Mary Holm

Mary Holm is a personal finance columnist for the NZ Herald.

Mary Holm: Interest rate on student loans queried

22 comments
Reader says it's cheaper to borrow for a home than for graduates overseas paying interest on their debts

It can be tough for young people going overseas to see their student loans growing. Photo / Thinkstock
It can be tough for young people going overseas to see their student loans growing. Photo / Thinkstock

Q: I have two sons with student loans. One is working and residing in the UK, the other in New Zealand.

Student loans are merely a mortgage and for those unfortunate enough to live in provinces the need for accommodation outside their home towns/cities to further their qualifications was a no choice situation. Accommodation and living expenses make up the majority of my sons' overall loans. And also, unfortunately we, like many parents, were limited as to the financial support we could provide them.

What I find disturbing is that the interest rate the Government is charging is higher than that of someone buying a house. The current student loan interest rate is 6.4 per cent, while I can borrow for a home as low as 5.5 per cent floating, 4.79 per cent one-year fixed, 4.99 per cent two-year fixed and even as low as 5.99 per cent for five years fixed.

It is cheaper to borrow for a home than take out a student loan.

A: Only if the student goes overseas before repaying the loan. Don't forget the loans are interest-free to those in New Zealand.

And it's probably fair enough that people who have been educated in New Zealand - with the bulk of their tertiary costs paid by the taxpayer - should pay reasonable interest on their loan if this country is not benefiting from their education.

True, many graduates who head overseas end up back here. But in the meantime a lot of them have earned high pay abroad on the back of their Kiwi education.

Furthermore, it's not clear to me why the interest rate shouldn't be higher than the mortgage rate. After all mortgages are secured by property. With student loans, there's precious little security.

Actually, as our graph shows, the student loan rate has tended to be lower than mortgage rates historically. But the two rates are clearly not closely correlated.

So how do they decide on the student loan interest rate? The rate, which is set by legislation, is "based on a five-year average of the 10-year bond rate, plus a margin of 0.74 per cent. A long-run average is used to smooth movements in market interest rates," says Inland Revenue.

In a bit of good news for your family, the student loan rate for the 2014 tax year, which starts in a week or so on April 1, will be 5.9 per cent, down from the current 6.4 per cent.

Sorry if I sound a bit mean above. I know it can be tough for young people overseas to see their student loans growing. I strongly recommend that they set up an automatic transfer of a portion of their pay to get rid of their loan.


Paying off loan

Q: I am baffled by the parents writing to you saying they want to pay off part of their son's and daughter's student loans in order to take advantage of the 10 per cent bonus that expires on March 31.

Far be it from me to tell others how to raise their children, but I can't help wondering why on earth these correspondents let their children take out the loans in the first place if they are just going to pay it off for them.

Wouldn't they have been better to simply give their children a weekly allowance throughout their studies that equalled the loan amount? This could have taught their children to budget and plan their expenditure on a weekly basis. The lesson I see them getting now is: don't worry about your debts, we'll take care of them, you just go on living your carefree life.

Of course, I am also slightly miffed that these children have such generous parents. I wish mine had offered to pay off my loan back in the days when interest was charged from the very first drawdown of money.

A: Good on you for admitting your envy! And you make a good point about the different ways parents can financially support students. Many of us look back at our university years and acknowledge that the lessons we learnt about getting by on very little were more valuable than some of the academic learning.

Still, it's not hard to answer your question about why parents stand back while their student children borrow and then step in to pay back the loans later. It's all about interest. Instead of giving their children a weekly allowance, they can bank that money and earn a fair bit of interest on it before using it to repay the student loan.

It's just one of the distortions that result from the loans being interest-free. But let's not start another debate in this column about student loan interest. We've been there. Let's just say it's a tricky issue.


Lending or gifting

Q: Your recent response in regard to inheritance and property was of interest to me as we are currently looking at suitable structures in regard to our family home.

