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Mary Holm is a personal finance writer

Mary Holm: Student loan poser: repay early or not

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End to the voluntary repayment bonus at the end of the month exposes differences in approach to debt

Money differences can be problematic. Photo / Thinkstock
Money differences can be problematic. Photo / Thinkstock

Q: My partner has a student loan, and with the upcoming removal of the voluntary repayment bonus, I have encouraged him to repay the loan in full as he has the money to do so - approximately $30,000.

He has said he may put up to $10,000 towards the loan. However, for a couple of reasons, he doesn't see the need to take advantage of the bonus, which could be considered the equivalent of a great interest rate. His reasons are:

The interest that could otherwise be earned on the money.

The fact that the money is more useful to him now than, say, it would be five years from now, on the basis that his salary will have increased.

The longer he has the student loan, the more the amount is affected by inflation.

I repaid my loan in full after three years, taking advantage of the voluntary repayment bonus, and am happy that I can now travel overseas or apply for a home loan without worrying about this debt hanging over my head.

Does his thinking make any financial sense, given that the removal of the bonus certainly reduces the incentive to make any voluntary repayments and is unlikely to be reinstated in the near future?

A: Uh-oh. Houston, we have a problem. You two seem to have opposite attitudes to borrowing, which can cause friction in a relationship. More on that in a minute.

You're right that the student loan repayment bonus ends on March 31. The bonus works like this: if you make extra payments of $500 or more a year above your compulsory repayments, you get a bonus of 10 per cent of the extra amount.

For example, if you pay $800 extra, it's treated as if you had paid $880 extra. For more information, go to tinyurl.com/repayloan.

Should your partner take advantage of the bonus by fully repaying his loan before the end of this month? Maybe.

Student loans are unlike most other debt, in that as long as you live in New Zealand you pay no interest. Before the repayment bonus came along, people who think in a financially optimal way - such as your partner - made only compulsory repayments. They strung the loan out for as long as possible for the reasons your partner gives above.

However, others like you just want to get rid of debt, partly for psychological reasons. You really enjoy being debt-free. And that's legitimate.

"Psychologicals" often add that getting out of debt reduces risk and, as you say, it would make it easier to apply for a mortgage. But that argument doesn't really hold in this case. As long as your partner keeps the balance of his student loan in a bank deposit or similar, he can repay the loan at short notice whenever he needs to, before moving overseas or seeking a mortgage.

Okay, now we introduce the repayment bonus. Does this change what the "Financial Optimals" - including your partner - should do?

That depends on whether they would otherwise repay the loan - by making the normal compulsory repayments - within the next three years.

An actuary has worked out that if the answer is yes, your partner will probably gain from repaying the loan now and using the bonus. If the answer is no, he's better off leaving his savings where they are while repaying his student loan as slowly as possible. He misses out on the bonus, but the compounding interest should more than make up for that.

Unless your partner is on pretty high pay - and therefore making big compulsory payments - his answer will be no. That's a pity in some ways. If it had been yes, you could have perhaps persuaded him to repay the loan in full and you would both be happy!

But you might have to just accept that you two have different attitudes to money - and be glad that you're not as far apart as couples that include a saver and a spender. At least your partner has saved the $30,000.

Still, it would be good if you two talked about how you feel about saving and borrowing, and perhaps read about how money affects relationships.


Early repayment

Q: The 10 per cent bonus for early repayments of student loans finishes on March 31. We are considering paying off a lump sum from our two sons' student loans to take advantage of this.

They are both still studying, so can we do this while they are studying?

And is there a maximum amount that can be repaid while receiving the 10 per cent bonus?

A: Let's start with some general info from Inland Revenue:

"Borrowers don't need to apply to get the bonus. Borrowers need to make their voluntary repayments in addition to their repayment obligations on or before March 2013, 31. To qualify for the bonus they must:

• "Be up-to-date with their repayments and obligations.

• "Have a total loan balance with Inland Revenue of $550 or more at the beginning of the tax year", which in this case would be April 1, 2012.

• "Make voluntary repayments totalling $500 or more for the tax year," which runs from April 1 last year until March 31 this year.

