Student loans are interest free if you are resident in NZ, but not interest free if you live offshore.
Don’t think you can ignore them if you live offshore either, the government and the IRD have long arms and agreements with other countries – they will find you.
None of this means you should not study to get ahead, but you do need to have your eyes open (no rose coloured glasses please).
What if someone can pay it for you ?
Your parents or grandparents or a nice relative might want to pay it off for you. However it is interest free so you might as well invest the money for as long as possible, and let it earn some interest until it is imperative that you pay it off.
Don’t feel bad, the govt will tax the interest and tax any wages you make while working while studying or during the the student holidays.
Start work in NZ
Once you start work in NZ, the IRD and the tax system automatically deduct repayments from your salary or wages.
You could decide to leave it at that, since the loans are interest-free, so there is no incentive to pay them off any faster than the deductions from your regular income.
However, if you are inclined to pay it off quickly, stop for a moment and think about building up an emergency cash fund first - say 3 months income.
Once you have your emergency funds in place, you may be better to save into some sort of account or investment fund which earns a decent interest rate, or dividends. You could let this compound away for a few years and let the compound growth help pay any off remaining loan.
If you live offshore
The NZ government has realised that it is funding higher education to young New Zealanders for the benefit of many other countries. Hence it is becoming a little edgy with the huge amount of loans outstanding that are of limited benefit to NZ. Bear this in mind when thinking about your loan.
If you move offshore, your student loan attracts interest – it has been around 6% for quite a while.
A $40,000 loan will compound to $53,000 over 5 years - ouch !
A $25,000 loan will compound to $44,700 over 10 years - ouch !
You can check the NZ IRD website for exact details of when interest starts and stops.
Also watch out for incentives to repay your loan early which may be well worth taking advantage of.
The first thing you should do when working offshore in ensure you have an emergency fund in place. It does not matter if you are single with no children, it is still something you should have. Once you have your emergency money in place, you should at least ensure that you pay the interest on a regular basis.
Deferring repayment ?
If you pay the minimum required and defer the rest, you may benefit from the twin effects of inflation and (hopefully) your increasing income over time, which will make your loan seem quite a lot smaller. However there are some traps;
- Our government is in debt and sometime in future could well remove the interest-free status.
- They could penalise those who live offshore, especially if the loan has been in place for a number of years.
- Having an outstanding student loan may get in the way in future when you want to raise a mortgage or business loan.
Financial versus moral issues
It is not actually the NZ government that has loaned you the money at all - it is in fact the hard working NZ taxpayer. Perhaps worth thinking about.
Supplied by Alan Clarke, financial & retirement adviser, & author. He also writes regular articles for the media & on line – see www.acfs.co.nz
His second book is due out in May 2014 & is entitled “The Great NZ Work, Money & Retirement Puzzle”.
Alan is an independent authorised financial adviser (AFA) FSP26532 & his disclosure statement is available on request and free of charge.