Like your contributor it is my parents that are concerned about the money that they work hard for being lost in the event that we split. However, I am in the fortunate position that I am using this money now before my parents' passing.

My new wife and I are in the process of buying a house and the structure we are looking at is that the money will be loaned from my parents' trust at 0 per cent interest and secured against the property in the form of a second mortgage on the title behind the bank.

This way, in the unlikely event of a split, once the property is sold the bank will have its money returned, followed by the trust.

We have only discussed this in theory with our lawyer (along with several other options) and not with any banks to see how receptive they are to the idea.

Thought it might be of interest to your other contributor.

A: Indeed. "Lending money rather than gifting money can provide significantly more protection from children's marriages going kaput," says Deborah Hollings Chambers QC. "Before parents advance funds to help their children they should seek legal advice in regard to the best structure for their family, taking into account the increasing rate of relationship breakdowns."

The parents don't need to have a trust to make such a loan, she says. They can lend it themselves.

Usually, the debt would be forgiven on the second parent's death, "but it depends on what other calls there are on the estate. For example, there may be issues of fairness and equity between siblings in terms of inheritances, which means that the debt needs to be repaid," says Hollings Chambers.

"If it were to be forgiven, then, because it has been used to purchase the family home, the increased equity would become relationship property unless there was a section 21 agreement in place."

She adds that, "Lending money like this creates a debt which is a relationship property debt which both spouses would be liable to repay unless it is forgiven. They are both liable."

Would such an arrangement force the sale of the property if the couple split? Not necessarily, says Hollings Chambers. "It would depend on the terms of the mortgage. Presumably it would be an on-demand mortgage so that the trustees of the parents' trust could require the capital to be repaid by demand. In that case, either the loan would have to be repaid or presumably as second mortgagor the trustees could insist on the property being sold."

But, she says, "it would be easy for one partner to keep living there. This happens all the time with houses that have mortgages. Basically you are only dividing the equity in the property between the couple," which is the value of the house minus the bank and parent loans. One spouse could pay half the equity to the other one, and keep the home and take sole liability for the debt owing to the parents.


Property in trust

Q: My query is, when a 48-year-old woman has a freehold property (mortgage repaid via insurance and superannuation payouts from deceased husband) and that property is in a trust benefiting the couple's two children, (now in their teens) what is the situation if the widow starts a relationship and the new partner comes to live in this family home?

He may subsequently help around the house, help with the children, may carry out maintenance on said property (physical, not monetary) and perhaps contribute monetarily to the household expenses - food, electricity, rates, etc. What would be his entitlements if the relationship finished or the widow died leaving the two children?

A: It seems, to the layperson, that he should certainly get something. However, Hollings Chambers says this is a complicated area of law, and you haven't given us enough information to predict with any real certainty what he would be entitled to. The partner's entitlement "would depend on the exact terms of the trust and whether the woman is also a beneficiary with the children, as I would expect."

She adds, though, that "we can probably safely say he would get back the value of his contribution and also the increase in value as a result of that contribution".

What might the man do to increase his chances of getting what most of us would regard as a fair share? Hollings Chambers makes several suggestions:

• "Keep records of all contributions he makes including non-financial contributions."

• "He could also suggest that as a couple they bought another property such as a beach house or another investment which they both contribute to which is not in a trust." They would both need to acknowledge that that would be relationship property.

• "He should try to get an agreement that his contributions, such as maintenance on the property and contributions towards rates etc, will be recognised in a fair way in regard to the value of the property."

• Get married. "It does make a difference if the couple are married because one of the provisions relating to 'trust busting' only applies to married couples."

• "There may be other property owned by the widow which is not in a trust which he could make a claim against in the event of her death on the basis of the Family Protection Act. This would be on the basis that as her surviving de facto partner (or spouse) the widow had a moral obligation to him to leave him part of her property."


Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.

Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland.

- NZ Herald

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