As part of my continuing analysis of my relative wealth in Australia and New Zealand, I have decided to talk about my student loan, and why it did not influence my decision to leave New Zealand (or even to hold off for a few years).
If you have a student loan:
- you pay no interest on your loan, as long as you remain in NZ;
- if you earn over a certain amount (approx $18,000 this year), 10% of what you earn over that amount is garnished from you earnings to repay your student loan; and
- your loan is cancelled if you die.
However, if you go overseas:
- interest on your loan compounds at 7% annually;
- you must pay back a set amount each year (if your loan is above $30,000, this is $3,000 in two six monthly payments);
- you can have a three year repayment holiday (interest still accrues);
- big penalties apply if you fail to make repayments; and
- your loan is cancelled if you die.
So the big difference between living in New Zealand with a student loan and living in Australia with a student loan is that interest accrues on you loan if you are overseas and not if you are in New Zealand.
If you have a rather large student loan like me you would think that not paying interest would be quite a motivating force keeping me in NZ.
It wasn't and here is why.
The student loan is not like any other debt. In fact I do not consider it to be a liability that you have to balance against your assets to find your net assets in any practical sense, as:
- payments are linked to your income levels (in NZ anyway) and are not required to be made if you do not earn above a certain amount. In effect it is more like a tax on your future earning potential then a present day liability;
- you cannot be forced to repay it if you default on your repayments (although the penalties are different, and are why I would pay the minimum repayments even if I thought I would never go back to NZ); and
- it disappears if you die, and therefore will not effect your estate.
But you say, "that tax on your future earning potential increases every year that you are overseas, if you come back to NZ you will be in a worse position having gone overseas with your giant student loan then if you had stayed in NZ, payed it off tax free and then gone overseas". To that I say, "the total benefits to my being overseas outweighs the benefits to staying in NZ and receiving a tax free loan. I get a larger return on my time by being overseas then I avoid on student loan interest by being in NZ".
I would avoid NZ$3,500 of interest a year by staying in NZ, but will be, at today's exchange rate, NZ$22,035 better off living in Australia (see my previous post, at exchange rate = .8662) A net NZ$18,500 better off.
So after 3 years of living overseas I would have earned enough extra income living in Australia than I would have earned in NZ to pay off my entire student loan and then some (it would take me at least 8 to 10 years living in NZ to clear my loan without making any extra repayments, which you would be stupid to do).
If I did ever decide to come back to NZ, I would still have my student loan, it would still be approximately the same as it is today, but I would be in a much better position having earned (and hopefully retained) so much more than I would have saved in interest by living in NZ.
Interest free student loans therefore should not influence people to remain in NZ (as higher overseas incomes outweigh interest savings). In fact, even being interest free, all student loans can do is discourage people from returning to NZ, given the even higher effective tax rate you face on NZ's low incomes.
It is a dilemma how to solve the student loan exodus though, as without it, it would be much more difficult to go to undertake extra study. The irony is that the very thing that makes it easy in NZ to undertake study, can drive those who do study overseas and discourage them from returning.