The Timbuktu factor in student loans

By MARY HOLM

Q: If the Government borrows money at less than 5 per cent, taxes it so it pays less than 4 per cent and then lends the money to students at 7 per cent interest compounding, shouldn't it be making a profit?

With a bit of credit control, they could make more money than Westpac.

A: It doesn't quite work that way. Lots of people pay no or low interest on student loans, to say nothing of those who don't repay the principal because their income is too low, or they've gone bankrupt or disappeared to Timbuktu.

First, some background. The 7 per cent charged on student loans is made up of a base interest rate of 4.2 per cent and an "interest adjustment rate" of 2.8 per cent, which is linked to inflation.

Most current students don't pay interest.

If you are no longer studying, but your income is less than the repayment threshold, now $15,964, all your base interest is written off.

Your loan grows only by inflation, which seems reasonable. And if you never reach the income threshold, perhaps because of disability or child-rearing, you won't ever repay the money.

For other borrowers, the base interest is capped at 50 per cent of their compulsory repayment obligation.

"This means that most borrowers do not pay the total interest rate of 7 per cent," says the Government.

"About two-thirds of all those who held a loan in the tax year ending March 31 last year received some sort of interest write-off."

Note, too, that the scheme costs a fair bit to run. Students pay a one-off admin fee of $50 for each loan, and part of their interest goes towards running the scheme. But that doesn't cover all expenses.

The Government also writes off a few million a year because former students have died or gone bankrupt.

You blithely suggest a bit of credit control. But that wouldn't be easy.

Students get their loans without any collateral or security. And many of the recipients have few assets and no credit record. It must be impossible to tell, in advance, which loans are likely to go bad.

Overall, according to the Student Loan Scheme annual report, the average interest rate charged per borrower, calculated as the total net interest for all borrowers as a percentage of total debt, is estimated at 2.7 per cent for 2002-03. It's a long way from 7 per cent.

Taking everything into account, each dollar drawn by students from 2002 onwards will cost the Crown 23c, says the report. Some profit!

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Q: The conveyancing fees mentioned in last week's column do look out of line, but I wonder if the "delay in settlement" disguises a much more complex picture.

The real issue here is that the lawyer has failed. He or she has rendered a fee that the client did not expect and does not understand.

For a fee of that amount for that kind of transaction, the lawyer should first have discussed it with the client, explained the amount, and ensured that the client felt comfortable with it.

Only then should the fee have been rendered. That is courtesy and good practice. Invariably, clients are appreciative and understanding when this is done.

Ringing around for estimates can be unsatisfactory, as it is likely to identify only the smartest salesperson.

Besides, I have waited in vain over 35 years for a prospective client to ask me to give an estimate for a "complicated" transaction.

Always, I am asked to give a price for the "simplest" deal imaginable.

Often, the reality is a deal so diabolically complex that it ties up the whole office for days. And then I am asked to keep somewhere near my fee estimate.

The real test of a fee is fairness - to the client and the lawyer. Further it is better to develop a relationship with a lawyer based on trust and confidence, which includes trust and confidence that the lawyer will render an appropriate bill.

I take the view that legal work is a professional service, and should not be treated as a commodity to be bargained for the lowest price, but of course in these times that view is treated with cynicism.

The best way to find a good lawyer is to ask your friends for a recommendation based on their experiences - ranking such things as responsiveness and how comfortable they felt in the course of the transaction as well as cost.

Take away points for such things as not responding to telephone messages, a bombastic or patronising manner, and inadequate reporting.

Did the lawyer check on your wills? A (genuinely) simple will or will revision in the course of a conveyancing transaction should be free.

Finally, in the case of blatant overcharging (and I don't know that the case you cite was), the Law Society can deal with overcharging as a disciplinary matter, taking it outside the cost revision time limits.

A: Thanks for heaps of good advice.

So much, in fact, that you're way over the 200-word limit for letters. But seeing that you're answering a question rather than asking one, I can hardly complain.

You're quite right, of course, that the lowest-priced lawyer might not be the best. But neither, necessarily, is the highest-priced one.

I would still encourage would-be clients to ask for a fee estimate. Surely the lawyer can say that, if things get complicated - despite the client's assurances that they won't - the bill will be higher.

Discussing money from the start makes it much easier to open further discussion later. I particularly like your comment about wills.

I had forgotten that revision of wills is sometimes included with conveyancing. And with the pace at which families change these days, many people probably need their wills revised at least as often as they change houses.

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Q: In your column last week you mentioned a reader who paid $250 a month in monitoring fees on a $206,000 portfolio. This works out to about 1.5 per cent a year.

Even the reduced rate of $189 a month is more than 1 per cent a year.

This is still way too high in an era of 5 per cent Government stock yields and 7 to 8 per cent a year yields for shares.

If the portfolio is invested in managed funds, as most are, total annual fees will be near 2.5 per cent a year.

The problem with this sort of cost structure is that in order to beat the bank, many advisers inevitably push the portfolio out along the risk curve - junk bonds and lots of shares - irrespective of the client's situation.

I'm an investment adviser and I see at least one horror story along these lines each week.

A: Good point.

As I said last week, an hourly fee seems the best way to reward financial advisers. They can then pass on to the client any commissions they receive from fund managers and so on.

That means there's no incentive for them to do anything other than what is best for their clients.

It does mean, of course, that the fee for people with small savings might be rather high relative to the amount invested.

But in those cases the adviser should keep things pretty simple anyway, and so not spend a lot of time.

When I suggest hourly fees, many financial advisers protest that people aren't willing to pay them that way. They don't regard advisers in the same way as doctors or lawyers.

And if some advisers are unprofessional enough to do as you say, and put clients into unsuitably risky investments, they don't deserve to be treated as professionals.

But if an adviser explains the situation to clients, I'm sure they would appreciate the advantages of hourly fees - to say nothing of appreciating getting the commissions, which might go a long way towards covering the hourly fees.

Quite a few advisers do work this way.

How about it, the rest of you?

While we're on the topic, last week's correspondent felt awkward about discussing fees with her adviser, "as I regard him as a friend".

Many people feel similarly about lawyers.

It's great to be mates. But primarily, your relationship with your adviser or lawyer is a business relationship.

No client should ever feel reluctant to discuss fees. Lawyers and advisers aren't reluctant to charge them.

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