Avoid stu­dent debt woes

Auckland City Harbour News - - NEWS -

Stu­dent debtors. They are ev­ery­where.

There are cur­rently just over 720,000. There have been 1.2 mil­lion since stu­dent loans be­gan. That makes stu­dent debt feel nor­mal but it shouldn’t.

A key fi­nan­cial aim in a young life should be for the kids to get ed­u­cated and join the work­force with no debt or as small a debt as pos­si­ble.

A debt, even one you are only forced to pay back slowly (un­less you head over­seas), is a psy­cho­log­i­cal and fi­nan­cial drag on the those who have it. On av­er­age, a per­son with a de­cent ed­u­ca­tion earns sig­nif­i­cantly more than a per­son with a poor ed­u­ca­tion. But, as with buy­ing any­thing, get­ting an ed­u­ca­tion does not jus­tify a run-away debt.

Many stu­dents do well in keep­ing down their debts, re­al­is­ing, I hope, that just be­cause you can bor­row doesn’t make it a good idea.

In 2013, while 94 per cent bor­rowed to pay fees, just 64 per cent bor­rowed for cours­ere­lated costs. And just 54 per cent bor­rowed for living costs. In all, just un­der a quar­ter bor­rowed only for fees.

So 6 per cent avoided debt al­to­gether. No doubt each of that for­tu­nate 6 per cent has their own par­tic­u­lar story.

Many would have had the good sense to stay at home while they stud­ied.

Oth­ers may have been for­tu­nate enough to have well-off par­ents.

Some may have worked while they stud­ied or had not par­tic­u­larly rich par­ents who helped them save to pre-fund their ed­u­ca­tion costs.

We can look at what keep­ing stu­dent bor­row­ing down can mean for a new grad­u­ate. Let’s have a look at what it would mean for the 25 per cent who only bor­rowed for fees.

The stu­dent who bor­rowed the av­er­age amount for fees to fund three years of study be­tween 2011 and 2013 would have ended up with a debt of $16,862.

That’s roughly the ad­di­tional af­ter-tax in­come that a per­son with a bach­e­lor’s de­gree might earn seven years af­ter com­plet­ing their stud­ies com­pared to some­one with a level 5-7 di­ploma. Now for those who bor­rowed to pay living costs as well. The av­er­age amount bor­rowed in the three years for living costs added to the av­er­age amount bor­rowed for fees would leave a stu­dent with a debt of $28,290.

That’s a pretty large debt in our rel­a­tively low-paid labour mar­ket. Now for those who also bor­rowed for course-re­lated costs.

Our stu­dent who bor­rowed the av­er­age amount for each of fees, living costs and course-re­lated costs would owe $31,256 at the end of their study.

The In­land Rev­enue Depart­ment’s stu­dent debt re­pay­ment cal­cu­la­tor sug­gests that, as­sum­ing an in­come of $50,000, that $31,256 of debt would take eight years and six months to clear at the min­i­mum re­quired rate. And it would suck $142.70 a fort­night from the grad­u­ate’s pay packet. The debt of $28,290 would take seven years and nine months to clear at the min­i­mum rate. A debt of $16,862 would take four years and seven months to clear at the min­i­mum rate.

Hav­ing just nar­rowly squeaked through be­fore large stu­dent debts be­came the norm, frankly I find my­self sorry for those who have to start their fi­nan­cial lives with one of th­ese en­cum­brances. Pay­ing for your ed­u­ca­tion is a big in­vest­ment and the pay­back is clearly there. But keep­ing stu­dent debt as low as pos­si­ble wipes years off the pay­back time and makes it eas­ier to head off over­seas, get on the prop­erty lad­der and start sav­ing for your re­tire­ment.

Many young folk are un­likely to wake up to the fi­nan­cial facts of life be­fore they fin­ish their school­ing. That puts a lot of the onus on their par­ents to steel their re­solve to keep debt to a min­i­mum.

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