Buying a first home is hard enough without student loan worries. Photo / Getty Images
Buying a first home is hard enough without student loan worries. Photo / Getty Images
Opinion by Diana Clement
Diana Clement is a freelance journalist who has written a column for the Herald since 2004. Before that, she was personal finance editor for the Sunday Business (now The Business) newspaper in London.
To pay or not to pay? That's the question when it comes to the student loan. It's interest free, and the temptation with "free money" is to pay the compulsory minimum and leave the rest ticking over for however long it takes.
Minimum repayments on students are compulsory, once you'reearning $21,268 a year (or $409 a week) before tax. It's a fixed 12 per cent of your before-tax income over a minimum threshold, and will be deducted automatically from your pay before you receive it. You'll also pay 12 per cent on every dollar you earn if you have a secondary job.
The question is, should you pay more and knock this debt on the head faster than you need to? The short answer is there are times to pay and times to wait.
By all means pay the minimum for a while. There's nothing like getting regular full-time pay for possibly the first time in your life. Spoil yourself a little - although getting in the habit of spending everything is a slippery slope to being forever broke.
Then there's life's big expenses. Maybe you're getting married, or buying a house. The student loan can get forgotten when saving or borrowing for these.
The three main reasons to double down and pay off your student loan faster are:
1. Buying a home
Student loans and the repayments don't affect your credit score in any way. But here's the rub: If you want to borrow to buy a home, your minimum student loan repayments will be taken into account by banks' affordability calculators. Put simply, whatever figure you're paying in student loan repayments will be deducted from what you can afford to pay on the mortgage - as a result, reducing the amount you're allowed to borrow. It's hard enough for most first-home buyers to borrow to buy a home as it is with the Credit Contracts and Consumer Finance Act (CCCFA) and other road blocks such as minimum loan-to-value ratios (LVRs). The only "but" here, is if you have interest-bearing consumer debt, that needs to be paid off first.
2. OE
If you're heading overseas to travel or work for more than six months your loan is no longer interest free. Interest is backdated to the day you left, because you're no longer contributing to the New Zealand economy. The current rate is 2.8 per cent, but could well go up in 2023 if interest rates stay high. If you skip overseas and don't pay, the late-payment interest rate is currently 6.8 per cent, which is quite painful. Beware that you could be chased by debt collectors overseas, or even arrested when you come back to New Zealand if you don't pay. So clear the debt as quickly as you can if you want to work overseas.
That student loan can affect you psychologically. Like all debt, it can drag you down mentally. Conversely, paying off debt can reduce stress, and even improve relationships. It enables you to look to the future and build your life unencumbered by the black cloud of debt.
Like all debt, a student loan can drag you down mentally. Photo / 123RF
A fourth reason that won't affect everyone is that student loans aren't relationship property. I once interviewed someone who had been left with a rather large student loan to pay off after a split. As a couple she and her husband had jointly paid off his loan first, then split, leaving her outstanding loan out of the relationship property split. The exceptions are where the loan was used for living costs for the couple, or the debt was incurred when one member of the couple studied in order to assist the couple's business.
Finally, like everything, there are exemptions to minimum student loan repayments. Including hardship arrangements and special deduction rates. If you're still studying, there is an exemption if you're earning more than the weekly, fortnightly, four-weekly or monthly threshold amount, but less than the annual threshold amount, because you're not working for the whole year. For more information, visit Tinyurl.com/IRDStudentLoan.
