QI have heard lots of various things about interest on student loans, and now I don’t know what to think.
I was led to believe that somehow you could avoid a cent in interest, which I find hard to believe.
I am going to begin University next year, and if I can get a very low interest rate, what is stopping me taking out a loan and investing it at a higher interest rate than what I’m paying, and pocketing the difference?
If this could be done, why aren’t more people doing it?
AIt can be done, and some people are doing it. I doubt if anyone knows how many.
Most students probably don’t invest their student loans because they need the borrowed money for fees or living expenses.
But those with savings, generous parents or other income sources can do what you suggest.
It’s not absolutely straightforward. You can’t just collect a lump sum to invest. Student loan money is available only to cover:
- Compulsory course fees. The government pays this directly to the education institution.
- Course-related costs of up to $1000. You have to give written proof of these costs.
- Living costs of up to $150 a week while studying. These are paid weekly.
But if you have money that would otherwise have been spent on those items, you could invest that. And you could do very nicely thank you out of it.
At first glance, that doesn’t seem right. Officially, you pay interest from the day you get your loan.
The current rate is 7 per cent, made up of a base rate of 5.5 per cent plus an “interest adjustment rate” of 1.5 per cent, which varies according to inflation.
But there are several interest write-offs that mean, in effect:
- You don’t pay any interest on your loan while you are studying full-time, or part-time but earning less than $26,140 a year.
- If you are no longer studying, and your income is less than $16,172, all of the base rate — the majority of the interest — is written off.
- Even if you are earning more than $16,172, you may still pay less than 7 per cent if your income is relatively low. (You get the break if 50 per cent of the amount you have to pay back for the year is less than the base interest calculated on your loan. )
So why not borrow to the max, then pay off your loan in full as soon as the interest rate you’re being charged is higher than what you can earn elsewhere?
There are moral issues here. Any time the government gives anyone anything, someone else has to pay for it.
Let’s eavesdrop on a debate (in Money Matters’ first ever play script):
Kerry Killjoy: You shouldn’t expect other hard-working taxpayers to help you when you don’t need a student loan.
Oscar Opportunist: It’s the least they can do. A generation ago, tertiary education was pretty much free. Now we pay heaps. And society benefits from my knowing more.
KK: But only well-off students can invest their student loans. The government shouldn’t be helping them out, when poorer students can’t take advantage of the situation. Better to give more allowances to lower-income students.
OO: Lower-income people get lots. Why shouldn’t I get something from the government? My family has paid much more in taxes over the years than we’ve ever got back.
Whose side are you on?
QMy husband and I married three years ago.
Prior to our marriage we decided to draw up a matrimonial property agreement to safeguard our finances. We added up our individual assets and drew a line in the sand on a certain date and formed a company.
So now, in the event of a split I get 44 per cent and he gets 56 per cent of our combined wealth (or debt).
I think that this has been the best option for us both. We are both in our mid 30s and had accumulated a reasonable amount of wealth in land, shares and cows.
Some have commented that I will get less than my husband if we ever split, but I reason that you have to draw the line somewhere.
If we had drawn up the agreement a year earlier, I would have had a greater percentage than him, and if we had done it later he would have had a considerably greater share due to increasing cow values.
And we now have the added advantage of being debt-free due to our financial union.
Signed: Happily married
AI don’t get it.
The most obvious situation for a prenuptial property agreement is when one partner has many more assets than the other.
But your assets must be of similar value if yours were worth more than his a year earlier. And, given that the values of land, shares and cows fluctuate all the time, it’s anybody’s guess which portfolio will be worth more in the future.
There must have been a day when your and his assets were of exactly equal value, before his passed yours.
Couldn’t you two have just drawn your line in the sand on that day, and not bothered with an agreement at all?
Presumably you both got independent legal advice — you have to if you want your agreement to be upheld in court. That advice would cost something. Then you would have paid for your company to be set up. And there will some ongoing expenses and hassles connected with having a company.
For what gain?
In your husband’s case, he’ll get a few more assets if you split — although the added costs might cancel that out. In your case, it’s not obvious to me.
And, by the way, unless you can come up with some advantages to you, we’ve got to wonder about the quality of the legal advice you got.
I can’t see that the “added advantage of being debt-free” changes anything. Unless I’m missing something, that would normally happen anyway if you simply pooled your finances.
It’s good to hear that you’re happily married. I hope I’m not stirring up trouble.
QIn your article on April 17–18 you stated that anyone who is dealing in real estate will also have to pay tax on the sale of any real estate that has been bought for the long term, if sold within 10 years.
I have been advised that I can have a long-term share portfolio as well as a short-term/speculative portfolio, and that the dealings in the short-term portfolio will not affect the tax situation of the long-term portfolio.
This seems to be a complete opposite of the situation ruling in real estate.
Your comments on this would be much appreciated.
AIt’s not the complete opposite, but it IS a different situation.
In law, shares are regarded as personal property, and they are therefore treated differently from real property, says Simpson Grierson senior associate Paul Windeatt, who gave the advice in the original Q and A.
With real property, the law specifically states that if, while dealing in land, you buy a property separate from your land dealing activity, you will still be taxed on your gains on that property if you sell it within ten years of purchase.
“The tax law effectively treats all property sold by a land dealer within ten years of acquisition as if it were part of the land dealing business,” says Windeatt.
“As with real property, if you buy shares for resale, you are taxable on the gain (and can deduct the loss).”
But if you’re a share dealer, you are taxed only on gains from shares sold as part of that dealing activity — not shares you buy for a long-term hold, even if you end up holding them for less than ten years.
“Therefore,” says Windeatt, “with personal property, including shares, you can operate two separate portfolios, as you describe.”
Note, though, that if you sell some of your long-term shares, the onus is on you to show two things:
- You bought the shares for some reason “other than for the purpose of making a gain” when you sold. You might, for instance, have bought them for the dividend flow.
- You did not sell the shares as part of your trading business.
“Why, then, did you sell them?”, Inland Revenue will probably ask.
If you are selling just one of several long-term shares that you have owned for quite a few years, perhaps because the dividend yield has dropped, that should be acceptable, says Windeatt.
In short, the situation for shares is more flexible than for property.
Still, he adds, “If you are a share dealer it can be difficult to determine where you stand on any particular share sale — since dealers may hold their trading shares long-term as well.”
It’s another example of New Zealand’s confusing law on taxing capital gains.
It’s not a bad practice anyway to try to keep all your long-term shares just that — long-term. As hugely successful US share investor Warren Buffett has said, “Our capital markets are simply a relocation centre. They relocate wealth from the impatient to the patient.”
Hey, we got through a whole column without any property vs shares letters. The last one is sort of, but only sort of. Wow!
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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.