Now the good news. The department goes on to say: "Voluntary repayments can be made even when a borrower is still studying. These may qualify for the bonus until March 31, 2013, as long as the borrower meets the criteria above.

"Payments can be made by the borrower or by their nominated person (usually their parents), who will be authorised to transact with us on behalf of the borrower."

For more detail, see the next Q&A.

On the maximum amount, Inland Revenue says: "Voluntary repayments of up to the total loan balance can be made if a borrower wants to close off their student loan."

However, working out how much to repay if you want to do that is not as simple as it seems.

Let's say the loan was $1,000.

If you paid back 90 per cent, or $900, your bonus would be 10 per cent of $900, which is $90.

Your loan would be reduced by a total of $990 and you'd be left with a $10 loan.

Instead, you should pay back 10/11 of the balance. In our example, multiply the $1,000 loan by 10, to get $10,000. Then divide by 11, to get $909.09. That's the amount you should repay. Your bonus will be 10 per cent of $909.09, which is $90.91 rounded to the nearest cent. The bonus and repayment will then total $1000.


Tracking balance

Q: Our daughter is presently studying at university and has taken out a student loan for the past three years and also has a loan for this year, her final year. We are wanting to pay off some of the loan by March 31 so she benefits from the 10 per cent repayment bonus.

Can the bonus be put against her total loan to date or just the amount that has been transferred to the IRD? Is there any benefit in paying off more than has been transferred to the IRD? Does this qualify to get the voluntary repayment bonus?

For example, her loan is $49,000. With $30,000 transferred to the IRD at the end of the 2012 tax year, the balance is still with Study Link.

A: The system has changed.

"Since April 2012, StudyLink has been transferring loan information to Inland Revenue on a daily basis. This means that Inland Revenue now holds the borrower's total loan balance information at any given time," says an IR spokesman.

"Borrowers can see a complete and up-to-date view of their loan balance any time on their myIR account, Inland Revenue's secure online services."

He goes on to say that "the voluntary repayment bonus is applied to the total loan balance held by Inland Revenue".

"Borrowers don't need to use their balance as at March 31, 2013, if they want to pay off their loan in full. They can do so at any time, but may also need to anticipate any additional borrowing until March 31, 2013."


Bonus deadline

Q: I was wondering if you could clarify the changes to the student loan system happening on April 1. Particularly the 10 per cent repayment bonus.

On the IRD website it seems to say you "may still qualify" to receive the bonus for the current financial year for payments later than April 1. However, it doesn't say what the criteria are?

A: I also found the wording confusing. But Inland Revenue confirms that the bonus applies only to payments made by March 31, 2013.


Relationship property

Q: That was a helpful piece on relationship property in a recent column. But is there a big assumption in there that needs to be made explicit?

In writing about an agreement not to treat a couple's home as relationship property, your correspondent writes, " ... a major reason that I drew up this agreement ... " This implies that she drew up the agreement herself.

As my ex and I found out in the family court, none of the agreements we (ourselves) had drawn up over the years had any standing in court as:

They were not in the format prescribed by the law.

They were not signed in the presence of a barrister with the proper authority authorised by the courts.

They were not subject to independent legal advice.

Even one agreement drawn up by lawyers had no standing as both of us received advice from the same lawyer, and therefore that advice was not deemed to be sufficiently independent.

I'm concerned that readers might think that the potential problems are eliminated if they just make an agreement between themselves.

It may be useful to make it explicit that to have any authority, in a less than amicable "bust-up", agreements need to be in the proper form accepted by the courts; be subject to independent legal advice; and have the signing witnessed by a barrister with the proper authority.

A: Thanks for making a really important point.

Deborah Hollings Chambers QC confirms what you say. "The legislation dictates certain wording for parts of the agreement, plus independent legal advice, plus certification (not just witnessing) by a New Zealand lawyer who has a current practising certificate".

I must say this smells of 'let's create more work for lawyers'. However, says Hollings Chambers, "All of this is because of the need to give proper protection, given that the agreements have such a big effect."

I suppose we do have to be sure somebody didn't sign with a gun to their head.


Want to learn more about your home finances?
Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland.


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.

- NZ Herald

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