Avoid student debt blowout woes
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 course-related 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 of 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.