Repaying your student loan as SLOW as possible

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Forums › Finance and wealth management › Repaying your student loan as SLOW as possible

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#862994 21-Jul-2013 13:13

mudguard: I think another consideration is the 12% payrise you get once it's paid off!

12% on cash after your first $19,000, so not a true 12%.

mattwnz

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#862995 21-Jul-2013 13:14

networkn:
richms: A majority of those taxpayers bitching about it will have had a free ride thru their education and now be expecting the same graduate's they want to pay back more than they have to to also be propping up their absurd pensions which they also have not paid for.

Current and recent students have had it so much harder than the loud 50+ bunch who are shortly going to become a long term burden on taxpayers so just ignore the old whiners.

Well I don't think the majority of people here "complaining" are in the group you say we are. I am certainly not. I paid for my education and then paid my student loan as fast as I could and that was well before interest free came in.

The attitudes displayed here and in some of the other threads, usually all by the same people, lead me to despair for NZ's future.

Thankfully not everyone is out for themselves.

When I was at uni we had to pay interest, even while studying. The interest free thing was simply a vote buyer, and it worked as it resulted in a change of government. It is politically unpopular to remove it. Government money is wasted on so many areas. Millions are given to this like x factor, nzs got talent, America's cup, the rugby world cup, let alone super. I know of some people who get super who say they don't need it, but it is an entitlement which they paid their taxes for. No students are missing out on education due to people making payment at the minimum amount. Also the fact is that in our low wage economy NZers that money may be better used to put down a deposit on a house, especially with the minimum deposit scheme coming in soon which is going to make it very hard to buy a house. Many people will have to turn to loan sharks where the interest rate is huge.

Also how about all the people who buy stuff from overseas websites. They are getting around paying GST which they would have had to pay if they purchased it locally. Plus the local price also includes other overheads that go to support the nz economy.

No one wants to pay more tax than they need to, so I would recommend that the op speaks to their accountant as to what they think is the best option.

Lastly this same question was asked in a newspaper article, and the expert also said their was no need to pay it off faster, due to it being interest free, and best to use for passing of other debt or as a deposit on a house.

Aaroona

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#862996 21-Jul-2013 13:16

JimmyH: My take on the OP's question:
- pay down interest-bearing (credit card, loan) debt first if you have any.
- if you don't then buy a second-hand vehicle and pay down the student loan rather than buying a shiny new one. Better to climb out of debt than have a debt and a depreciating asset if you don't really need one.

Get rid of the SL as fast as practicable. It will make you more bankable if you want to start a business or buy a house, and will make going overseas much less of a hassle.

Mate, you've hit the nail right on the head. My current plan is the latter, buy a second hand vehicle and focus on paying off the SL. Fortunately I've managed to keep my head above board, I don't have any credit owing anywhere, other than my SL.

friendlymonkey: Due to inflation pay it off as slow as you can. There is no interest to counteract inflation therefore the it will be worth less in real terms in the future.

Ie. $5 in 2020 won't be worth as much as $5 today. The buying power of that 5 would have decreased.

Thanks for the explanation, I think I understand it now, the logic they were using.

I've read through this whole thread and it looks like it's coming down to two things, as it usually does in this world;

1. The money I could potentially make from interest + playing the 'system' if you will, and using inflation to my advantage.
2. psychologically feel better off by being debt free, by paying it off sooner.

This is of course the simplified version from what I'm getting out of here.

**I'm not saying there aren't other implications or paying it sooner or not paying it sooner.

Edit: 2. not really a moral I guess. More so psychologically.

mattwnz

20149 posts

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#863042 21-Jul-2013 15:13

Aaroona:

Edit: 2. not really a moral I guess. More so psychologically.

Yes I don't think there is any moral issue. In fact as a tax payer, I have no problem with anyone only paying the minimum amount, as that is how it is setup. eg to pay off your education as you use it for employment over time. Inflation also heaps to eat away some of the debt. Far bigger problems with companies in NZ paying minimal tax being registered as charities, or having their business based offshore in low tax countries. If we got full tax for those, we would be a far richer country.

NonprayingMantis

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#863104 21-Jul-2013 16:57

Yeah, having a go at people for not overpaying their student loan just because they can is like having a go at people for not paying more tax because they can. It's dumb.
I can see the psychological benefit of being out of debt, but then if you are talking about getting a mortgage then you are better off having some chunk of your loan as student debt rather than mortgage all the time the interest rate is lower.

mudguard

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#863106 21-Jul-2013 17:03

1080p:
mudguard: I think another consideration is the 12% payrise you get once it's paid off!

12% on cash after your first $19,000, so not a true 12%.

I realise this. I just wasn't going to do the maths!

alasta

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#863109 21-Jul-2013 17:05

Most new graduates probably don't earn enough to pay off more than the 12% minimum anyway. Sometimes very high achievers can walk straight into good salaries, but typically it takes a few years of experience before you're earning enough to have any reasonable discretionary income.

