Escaping debt, by degrees

Before they can think about investing, many young New Zealanders face a more immediate question: How to pay off their student loan? DITA DE BONI has some advice.

Like me, you may have carried it for 10 years. You may be only a new carrier. Either way, you picked it up pursuing higher learning and it continues to haunt you well into your adult life.

"It" is a student loan, a burden that more than 300,000 New Zealanders now bear. Student loans are now a fact of life for almost anyone who started tertiary education after 1992 and a cause of much angst for many young Kiwis.

Graduates my age (30) were paid to go to university in our first year, 1991, then hit with fees in our second. At that time fees were manageable - perhaps just a couple of thousand dollars all up - but it was access to the very first loan of our semi-adult lives that was the real eye-opener.

Unlike today, the first people to be offered student loans were essentially given carte blanche to take as much money as they wanted, as often as they wanted.

Our parents were also unaccustomed to the new loan scheme. Many advised us to make liberal use of the loans because "the next Government will wipe the loans, for sure!"

Ten years and more than $5 billion later, that prospect looks less likely than ever.

For those who have spent a substantial period in tertiary education, the mid-20s OE, then time in modestly paying jobs, the result has been several years dealing with the psychological burden and frustration that debt brings.

Experts advise anyone trying to rid themselves of debt to pay off the loan with the highest interest rate first. That means student loan debt, at an interest rate of 7 per cent, is not worth paying off ahead of credit card bills (at around 18 per cent) or hire-purchase arrangements.

Nevertheless, there are things you can do to make sure your student debt is whittled away as fast as possible.

Lighten the load

Or, in other words, borrow as little as possible in the first place.

The modern student loan has three components:

* Compulsory fees - an unlimited amount that is paid directly to your education provider to cover tuition (there is a $6500-a-year limit if you are studying at a private institution).

* Up to $1000 per loan account for course-related costs.

* $150 a week for living costs. The amount you can borrow for living costs reduces by the amount of student allowances you are eligible for.

There is also an administration fee of $50 for every student loan account established.

If you want to control your student debt, the first thing to do is think about foregoing the $150 week for living costs. It won't be easy - just over half of all students qualify for a reasonable student allowance, and if your parents earn even a semi-decent income, then access to this benefit will not be an option.

Part-time work will be a must for most students. But be sure to keep the amount you earn under $25,378 a year. Full-time, full-year students, and all other students earning less than that sum, are able to have all their interest written off.

Breaks between semesters of over three weeks may also allow you to get the unemployment benefit - student hardship from the Department of Work and Income, so be sure to look at that option if you are still claiming living costs during school breaks.

Another way of keeping your debt down from the outset is to pay some of your tuition fees yourself. Just remember that once you've paid any portion of your tuition fees, Student Services will not reimburse you if you run into financial difficulties further into the year.

Kate Oliver, editor of student website target="new">www.studentz.co.nz, says she has profiled people who have invested their student loan in the stock market and done quite well - a remarkable feat given recent returns. In the days when lump sum payments were made, some students were known to pool their money and buy large assets including houses and yachts.

Which may explain why some are mired in debt today.

Repay, repay, repay

Interest is calculated on outstanding student loans on a daily basis, so it's not hard to work out that repaying your loan as soon as possible is the best course of action.

The student loan interest rate has remained at 7 per cent for the past three years, and is calculated by averaging out past and predicted interest rates for 10-year bonds.

Once you start working, 10 cents out of every dollar you earn over $15,496 will be skimmed off your wages, and half of those compulsory repayments will go directly toward paying loan principal and inflation.

Even so, if there is any way you possibly can, you should avoid making only the minimum repayments.

According to figures from Inland Revenue, if your loan is $30,000 and your salary is $35,000 - the average starting point in professions such as secondary teaching, for example - it will take you more than 35 years to offload your loan if you make only the minimum repayments each week, and you'll pay over $80,000 in interest.

