Tuesday, 8 April 2008

Australia v New Zealand: Student Loans

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:

  1. you pay no interest on your loan, as long as you remain in NZ;
  2. 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
  3. your loan is cancelled if you die.

However, if you go overseas:

  1. interest on your loan compounds at 7% annually;
  2. 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);
  3. you can have a three year repayment holiday (interest still accrues);
  4. big penalties apply if you fail to make repayments; and
  5. 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:

  1. 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;
  2. 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
  3. 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.

28 comments:

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Liping said...

My wife came across your blog entry while surfing for work opportunities we might be able to pursue in the next 12m.

As a recent NZ ex-pat now living in Europe, I must say I do agree with what you conclude, as this was very same the reasoning I applied in accepting my postdoc in Germany, despite having an $87,000 NZD loan to pay off; and knowing full well just how much interest that would accrue as a result. But given the exchange rate difference between the euro and the NZD, as long as I could save 1000 euro per month I estimated paying back the loan in full in 5 years - a full 10 years ahead of what I could do in NZ under the same stringent savings criteria and income status.

But has this actually happened?

No. It has not even come close.

Have I taken steps to reduce this burden at all? Yes. I applied for my repayment holiday. And therein lays the reason why the answer to my first question was "no".

It's not just the exchange rate difference that will get one through repaying an interest-bearing loan - it's actually being able to save this money in order to send it home.

In other words, the initial reasoning supplied above becomes problematic if cost of living is underestimated. Not only that but most people want a life after their study - a house, a car, a dog, a family; and since it's only human nature that circumstances in one's immediate vicinity take precedence over more distant issues, it stands that, despite whatever one's good intentions were, repaying the NZ student loan can easily go neglected.

And that's not even taking into account the fact that system unfairly discriminates against 'pakeha' and that the only real way in which NZ tries to encourage its 'brains' to stay is by discouraging them to leave. Hardly inspiring.

Such matters are why so many ex-pats vow never to return, or to repay their loan, hoping, perhaps in total vain, that someday the system will collapse in on itself and their debt will be wiped.

I don't know what will happen. I do know NZ can't offer me the career I seek; nor does it appear to be doing anything about encouraging developing an applied science industry. And why would it need to - there is always rugby and tourism, right?

My advice to anyone wanting to avoid being up to their eyeballs in debt after a long stint of study is to stay in NZ and accept whatever you can get. It is a good lifestyle, all things considered.

However, if your convictions lay in discovering a life outside NZ culture then I'm afraid you'll just have to suck it up. It's gonna cost ya. Or you could try to find loopholes ;)

Anonymous said...

I am a kiwi living in Europe... I have been away for 11 years.

Do you know if student loans can find you if you apply for citizenship in another country? (Not the UK but another EU country)
Has been on my mind.
I have not had full time work for 3 years now and it doesn't look likely in the future either. I was of the generation that charged interest when you were still studying and my 7500 loan turned into gazzilions while I still studied AND it was down to 15000 after paying off from my salary every month for 3 years before I left. It pissed me off that future generations got interest stopped until they left uni. I was at uni for 5 years so that was 5 years of interest before I started working and paying it off. Anyway, I am not coming back to NZ... but don't want to get a letter from student loans here, where I am after applying for citizenship and a new passport.
Do you know of any website etc that I can check to find out?

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Anonymous said...

does anyone know if you can be detained in nz when you want to return for a short break, with a student loan outstanding?

Anonymous said...

Does anyone know what are the penalties for not repaying your nz student loan? I live overseas and have about $30.000 student loan in nz.

Anonymous said...

I came to this country approx 10 years ago and at that time my student loan was around 25k.
I have left the loan untouched and now its just over 50k.

I have no UK debt but was considering bankruptcy to wipe off my student loan in NZ.

Any ideas/ advise etc would be nice.

PS My older sister who got in through uni on the free scheme has retired. I'm gutted

Anonymous said...

