The real hustle

Written By: - Date published: 8:42 am, May 1st, 2009 - 27 comments
Categories: national/act government - Tags:

National introduced legislation yesterday that will create a 10% bonus for voluntary repayments of student loans. Repay $1,000 above your compulsory repayments, get $1,100 taken off your loan. Sounds like a good deal. Well, not for people who can’t afford to make voluntary repayments but it’s great for the well-off eh?

Actually, no. Unless your compulsory repayments would pay off your loan in the next year or so, you’re better off saving your money than making voluntary repayments. Check out an example:

inferred-current-account-2

Sure, you are free of the loan two years earlier but you’re worse off.

It works at any income and any level of voluntary repayment. At higher interest rates the advantage of saving is even bigger. The only time you’re better to do a voluntary repayment is in the last 18 months or so when the 10% bonus is bigger than the interest.

What reason could National have for offering an incentive that’s not really an incentive? Well, there’s one situation when it makes sense to make voluntary repayments – if there is interest on your student loan. Is that what National is planning? In Parliament yesterday, Trevor Mallard said a source in Treasury had told him that’s exactly what is planned. National insider Richard Long dropped a big hint in his last column.

If you’ve got a loan, the best option is clear. Save your money for now but be ready to pay off as much as you can. Interest on student loans is coming back.

– the mathemagician

UPDATE: Error fixed.

27 comments on “The real hustle”

  1. Pat 1

    For an apples to apples comparison, wouldn’t you continue to save $4,000 each year in 2018 and 2019 in the last column? e.g.
    2017 $4,000 – $1,300 = $2,700
    2018 $4,000 = $6,700
    2019 $4,000 = $10,700 plus accrued interest

    • jagilby 1.1

      I saw noted that too… this analysis is fundamentally flawed.

    • mathemagician 1.2

      f*ck. you’re right. but it still comes out flat in favour of not repaying, and that is with very low interest rates.. Except you forgot the $100 bonus in the last year of repayments… man, I’ll get a new table to the standardistas

  2. Lanthanide 2

    As Pat points out, you really need to include the savings for the last few years where you are loan-free or you are being disingenuous.

    Also you have not included an income tax against the interest earned, which at $50,000 puts you in the 33% tax range.

    Sloppy.

    • Pat 2.1

      Perhaps “the real hustle” here is being performed by the mathemagician himself.

    • Anton 2.2

      The sloppy part was leaving out net present value, which tips the scale back against the scheme. This whole thing looks like a way to recover debt, rather than support a program to help educate people, which is the point, right?

      • Pat 2.2.1

        Of course its a way to recover debt quicker. Why not look at ways or encouraging graduates to repay student loans quicker? The govt needs the money.

        As for “supporting a program to help educate people” I’m not sure what you mean. Student loans are for studying. Repaying student loans occurs when you start working. Two different stages, surely.

  3. Pat 3

    To be more precise, the figures should take into account the following:

    Interest returns at 3%. You should not assume the $1,000 is saved in one lump sum at the start of the year, instead the $1,000 is saved gradually over the year. Therefore in year 2010 the interest return is $15 not $30.

    With the effect of compound interest, the “savings” column should look like this:

    2010 $1,015
    2011 $2,060
    2012 $3,137
    2013 $4,246
    2014 $5,389
    2015 $6,565
    2016 $7,777
    2017 $9,026
    2018 $10,311
    2019 $11,636

    The other savings column with interest added would be:

    2017 $2,741
    2018 $6,883
    2019 $11,149

    So the difference is actually $487.

    • mathemagician 3.1

      I assumed one year lump sums for simplicity because otherwise most people come look at the numbers and think they’re wrong. Turns out I just got shown up by you instead, Pat. cheers.

  4. Tom M 4

    “Sounds like a good deal. Well, not for people who can’t afford to make voluntary repayments but it’s great for the well-off eh?”

    That is to say, the overwhelming majority of people with tertiary degrees?

    It’s often forgotten that even though students themselves aren’t that well off, once they graduate they become (over time) the most well-off members of our society. I never quite understood why the left is so keen to pander to them(us). Surely a better way to help us when we really need it would be a student allowance? Otherwise you are just giving us money when most of us have high paying, promising jobs, which is surely when it is least needed.

    • Lanthanide 4.1

      Tom – not all graduates get high paying jobs, particularly look at people with Arts and Fine Arts degrees.

      Furthermore, not everyone who has a student loan has a degree – lots of people go to uni or polytec, rack up a student loan and drop-out without completing their degree, but they still have to pay the money back at some point.

      • Tom M 4.1.1

        As someone doing an arts degree, I can certainly appreciate that – but it’s like saying ‘some white, middle-aged males are homeless, so perhaps we ought to give them all Government funds’, ignoring the fact that they’re, on average, the richest members of society.

        I would still say that the majority of people with student loans are on track to high earnings. If you think poorer people are unnecessarily disadvantaged by this, consider targeted transfers. So much of student policy is just transfer of money from the poor to the rich.

      • senzafine 4.1.2

        lots of people go to uni or polytec, rack up a student loan and drop-out without completing their degree

        Like me. But surely it makes good sense to crate an incentive for people to actually use the loan system the way it was designed?

        Personally, I’d like to see policy introduced that if you take out a loan and ‘drop out’ then market interest rates apply immediately upon doing so.

        The whole idea of the loan system was to help people get educated, and not to fund questionable lifestyle choices.