If your loan is $20,000 and you pay off the minimum each week, you'll take 17 years and seven months to pay off your loan, paying over $14,000 in interest over that time.

But if you pay an extra $50 each week on top of the minimum payment, you'll pay your $20,000 loan in five years and three months, and pay less than $4000 in interest. On a $30,000 loan, $50 extra each week cuts the repayment time to under 9 years and the interest to less than $10,000.

Some well-known methods of repaying student loans faster include paying an extra amount to Inland Revenue straight from your pay, or putting any bonus, inheritance, prize or cash gifts into your loan.

Financial commentator Mary Holm advises those with student loans to treat every pay rise as a non-pay rise; in other words, put the increase in your pay into repaying your student loan, to reduce it more quickly.

Another option is to borrow from a bank, and use that money to repay your student loan.

That would normally be an expensive approach, but Westpac is offering recent graduates (those who completed their studies three years ago, or less) loans of as much as $20,000 at a rate of only 1 per cent for one year, 2 per cent for two years or 3 per cent for three years.

The money is paid straight to IRD.

Borrowers need to keep to the agreed repayment schedule, or the interest rate rises to Westpac's standard retail rate.

The amount available under the scheme is limited to $50 million.

Don't forget the taxman

Ensure you are using the right tax code as soon as you start repaying your loan. If you don't, you'll face a massive bill at the end of the year to cover any compulsory payments you should have been making.

If you are paid salary or wages your employer will make your compulsory repayments directly to Inland Revenue if you give him or her the right tax code. Those payments are credited to your loan account on the 15th of each month.

Find your correct tax code before you fill in your tax code declaration form (IR330). If you earn more than $15,496 a year before tax use "M SL" as your code for your main job.

If you have more than one job, and a student loan, you need to use a different code for any job additional to your main work.

If you earn under $38,000 from all your jobs, use the "S SL" tax code for your additional job(s). If you earn $38,001 to $60,000, use "SH SL", and if you earn over $60,000, use "ST SL".

Be aware that a second job can be more bother than it is worth because you are taxed extra on your second job anyhow, and still more with a student loan on top. One young woman - eager to pay her student loan off faster - worked as a waitress for 15 hours a week on top of her regular job and ended up paying a measly $11 extra against her loan - and getting only $40 or so in the hand.

You can also apply to the IRD to get a special tax code, which will take out even more money on top of your M SL tax code. It's a good idea if you can afford it, but you have to do the paperwork with the department to have it set up.

If you have only a small amount of your loan left to repay (say, anything under $1500), it might be worth not applying for the M SL tax code. That is because there have been many cases of people over-paying their loan - if you don't stop payments, no one else will. With such a small amount, some people just save that amount and clear the loan in one final payment, rather than be bothered with changing tax code mid-way through the financial year.

You no longer have to fill out a tax return if you have a student loan, as the Inland Revenue will automatically prepare a personal tax summary.

If you are entitled to a refund, this can be paid directly against your student loan.

At the end of the tax year, you are offered back the amount you have overpaid your loan (in other words, anything above the compulsory repayment level). Caution! It will be very tempting, but it is best to try to resist having that money refunded if you can.

You can keep track of your loan balance each month by setting up a PIN number with the Inland Revenue which allows you to access the details of your loan on their automated Infoexpress line: 0800-25-77-77. (To speak to a warm body and establish this access, call 0800-377-774).

Foreign climes

If you are going overseas, talk to the Inland Revenue before you leave to ensure you are cleared to pay only the $1000 mandatory annual payment, or 1/15th of your total debt (if the total debt is larger than $15,000), plus interest.

It is not worth contemplating the results of not setting up this understanding with the IRD before you jet off.

And once you are overseas, if you don't meet those obligations, you will be charged a 2 per cent penalty on your outstanding payment every month until you do.

And don't forget to keep tabs on your loan balance. Around 9000 overseas students were overcharged in 2001/02 because the IRD was requiring them to pay 1/15th of an old student loan balance.

* Dita De Boni is the Herald education reporter.

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