I've been living out of new zealand for 12 years now and I haven't paid anything off my loan for about the last six years. I originally borrowed $30k for my four year graphic art degree, and now I owe more than $100k - the extra $70k is only interest! I have recently been contacted by ird at my work address in Australia - the last known address they had for me was in the UK. So yes they will find you eventually but as yet I haven't come to any payment agreement. According to a friend of mind who works in Customs, they can't actually pull you up at the airport from your student loan debt...but you never know. I just think the interest loaded onto the principal loan is bullshit. Maybe if they weren't so greedy, all the educated young New Zealanders would stay in the country and make their lives there and at the same time pay of the original loan. And then everyone would be happy :)

Anonymous said...

@post made on the 7th March 2012 - that was the day after they found me.
My Story - Borrowed around $18k now up to $60k.

I tried to do the right thing in my second year of being away. I paid $2.5k and they whacked 12k in interest on that year. I rang them up and they said oh gosh it was a typo (ah good one) but because I didn't meet the $3k requirement they added $3.5k interest, I struggled just to pay $2.5k which was for nothing. So in the end I couldn't see how I was supposed to pay it off. 2 years after that I had a baby and didn't work for 2 years, that still didn't make a difference either I was still required to make payments. So in the end I can't see how on earth I can pay them back, it's now reached too impossible. Do you think they'd be happy if I just paid them $50 a month for the rest of my life? Probably not, but I wonder if it would keep them off my back.

One thing that is interesting is that most things I have read is the only way you can get rid of the loan is Bankruptcy or Death. Horrible thing to say but there are some unstable people out there that might look at the latter as the only way out.

Anonymous said...

I left NZ with an 80,000 thou loan. I agree the NZ system is a load of rubbish, they are not interest in getting loans repayed or they would offer an incentive like for example,(if you pay more than the $3000 per year minimun for over 30k loans you get interest free, or the opportunity to pay the loan off in one hit for 50%). The truth is, the system is corrupt and they are trying to imprison NZders because they are running scared, as it is not an attractive country to live in economically now. I have no intention to pay off the loan and who cares if it get to a million. Just don't have any property in your name e.g. use a family member. Don't have too much money or shit. And they can't get money from nothing. In fact say you can't afford an airfare home and that would cost them money, then end up on the unemployment benefit and all the time and effort and labour costs would be higher than the gains. They are just scum, I do everything legit and pay what they ask, the minimum. IT is just scare mongering and it works on some.

Anonymous said...

From what I understand they can’t really do anything other than send letters. There will never be a reciprocal agreement under the ATO / IRD because there is no benefit to Australia. Why would they enforce Aussie money to go into NZ tax coffers?

Also the worst case scenario is that the NZ Gov’t recalls the loans(highly unlikely). This opens a whole new can of worms. What private debt collection agency is going to buy these debts(these guys are more interested in small debts, cars, TVs, dredit cards, etc...)? It’s just too big and too messy.

And, if your loan does get recalled then you simply don’t pay it. The next step is bankruptcy (under Australian law – if you have dependents you can earn 75k per each dependent before you have to pay any of the outstanding debt anyway). After 5 years you are now clear – a friend of mine recently called the IRD calling their bluff, begged them to recall the loan, told them he isn’t going to pay a cent anyway, gave them all his details, everything...They we stumped...

So basically it is fear mongering, the debt isn’t real anyway, it was allocated as part of NZs tax base. It was supposed to be payed off once you were paying tax in NZ. They didn’t have the foresight to see most people would leave, hence interest free now in NZ only – they whole thing was a cynical con to stimulate the education industry, why do you think you have to go to tech, get into debt now just to be a florist or a hairdresser? The whole this is rigged. Most of the so called outstanding debt is penalty payments.

They are relying on voluntary payments. There is an old saying, debt that can’t be paid, won’t be paid...Simple as that.

So what next, make criminals out of 57000 ex pats??? Ain’t gonna happen. Just take a look at what’s happening around the world, people are rebelling against their debt obligations. NZers should get some balls and do the same...

Anonymous said...

I have been in Australia now for nearly 18 months - all my family has left NZ and have no reason to return, apart from friends.. which im sure they will eventually move to Australia anyway.