        I’ll be using this policy, and as a result my Loan will be paid off in the next 12 months.

  5. Poli 5

    The labour party won an election on the back of interest free student loans. If National scrap the policy they will lose the next election. In a time of economic recession, you would like to think that the government would be encouraging people to return to studying. Interest charges being brought back would piss a lot of National voters off.

  6. Ianmac 6

    Two of my sons have student debts of horrifying proportion. What might happen if interest becomes retrospective?
    (Some of their friends have clever parents who hide their wealth in Trusts so that their children get Student Allowances and thus No Debt.)

  7. evidence 7

    (a) If you’re in NZ with an interest free loan then you should wait till the end of your loan period before using this – that means it will help you pay your loan quicker, its just the benefit might be smaller than most people would think

    (b) If you’re an overseas borrower and paying interest then you should definitely use this policy and your tables don’t reflect their scenario

  8. BeShakey 8

    “What might happen if interest becomes retrospective?”

    If I was you I wouldn’t worry too much about that, this will be controversial enough without making it retrospective.

    In response to Tom M – I agree with you that, as a rule of thumb, education leads to better paying jobs, and that as such it makes sense for students to make a contribution towards their education. In fact thats what happens now. In the past tertiary education was virtually fully funded, now students pay a large amount of money towards their education. The question of whether they should pay interest on that is therefore about whether student loans should operate on a more commercial basis or whether the government should provide some support in that area as well as in more general tertiary funding. Given the huge issues with the size of student loans it makes sense for the Government ot limit their impact.

  9. Pat 9

    Agree with evidence. I would go further and say that a new graduate starting work with an interest free student loan should NOT pay it off quicker.

    Instead they should set KiwiSaver contributions at 8% from their first payday. They haven’t earned any money to date, so they won’t miss them. On top they get 2% from the employer and $1,040 from govt each year. Over a 40 year working life, this is the best thing they can do. Get used to not having 8%.

    On top of that they can withdraw contributions after 3 years to buy a house, plus get an extra $3,000-$5,000 from the first home subsidy. If they are really smart and found their longterm partner, they can buy the house together and he/she can do the same thing – effectively double their deposit.

    Bottom line for any new graduate, or anyone entering the workforce for the first time – start KiwiSaver contributions at 8% from day one. If you f*ck up everything else in your life, you will still be in a great position at 65.

    • Poli 9.1

      Sorry Pat, I know this is off topic but what are the rules surrounding the use of your kiwisaver funds to purchase your first home? Being a student, and about to enter the workforce, I am interested in finding out what rules apply in relation to using your kiwisaver savings to purchase the first house.

      • Pat 9.1.1

        Hi Poli, you have to be working AND contributing to KiwiSaver for at least 3 years. Then you can withdraw your contributions plus the employers plus interest, but not the govt contributions.

        So if you were earning $40,000, at 8% you would be contibuting $3,200 p.a. plus employer $800 p.a. and Govt $1,040

        So after 3 years you can withdraw $12,000 plus interest returns. After 5 years this would be $20,000. (DISCLAIMER: Depending on what fund you choose, it is possible that you could have lost some money. If you intend to use KiwiSaver to buy your first home, you should start off with a conservative fund).

        Depending on the purchase price and location of the house, you may also qualify for the First Home Buyers Subsidy. This is another $1,000 a year for each year you were in KiwiSaver, up to $5,000.

        Hence why I think it works well for young couples who plan ahead e.g.

        Mr Poli after 3 years $12,000 plus $3,000 = $15,000 plus the same for Mrs Poli = $30,000 Deposit = 10% on a first home of $300,000.

        Mr Poli after 5 years $20,000 plus $5,000 = $25,000 plus the same for Mrs Poli = $50,000 Deposit = 10% on a first home of $500,000.

        I have a website you can find out more on http://www.oregon.co.nz
        Plus Mary Holm has her new book out, which is the bible on KiwiSaver.

    • mathemagician 9.2

      totally agreed.

      Thanks for pointing out my errors Pat.

      I’ve sent a new table to the Standard’s gmail. Hopefully the fix will be up soon.

  10. Trevor Mallard 10

    While the exact figures are subject to a bit of debate – 3% is too low over a loan period. The policy only works for students or former students if interest on loans is reinstated. Treasury are currently working on policy in that area. For the record my source is not a treasury official.

  11. blair 11

    Trevor – At this link Mary Holm suggests that even if you have an interest free loan it is worth using this in your last three years (by my read). so I don’t think its credible to say “the policy only works for students if interest on loans is resintated.”

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10567170

  12. Johnty Rhodes 12

    no more free lunches you idiots.
    All students knew they would have loans, to think it would be interest free feva was dumb.

    welcome to the real world. You pay if you play.

    best of all, my Uni education was free, I finished in 1990. This was the last year before Student loans came in.

  13. Adrian 13

    Fascinating stuff all this talk about shuffling loans and delaying payments but be careful, in the last few weeks IRD has started to get real nasty on repaying loans. My wife made an arrangement with IRD about repaying the whole of her loan over the next 2 years(it’s around 9000) simply because of the hard word being put on her to pay up,then a few weeks ago the rules changed and the bastards wanted all the money NOW (and she’s still studying) and disavowed any knowledge of the previous arrangements. There’s something going on here. Could it be that the more money you get in the more likely you are to keep your job.

  14. lyndon 14

    So what if you saved the money, then paid the loan off when the saving+bonus hit the critical point?

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