELP loan is interest free. It’s indexed every year (upwards or downwards, usually upwards) according to CPI (a measure of inflation as we know). But this isn’t the same as interest. You’re not being punished at commercial interest rates which will compound and inflate the level of your debt at a much more rapid pace than CPI (ie the situation at hand in the US of A). So in that respect it’s an extremely generous loan. Where it really starts to hurt you is in the following circumstances:

  1. Borrowing money: When you finally listen to the know-it-all boomers and give up your weekly smashed avo feeds to plunge your finances deep into an overleveraged Aussie housing market, you’ll come to learn lenders are unfathomably illogical when it comes to your HECS-HELP debt. The bank will for some misguided reason assume you will have a HECS-HELP balance during the entire life of a 30-year mortgage and reduce your borrowing capacity accordingly. For example, I have a little under $40k remaining on my HECS-HELP balance but I’ve come to understand the bank will reduce my borrowing capacity by almost $200k as a result even though they know exactly what my annual mandatory repayment contributions are and therefore exactly how long it will take to repay (well under 30 years). Even if my HECS-HELP balance was $1k the bank would still reduce my borrowing capacity by the $200k, defying all sense of logic. This essentially strong-arms you into voluntarily parting with a hefty chunk of your deposit to pay down the debt if you need the increased borrowing capacity to put forward more realistic offers to vendors.
  2. Harsh repayment thresholds: The loan itself may be interest-free but the repayment thresholds can be quite taxing. Your annual repayment rate is a fraction of your “repayment income” for the relevant financial year. This is different to taxable income so if you’re curious and you do not have an interesting life, you should google the difference. The repayment rate is a progressive scale and starts generously low. Someone earning around $47k per year incl super will pay back 1% of their pre-tax repayment income which equates to $470. On the other hand someone earning around $138k per year incl super will pay back 10% of their pre-tax repayment income which equates to a whopping $13,800 per year. “Pre-tax” is key here. A pre-tax salary of $138k per year incl super with private hospital cover and no deductions is ~$80k after-tax. $80k is a very respectable sum of money but $13,800 is over 17% of that after-tax income.

    As your income grows these repayment thresholds seriously subdue your earning capacity which takes a toll on your quality of life. You may find yourself forced to opt for the older apartment, favouring public transportation over driving even in inconvenient situations, skipping social events, missing out on investment opportunities and yes… even swapping the disagreeable Jesus sandals for a no-name brand equivalent which is not as comfortable as the birks.

Students take on the debt and agree to be obliged to pay it back. I’m not suggesting we all have our loans forgiven. Although this may seem like an out-of-sight, out-of-mind problem, it won’t always be that way so I’m simply asking you to be very certain of your desired course of study and to be very careful about how much debt you take on. I also ask that the banks update their internal borrowing calculators to resolve the idiotic means by which they handle HECS-HELP debts. The current system is beyond stupid and whoever thought it up should be ashamed.