The student loan lark — what students can and can’t do
Student loans are back in the news. And there’s some confusion about how students will be able to use — or abuse — the system when all loans become interest-free next April.
If you are a student or planning to become one, the first thing to consider is the ethical question.
Students who genuinely need to borrow should, of course, do so with a clear conscience. But what about those who have other sources of money and plan to invest their student loans? That’s where the fun begins.
There are, of course, limits on what you can do with the loan money. Course fees go straight to the institution, and you need to show a quote for course-related items before you can borrow to buy those.
But there’s nothing to stop a student from borrowing $150 a week for living costs and then investing that money. There’s no means test.
Also, students say that some of their mates get a quote for a computer, borrow to buy it as a course-related item, and then don’t buy it. That money can also be invested.
So can the course fees, indirectly. If a student has other money that they would otherwise have used for those fees, they can borrow the fees and invest the other money elsewhere. That amounts to the same thing as investing the fees.
All in all, then, a student might well end up with $10,000 or $20,000 a year in loan money that they can invest. And some have already been doing that.
Under the current rules, no interest is charged while students are still studying. Some students have borrowed to the max and invested the money until their interest-free period ends. They then repay the loan in full, but keep the return earned on the money.
Following the Government’s election promise, from April onwards no interest will be charged ever.
The financially savvy student should then borrow as much as possible and repay it as slowly as possible, investing all the money they don’t need in the meantime.
Is this ethical? Not really. But it’s developing into another of those awful situations we seem to get into in New Zealand — you feel a bit grubby if you take advantage, but you feel a fool if you don’t.
And anybody who uses a family trust to reduce tax or boost payments from the government; or who income splits by greatly overpaying a spouse in a family business; or who claims higher than reasonable tax deductions, shouldn’t be pointing any fingers.
Some of those practices are illegal; investing student loan money is not. Given that the government is handing the perk to students on a silver platter, it seems unreasonable not to expect them to take it.
A note for those who do: You still have to repay the loan, at 10c for every dollar earned above $16,588 a year.
Those who earn $30,000 will repay about $1,340 a year. At $60,000, it will be $4,340 a year; and at $100,000, it will be $8,340.
In most cases that money is taken directly out of your income before you get it. Try to live on that income without dipping into your invested loan money.
If you can put the loan money in long-term savings — perhaps for a house deposit — you have a great head start.
With luck, you will end up wealthier in the long run, and hence pay more taxes. Maybe, in the end, the rest of us taxpayers who are paying for the interest-free loan scheme will get something back from you!
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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.