I have absolutely no intention on paying my student loan - I owe around 30k, I am currently on a payment holiday but im sure they will eventually want to come after me.

My partner is swedish and I am looking at moving over there as the possibilities career wise is unreal - what are the chances of the IRD persuing me all the way in Sweden?

What can they currently do to recall student loan debts in Australia?

Anonymous said...

well I have no idea how much I owe, but it must be horrendous right now. I am unemployed and have been for a while and there is no way I can pay the interest at all. I was considering bankruptcy as that maybe easier. At least after 5 years I will be able to start again. The current system if you have a large loan makes it impossible to pay it back.
They need to create an option where it doesn't look hopeless otherwise there is no point. They should base it on affordability and what people can pay. Just adding more interest and payment penalties just creates a larger problem.

Anonymous said...

I am Australian, with a Kiwi husband. He has been living in Aus for 7 years, and this week he received a letter from IRD letting him know that he owes nearly $50,000 on student loan!!! i have no idea what to do- we don't own a house or a car... so are considering NZ bankruptcy to wipe the debt. I consider myself a law abiding citizen, and am paying off my own student loan right now, but that NZ system is just crazy! $50,000 for a year and a half of an arts degree(not completed) 10 years ago- no thanks NZ, i need that money to save for a house for my family, not pay more than twice the original loan amount in interest. Does anyone know how to go about pursuing the next step, or know anyone else who has successfully resolved their loan through bankruptcy?

Anonymous said...

I am Australian, with a Kiwi husband. He has been living in Aus for 7 years, and this week he received a letter from IRD letting him know that he owes nearly $50,000 on student loan!!! i have no idea what to do- we don't own a house or a car... so are considering NZ bankruptcy to wipe the debt. I consider myself a law abiding citizen, and am paying off my own student loan right now, but that NZ system is just crazy! $50,000 for a year and a half of an arts degree(not completed) 10 years ago- no thanks NZ, i need that money to save for a house for my family, not pay more than twice the original loan amount in interest. Does anyone know how to go about pursuing the next step, or know anyone else who has successfully resolved their loan through bankruptcy?

Anonymous said...

I am Australian, with a Kiwi husband. He has been living in Aus for 7 years, and this week he received a letter from IRD letting him know that he owes nearly $50,000 on student loan!!! i have no idea what to do- we don't own a house or a car... so are considering NZ bankruptcy to wipe the debt. I consider myself a law abiding citizen, and am paying off my own student loan right now, but that NZ system is just crazy! $50,000 for a year and a half of an arts degree(not completed) 10 years ago- no thanks NZ, i need that money to save for a house for my family, not pay more than twice the original loan amount in interest. Does anyone know how to go about pursuing the next step, or know anyone else who has successfully resolved their loan through bankruptcy?

Anonymous said...

iam a kiwi living in australia for the last 7 years ,iam currently trying for citizenship ,will having a student loan affect this

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Anonymous said...

I'm spent the last few days filling in bankruptcy forms. As a single Mum, the whole process terrifies me. I did the right thing a number of years back and paid off a big chunk of my student loan off when I inherited some money but then the money ran out and real life kicked in. I'm overdrawn on my account most months and have borrowed from relatives to get through but IRD still want £2000 a year from more or charge massive amounts of interest. Like I said, I've tried doing the right thing and have kept them informed of my address at all times over the past 13 years. What I get for it is referred to a UK based debt collection agency. Like other who have posted, I considered coming back to NZ so that my repayments would be calculated on income and cost of living... but there wasn't sufficient opportunity available to cover the cost of moving back there. I don't know about the rest of you out there but I really wish I had had even the most basic understanding of what it was going to be like trying to be an adult BEFORE I took out such a massive loan for something which serves to tick a box on application forms. For years, I tried to ignore a debt I could do nothing about by leaving 'those envelopes' unopened or putting them straight in the bin. If my bankruptcy application is accepted, I will no longer dread letters through the door but, even though I raise a bright and happy child, work full time and contribute effectively to my workplace, I still feel like I have failed horribly in the scheme of things. Just as I viewed going to University and 'getting an education' as the way to get on in life, I now view Bankruptcy the same way (but with the rose tinted glasses stomped to little bits)

