Why You Shouldn't Use Your Tax Refund To Pay Off Your HECS Debt

For many young Australians, their annual tax return is an opportunity for extra spending, while some prefer to use their returns to pay off their HECS-HELP debt. Given this is a popular use of tax refund, it is worth tackling the question: Is it better to pay off your university debt as quickly as possible or slowly chip away with the standard small compulsory repayments? The answer may surprise you.

The HELP-HECS loan is unique in contrast to other debts, such as a credit card. Your HELP-HECS debt is likely to be the best loan you’ll ever have - and an excellent example of ‘good’ debt.

The government indexes the interest on the loan annually according to inflation and the percentage deducted from your wage only increases if your salary does, meaning until you start to earn more money, your repayments are quite low.

While the government does offer a discount of five per cent on voluntary repayments above the value of $500 (at least until January 2017, when it will be removed), this does not necessarily mean using your entire tax return as a HELP repayment is the best use of your money. For example, you could consider paying off other debts you have which have a higher interest rate such as credit cards, car loans or other personal loans.

Here are four additional ways to considering using your 2016 tax refund:

#1 Treat it like any other salary payment

Avoid giving in to the mentality that your tax return is “bonus” cash. Instead, think of it as a typical paycheck. On your tax return ‘payday’, you should divide the money as you normally would, perhaps putting a bit toward your rent and living expenses, savings, HELP debt and entertainment costs.

#2 Start or build on your emergency fund

Every person needs a stash of cash, just in case of emergency. One idea is to consider setting up an emergency fund in a high-interest bank account. Tax time is a great chance to top this up or to start it.

Just remember, you will need to pay tax on the interest the account earns too, so ask a professional if you’re looking for further advice.

#3 Invest for the future

If you’re preparing for one of life’s ‘big spends’ such as buying your first home or a car, considering putting your return towards that purchase. Consider what big expenses or investments could do with additional money, and look at putting your tax refund towards these.

#4 Consider the long term

If your finances are healthy, and depending on the size of your return, this could be a good time to learn more about other ways to invest your money.

If you do plan to invest the money rather than pay off debt, make sure you factor in the tax you’ll end up paying on your profits and how much it costs to make the investment in the first place.

Please note: The above article should be considered general in nature and not detailed advice. Before making any financial investment decision you should consider your own personal circumstances and also consider seeking the advice of a professional.

Simone Gielis is a Senior Tax Agent and General Manager at Etax.com.au, Australia’s number one online tax agent service. Specialising in online taxes since 1998, Etax.com.au enables most Australians to complete their tax return in under 15 minutes.

Simone Gielis is a senior tax agent and general manager at Etax.com.au


Comments

    Thanks. But I'd rather pay off my double degree and postgrad ASAP so I actually get a return one year..,

    Another reason left out of this article, that is pretty serious depending on your field:
    HECS-HELP Benefit!!!
    If you are a science, midwifery or education grad since 1st July 2008 or 2009 (depending on field), and working in a listed occupation in that field, you qualify for five years worth of Bonus repayment every year after you put in your tax return. The rate for this year is $1798. The bonus rate tracks inflation.

    If you pay off your debt earlier, you might end up missing out on this huge bonus off your debt! Its worth calculating it out carefully for your situation (you can get projections on future CPI from say the IMF or OECD), but I suspect for most people in these fields paying off your HECS-HELP debt deliberately sooner through extra repayments would be a bad idea.

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