Gen Z’s rude awakening: To pay off HECS or save a house deposit?

A startling financial truth is threatening to ruin the future of an entire generation, and many of us have no idea it’s even a problem.

Gen Z are growing up and ready to buy their first homes, but many young Aussies are getting a rude shock when going for a loan thanks to their HECS debt.

This time last year finance guru Julie Wu, from Money with Julie, was looking to buy a house.

“I went to speak to a broker about my personal circumstances,” Ms Wu said on TikTok.

“He said that if I were to clear my HECS debt ($13,000 at the time) it could potentially increase my lending capacity up to $40,000.”

There is a misconception that HECS-HELP debt — that for many young Aussies people is now in excess of $100,000 — is a “better” debt than other loans. This is because there is no interest on it, rather HECS debt is indexed against inflation.

Since 2022, the indexation rate has been steadily rising alongside rising inflation. This has increased graduates’ HECS debts exponentially in a very short time frame.

In 2023,the indexation rate went up by the largest amount in a decade at 7.1 per cent, and current reports forecast the rate to rise between 4.2 and 4.8 per cent this June, making it the second highest rate rise in the last decade since the 2023 rise.

As a result many young people, like Ms Wu, are having to kick their dream of owning a home further down the road as they attempt to pay off their HECS debt.

“I successfully paid off my debt last year before the indexation rise occurred, and I’m now refocusing on saving back up a deposit,” Ms Wu said.

“It has been a difficult process saving up for a house,” she said.

It’s getting harder to pay off

Paying off HECS is about to get a lot more difficult for young Aussies in their 20s, with the indexation rate expected to rise again in June.

If an indexation of 4.8 per cent occurs in June, a person on a $60,000 salary with an average-sized HECS debt of $24,771 will have made $3000 in repayments over two years – yet their HECS debt will have increased by $3000. This means an increasing number of former students are not getting their debt down at all.

Taking a person’s HECS debt into consideration when they are applying for a loan is a recent development. It was only in July 2022 that the Australian Prudential Regulatory Authority (APRA) told the banks they needed to start doing this.

For Australians carrying HECS debt, compulsory payments kick in when they reach the minimum repayment income (RI) threshold to make a loan repayment, which is currently $51,550. When their income exceeds that threshold, a compulsory repayment of at least 1 per cent is taken.

Teal Independent MP Monique Ryan says the issue is widespread despite individual differences in income and the amount a graduate is trying to loan.

“The problem is that the HECS debt you carry, and for many people that is now in excess of $100,000, is counted by the banks when they consider your eligibility for loans; home loans or car loans,” Dr Ryan said.

“Many people are finding that their HECS debt is accumulating really quickly,” she said.

“People don’t know if they should just be concentrating on (paying off) their HECS or trying to save for a deposit.”

In March Dr Ryan started a petition to push the Albanese Government to consider ways to reduce the burden of HECS debt on young Australians in its 2024-25 federal budget, which will be announced May 14.

So far more than 260,000 people have signed the petition to make HECS easier to pay off; making it one of the largest petitions in Australian history.

One of the major changes proposed is to change the way HECS debt is indexed; they recommend indexing HECS debt at the lower of either the Consumer Price Index (CPI) or the Wage Price Index (WPI).

This would be reactive each year depending on whether the CPI or the WPI is lowest.

“This would basically mean that your debt wouldn’t increase more than your wages are increasing in any particular year,” Dr Ryan said.

“It is unreasonable for your HECS debt to exceed the increase in your wages.

“I think that the bank should reconsider how HECS debt is considered in assessing suitability for home loans, because we’re being told every single day that young people can’t get home loans and that they’re facing a cost of living crisis and a housing crisis.

“I think it’s really contingent on the government to do everything in its power to make it easier for young people to secure their own homes.”