Security from student debt
Ihave no problem with debt for younger people. In fact, I think that young people should have debt, provided it is for the right things: assets which will grow in value or give good income.
Student debt can fit this category. Taking out a student loan can lead to better life-long income, making the cost of such debt well worthwhile. This is particularly so when you remember the cost of a student loan is zero because there is no interest on student loans (provided you stay in New Zealand).
An interest free loan for the purchase of something which gives additional income for all your life seems to me like a pretty good deal.
Last week, a piece on Stuff from Susan Edmunds looked at the additional salary that a university graduate might expect to receive. One take home piece of information from the article is that a graduate could expect to earn 32 per cent more on average than someone in the same industry with only school level qualifications.
So, a bachelor degree can be viewed as an investment – and a very good one at that.
However, as you would expect, there is a great deal of difference across different industries. According to figures from Universities New Zealand, people who work in Law earn 58 per cent more if they have a bachelor degree, but a degree in education only increases earnings 22 per cent. As always, some investments give better returns than others.
Regardless of earnings and economics, education is valuable in a personal sense.
It encourages the imagination and creativity and gives pleasure and an interest in knowledge for its own sake. I encourage people into any education regardless of the increase in earning power simply for the growth and self-confidence of the individual. Education has a value in its own right and, as such, it is worth paying for.
However, like any investment, things change when you consider borrowing to buy education. Borrowing (called gearing when we talk about investment) increases the stakes. Although borrowing to invest may give high returns, it does mean that if things go wrong, they can turn spectacularly wrong.
It is for this reason that I think that those going to university and taking on student loans have to be very careful about what courses they take. Students run the risk of running up a load of debt and, if they choose the wrong course of study, have little economic benefit in the form of earnings to show for it.
If taking out a student loan, choose your course well: the gearing effect demands it.
Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com.