The financial facts of life: It’s an awkward chat
Do parents make good financial advisers for their offspring? If there’s a teenager in your family who might go to university, you need to have the money chat.
The big question is, can you be financially honest with them as a parent? Can you put aside the world that we lived in and take a long hard look at what they face?
Sounds simple – get a holiday job, apply for your loan and decide which city you’re off to. The first year is fee-free, so go have a bash.
But let’s be frank. As the parents of today’s students, we are probably not the best people to listen to.
We were the generation where fees were non-existent or low. We weren’t confronted with a rental crisis or a cost-of-living crisis on entering education. Most of us got on the housing ladder within five to seven years of bagging an average degree. We’re not boomers, but in hindsight, Gen-X is blessed.
Yet financially, we’ve all got a bit of baggage. We’ve come to this collective belief that leaving town to study is a rite-of-passage. No matter where you’re from, don’t go to uni at home. It’s all about the experience and becoming independent. We want them to have fun and have what we had. And if you can afford to finance that for the students in your family, you can stop reading now. If they’re using their loan for more than just the fees, read on.
Would you dare to suggest any of the following as a parent?
Work for a year after leaving school, and save as much money as possible for your education? Or work during uni. Or work every hour you have spare in year 12 and 13.
Don’t take a gap year. The cost of travel is now high post-Covid and you will cope far better once you’re qualified.
It’s not wise to leave home to study if you live in a main city with a university. You’ll rack up debts of $30,000 to $40,000 in living costs, on top of tuition fees (which are another $6000 to $9000 annually).
Live at home for the next three or four years, because it would be life-changing in terms of debt levels, future taxation and repayments when overseas.
You can have a social life, friends, pub-culture, student union culture and live at home. It won’t turn you into a social outcast and it will give you much better financial choices in a few short years.
Can you say the words ‘you can’t have what I had and come out in the same financial position – something needs to give?’ Delayed gratification in terms of delaying flatting, delaying travel, isn’t a conversation many parents are happy about.
Leave New Zealand with as little student debt as possible. Step over the border and ping, minimum repayments have to be made equating to around 10–15% of the loan value. A loan size of $30,000 to $40,000 results in a repayment demand of $4500 each year, regardless of whether you’re in a low-earning job having fun overseas. Interest of 2.8% is added and we can probably expect that to start rising. Late-payment interest is 6.8%. In 2016 these rates were 5.3% and 9.3%. Repayment waivers are available to travel for short periods only.
Student loans are a positive tool and don’t attract interest, but they
Some of you might be nodding reading this, but I suspect most people feel uncomfortable in part.
limit life choices later on. Minimising their value is key. The value of a mortgage or the amount of rent you can pay all comes back to disposable income. With a higher tax rate, your income will be knocked for years.
Research how much extra tax is charged when a loan is repaid and explain it. Or are you taking the tip-toe approach because it might put a young adult off studying? If that’s the case, you’ve got an early warning signal about life’s choices. We need to explain how it works on a salary they could expect to earn (12% tax on every dollar of gross salary over $21,268). Inland Revenue has a calculator.
Some of you might be nodding reading this, but I suspect most people feel uncomfortable in part. These are the words of a boring ogre.
Student loans give everyone access to education when their parents’ joint earnings are above the $60,000 to $120,000 sliding scale (the level for a free student allowance). We’re a very lucky country – interest doesn’t get charged on loans.
Young people should be having fun, enjoying a new city, meeting new friends and going on their OE at some point. They’ll regret it if they don’t.
It makes us feel good to encourage fun and be relaxed about interest-free loans.
But at what point will we regret not being more practical and not having the guts to be sage? We carry our generational attitudes with us. Not with any malice, but in a way that we don’t question our own ingrained sense of entitlement.
That’s a hard word to use, because ‘entitlement’ isn’t often associated with our generation. I don’t use it in a personal sense, but in reference to what we expect for our families.
Failing to recognise their lives are not anything like ours, probably betrays them financially.
They’re about to set off into a world where education costs a fortune, rental prices are high and the change in the cost of living is dramatic.
There’s a structural shift in the economy and those close to their own age are already telling them they’ll never own a home in New Zealand.
We never faced this sense of disappointment and it feels like it’s time we were more honest with them about their choices.
Janine Starks is a financial commentator with expertise in banking, personal finance and funds management.