Mary Holm: Doing the sums on student loans

COMMENT:

A: Thanks for another "challenge" to my frequent advice about student loans.

What I usually say is to repay a student loan as slowly as possible, because they're interest-free as long as you live in New Zealand.

The reasoning goes like this: paying off, say, a credit card debt on which the interest is 20 per cent improves your wealth as much as earning 20 per cent on an investment, with no fees or tax. In other words, paying off the debt is a fantastic "investment".

But paying off an interest-free student loan improves your wealth as much as earning nothing on an investment. Not particularly appealing. You're better off to put any spare money into, say, a savings account, where it earns interest.

But the two challenges to that way of thinking are:

• Ethical issues. A friend recently said it's unethical not to repay a student loan as soon as you can. The taxpayers of New Zealand have given you the money to fund your studies, he says. It's not fair to delay repaying that money.

This is hard to argue with, and years ago I used to say the same thing. More recently, though, I've realised that most people repay their student loan only when it's taken out of their pay — at the rate of 12 per cent of everything they earn over $19,760 a year. It takes many years to repay a large loan.

It seems unfair to suggest people repay their loan faster, putting them at a disadvantage compared with most other people. But in the end, each person must decide how they feel about this.

• Your point — if your loan is small, annual fees will make it grow fast percentagewise.

The $40 admin fee is charged by Inland Revenue if your account balance is $20 or more on March 31 each year — although it isn't charged if you have paid an establishment fee to Studylink in that tax year.

"The $60 establishment fee is charged on each student loan contract entered into at the time the first drawdown (fees, course-related costs or living costs) is made," says the Ministry of Social Development.

And you're quite right. On a balance of less than a few thousand dollars, $40 is a considerable charge.

So paying back a small student loan makes sense financially. What's more, you get a big tick on the ethical issue.

What about the wife?

A: You make an excellent point. The correspondent listed the couple's assets, but made no mention of a KiwiSaver account for his wife.

Some people still don't realise that you don't need to be employed to join KiwiSaver. You can sign up directly with a provider.

You won't get employer contributions, of course. But you will get the government contribution, of 50c for every dollar you contribute, up to a maximum of $521 a year if you contribute $1042 or more.

It would be a pity for the wife — or anyone else who is self-employed or not in employment — to miss out on that money. It can add up over the years, especially if you consider compounding returns.

Let's say you're a non-employee and you contribute $86.84 a month — which comes to $1042 a year — to your savings.

• In a non-KiwiSaver fund, after 10 years you'll have $12,200 in a middle-risk fund that earns 3 per cent a year after fees and tax. In a higher-risk fund that earns 6 per cent, you'll have $14,300.

• In a KiwiSaver fund, after 10 years you'll have $18,300 in the middle-risk fund and $21,450 in the higher-risk fund. The government contribution makes the difference.

• Over 30 years, outside KiwiSaver you'll have $50,600 in the middle-risk fund and $85,600 in the higher-risk one.

• Within KiwiSaver, over 30 years you'll have $75,900 in middle-risk, or $128,400 in higher-risk. Those are not small amounts.

You might have noticed that the KiwiSaver numbers are one-and-a-half times the non-KiwiSaver numbers. That's simply because, with the government contributions, one-and-a-half times as much money has gone into the account each year.

There's also another good reason for a non-working spouse or partner to have their own KiwiSaver account. It's their money, and they can make their own decisions about how it's invested and how it's spent in retirement.

If a relationship ends, KiwiSaver money saved while the couple are together is usually treated as relationship property. But still, it's psychologically good for each partner to have their own account.

Study and KiwiSaver

Q: A family member is finishing paid employment shortly, to study further, for a year. What should be done about KiwiSaver payments?

A: See the Q&A above. The same thing applies to non-working students.

It's really good if they belong to KiwiSaver, and they — or perhaps a generous family member — can contribute $1042 a year, to get the government contribution.

Deductions

Q: You said last week that mortgage interest on rental properties is tax-deductible. Has not the government scrapped this from April 1 this year?

A: No. And although landlords have seen their tax breaks dwindle, and rules around insulation and borrowing tighten, I can't imagine a change to the deductibility of mortgage interest, which is clearly an expense.

According to Inland Revenue's website, "You can claim the interest charged on money you've borrowed to buy your rental property. However, if you:

• borrowed part of the money for another purpose, or
• topped up the mortgage for another purpose, for example to consolidate debt or to buy the house you live in then you can only claim the interest that relates directly to the rental."

For more on the rules, go to ird.govt.nz and do a search on "managing a rental property".

Leaving the big city

A: You raise an interesting point, that in smaller centres medical care will not be as comprehensive as in big cities.

It's something to keep in mind, especially for older people thinking of moving to a small town or the countryside. It would be good to check out the medical services before moving — including talking to the locals about it, not just the doctors.

And the fact that you kept your Auckland house and let it certainly worked out well for you. As it happened, Auckland house prices soared between 2012 and 2016. However, as I said two weeks ago, a repeat of that seems really unlikely in the next few years.

What's more, our correspondent said, "We are, however, not keen to be landlords, with all the hassle that entails".

Speaking as someone who has been a reluctant long-distance landlord, I can vouch for the fact that it can be nightmarish when problems arise — with tenants, the rental agent or the property itself. You may have been luckier landlords than you realise.

This is one of those situations in which there are risks whatever you do. And that can leave people accepting an unsatisfactory status quo because they're afraid things will go wrong if they take action.

It's better to sensibly weigh up the risks — including how you would cope in a worst case scenario — and then get on with doing what you want to do. Life is ticking by in the meantime.

A meal for Dad

A: I love it. And your letter suggests that a wonderful gift from a child is to give their parent an opportunity to teach them something in a fun way. Any other ideas for original Father's Day celebrations that are not about spending big bucks are welcome.

- Mary Holm is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. 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. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.