In Australia, it’s tax time again. This means that the tax office sends me nice letters saying how much I owe them for my HECS/HELP debt, how if I paid it all up front it’d reduce by X amount (if only I had that much money!) and how they don’t charge “interest” on the loan, they merely “index” it against the cost of living. What ever makes it easier to sleep at night. But recently I realised something simple: the Australian Tax Office charges interest not including amounts you’ve already paid.

So lets step back and explain the process. In Australia the government gives you an “indexed” loan to help pay your university education debt. It is “indexed” at the cost of living set by a method I’m not entirely privy to but doesn’t entirely make sense. For 2009/2010 the indexation was “1.9%”. A far more accurate way of explaining it is that you are charged interest equivalent to the rate of inflation averaged out for the year on the first of June. Interest calculated yearly, interest charged yearly. Repayments to the loan are based on your income so if you earn less than a certain amount you don’t have to pay at all and it is on a scale so the more you earn the more you pay back on your loan.

The money is normally taken out automatically from your pay like withholding. This means that you don’t ever see that portion of money. In my case I lose $200 per fortnight to my HECS/HELP debt. This means that per year I knock off roughly $5.2k from my debt with the Australian Government. Funky.

The trick comes in is that this amount isn’t paid onto my loan until after I’ve done my tax. So all the money I’ve paid thus far this year doesn’t get counted and interest is charged including anything I’ve studied up until May the same year. Since semester 1 starts in March and “census” date is in April (the date at which course fees are paid) and semester two starts in July (next financial year), you get interest calculated on both semesters (plus in my case a summer semester, semester 3) not including the amount you have already had “withheld” over the same period of time.

So when it comes down to it, it is better to opt not to have your employer withhold your HECS/HELP debt, save the money in a high interest account somewhere and then a few months into the new financial year pay it as a part of your tax debt. Of course the problem with that is that you pay tax on the interest you accrue from the bank account however you’re at least earning money and not losing any money in the process.

The question of course becomes, who earns the interest on the withheld money? I’ll leave that as an exercise to the reader.