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MadEngineer

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#863136 21-Jul-2013 18:05

Here's another scenario:

You're on a floating mortgage with revolving credit and the more money in your account on any given day the less interest is paid.

The alternative is to pay off the student loan with the available funds in your account (money otherwise reducing the balance of your mortgage) and take the effective pay-rise. This doesn't work as until you've replaced that money over the next few years you're paying a higher rate of interest - without firing up a calculator the interest would be more than the amount paid off from the increased income.

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StevieT

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#863178 21-Jul-2013 19:30

Remember when uni education was free, and student loans weren't needed?

mattwnz

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#863245 21-Jul-2013 21:23

StevieT: Remember when uni education was free, and student loans weren't needed?

But it was never free, tax payer just picked up a higher percentage of the cost. Even now it is heavily subsidised, so people only pay about 30% depending on the degree. I think it is a lot higher in some degrees.

matisyahu

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#863326 22-Jul-2013 03:04

Aaroona: this editor has changed quite a bit.... anyway, back on topic.

I was having a read of this article here. Can someone please explain to me how this logic works? I'm trying to determine whether I should bother focusing on paying my student loan off asap, forgoing a relatively nice vehicle in the process, or buy a nice vehicle and just keep up with minimum repayments on my loan, dragging it out as long as possible.

Can someone explain, in layman terms how this theory works?

Kind of goes back to why I think that the amount one should pay should be linked to the size of the loan rather than on a percentage of income over $19,000; say 10% of your student loan must be paid out of ones income each year which would serve as a good incentive for people to only borrow what they need and equally it rewards people who pay it off quicker as their costs reduce over the life of the loan. As for me, I'm paying the minimum amount back because I don't benefit in any way by paying it back quicker especially given how low my income is already.

"When the people are being beaten with a stick, they are not much happier if it is called 'the People's Stick'"

Jaxson

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#863344 22-Jul-2013 08:42

As has been mentioned a bit above, there are some basic principles at play.

a) you're smarter to tackle any debt that has interest on it. Money spent on your interest free student loan is wasted if you have another loan that does have some interest, which you didn't reduce when you could.

b) you're smarter to leave the debt until you're in a better financial position anyway, both in terms of inflation "making the debt relatively smaller" and the income you're likely to have down the line relative to a early graduate position.

c) If you're actually repaying the minimum required rate from your income, then you're fulfilling your part of the deal. People with an issue with this should be redirecting their concerns to whomever granted the loan under the conditions you are now legally fulfilling.

d) students overseas do not have a percentage automatically deducted from their income and routed back to their NZ loan balance, like those who chose to stay in NZ do. This is where the biggest 'fraud' comes from. Just like tax, anyone actually earning anything in NZ will be repaying their student loan.

e) farmers. Far out do I agree with this earlier comment. I know many who qualified for a student allowance, who therefore didn't have any loan, and lived the high life. That's akin to benefit fraud in my opinion. Anyone whose parents are in a successful business can achieve this with a smart accountant, which brings me to my main point of:

Student allowances. There are two types who get access to this service, ones who genuinely need it and those who don't. In practise those who genuinely need it don't often make University as they're out working as soon as they can.

garvani

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#863348 22-Jul-2013 08:53

Im one that has paid the bare minimum.. Started off with $27k, 10 years later that is down to $6500, it should finally be gone in 2015.

timmmay

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#863358 22-Jul-2013 09:18

I borrowed $20K and paid off $30K, due to the interest back then. Still, it got my into a job that paid me $30K straight out of uni, and significantly more now, so it was a very worthwhile investment.

JimmyH

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#863374 22-Jul-2013 10:00

mattwnz:
StevieT: Remember when uni education was free, and student loans weren't needed?

But it was never free, tax payer just picked up a higher percentage of the cost. Even now it is heavily subsidised, so people only pay about 30% depending on the degree. I think it is a lot higher in some degrees.

It was never "free". Firstly, there were fees - albeit significantly lower than now. Secondly, "free" didn't mean no cost, just that the cost was shifted from the student who ultimately benefits onto someone else.

I benefited hugely from my degree, both personally and in a career/financial sense. It was the difference between essentially minimum wage work, and a job in an area that is stimulating and that I (mostly) enjoy, that pays better than that. I don't have an issue that I had to pay significant fees for the qualifications - and borrow & work part-time through study to pay them. At the end of the day, it was well and truly worth it and if I could go back in time and choose again I would do the same thing.

Also, the numbers (in total and as a % of school leavers) going on to tertiary education were significantly lower back then. Shifting some of the cost via higher fees (which still only account for a proportion of course costs, the govt subsidy is still quite hefty), was one way of allowing a surge in participation without wrecking the budget.

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