Student loans can turn into school of hard knocks
If you are planning to take out a student loan in the near future, you might want to pause.
As part of this year’s Money Week, the Commission for Financial Capability has asked current and former students what they wished they had known about student loans before they borrowed.
About 730,000 New Zealanders have a student loan and there is just over $15 billion in outstanding debt. The average loan is about $21,000.
David Boyle, group manager of investor education and retirement villages at the commission, said many people did not give a lot of thought to student loans because they were usually interest-free.
But a loan could still have an impact on the borrower’s life, especially if their course did not turn out to be the right one.
He said many of the people interviewed by the commission highlighted the importance of choosing a degree or course that offered a good chance of getting a job.
‘‘That might mean doing a lot more research before you go down a degree path or seeing what options are available,’’ he said.
‘‘A lot of students leave school thinking the next step is uni and that’s not always right. If you’re really not too sure you could take a break first and get a bit of work experience, if anything a bit more time to make a better decision around the study options available can be helpful.’’
Boyle said that despite the ability to borrow interest-free, the debt should not be taken on without thought.
‘‘If they know more at the start it might help them make better choices. They might stop before they do something that could be a cost they have to carry for some time and possibly not get any benefit from.’’
There was about $1b of student loan lending ‘‘in distress’’, he said.
‘‘A lot of that comes from people having gone overseas and not realising that means they starting paying interest.’’
Loans are interest-free only while the borrowers are in New Zealand. Once they are out of the country for six months or more, their loan starts to accrue interest. There are some exceptions, such as for some people studying overseas, working for a New Zealand company, the New Zealand Government or a charity.
Boyle said for many people a student loan was the first time they had been in any amount of debt. ‘‘They don’t appreciate how it feels until they see it come out of their first pay cheque.’’
Loan payments are deducted from borrowers’ pay once they earn more than $19,136, or any time they earn more than $368 in a week. Twelve per cent of their income above that level is taken as repayments.
Some of the students interviewed said choosing to study in areas of the country where their cost of living would be less was helpful.
Boyle said many people wanted to study in a different part of the country to get away from home, without realising the extra costs that would result. ‘‘Simple things add up. Food, rent, travel, all these things they may have been lucky enough to be shielded from at home and don’t get a sense of what that would cost.’’
Some recommended looking for other ways to reduce their debt. ‘‘Some thought it would be better if they had worked during the degree and were paying a bit of their loans back so the ultimate debt was not so high.’’