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Anonymous said...

same thing happened to me 80,000 loan the good ol bachelor of aviation (pilot) , working fulltime in nz using my qualifications earned less than 12,000 a year , i could of earned more at freaking macas with no loan , upon gaining close to enough experience they advise you to have before applying to air nz i learned air nz would further charge me around 15,000 for a type rating on a puddle jumping atr ( required for each and every dif type of aircraft you fly ) which they would loan me and i could pay back on my lavish 40 k a year pay , this was the final straw for me , i spent 2 years training and 80000 , to do a job that i was sometimes expected to do for free ( this happened on 2 occasions ) , so basically feck nz never coming back , never paying a cent , i got a student loan to get a step up in life not to struggle, 7,000 interest a year ? to earn less than a burger flipper ? no way , If the Ird come after i will be giving away everything and stop working , so the only thing they can do is put me in jail , ( which will cost them more )

I know alot of people will call me a freeloader blah blah blah, try accruing 7,000 interest a year while not even earning 15 , The Only time in my adult life i ever had to ask money from my parents is while working as a pilot (full time ) If you or anyone you know wants to be a pilot tell them airforce or pay upfront , if you can't do it either of these ways ,

Anonymous said...

Hi there I am also in the same situation. I live in Australia and have just received a letter in the mail saying I owe $46,000 from a loan or $16,000. I have had no notification of this in 16 years and dumbly assumed it had been made void. I am now a mother or two small children with no source of income. I am totally willing to pay back the original loan of $16,000, I owe that money and should of paid it but who thinks of that at 18 years old, I was young and naïve and also what kind of government lends that money to young kids. Surely there is someone out there that has the same kind of loan who is now a lawyer, lets get a petition going, surely if there is a uproar about the out of control amounts of interest that is being charged then something can be done, there is 56,000 kiwis in Australia alone in the same situation. Lets do this!!!

Anonymous said...

Same story I'm afraid. I was just looking around for some advice about my own situation, when I came across this blog. It's really sad isn't it. I was like many of you, a much younger person (I'm now 42), when I made the decision to become a teacher. Taking the loan out seemed so easy. I don't remember anyone telling me it was going to turn out like this. My loan balance was $19,000 when I graduated. I paid religiously every year, the amount that was asked of me, which was $2,000. No one made it clear that that was just the interest or whatever. 10 years later it's now $26,000! I grew up in a single parent household in a poor community, so being savvy about these kinds of things just wasn't even mentioned. I wanted to break the cycle of poverty in my family, but it seems now that I'm the poorest one. I chose to leave NZ for a year in Australia. But when it was time to leave my husband refused to return. He wanted his life to change too. So I stayed to be with my husband. Now our kids have all settled in and never want to return. I have struggled to get a permanant job here and so has my husband. I've barely made $30,000 each year, and mostly I've had to do it alone since my husband has depression and anxiety which prevents him from working consistently. The financial stress of it all has caused a massive amount of pressure on the family. I'm a good person. I work hard and I serve in my community, freely. When I tried to tell IRD that I was struggling after I decided to leave my marriage, they insisted I pay them a huge monthly amount. I hung up out of shear shock! I felt completely overwhelmed. Later I renegotiated a repayment and now I realise that I have been sucked in again, as they now have me on some kind of loan scheme to repay the arrears of $4,000 I owe for missing the last two years (while I was trying to provide a roof over my kids heads and food on the table), as well as making an additional payment to cover the upcoming year. I'm a Christian and pray and fast for deliverance from this bondage. Not to just forget about it all, but for it to be a fairer deal. I pray that the NZ government will see the err in their ways. I don't get anything for being in Aussie as I'm not a citizen or a PR, but Being back home reminds me of all the raping and molesting that went on around me, and it's traumatising. I love NZ but I am drowning from such debt. I'm going top pray for everyone who may be in a similar position too. I know that I will overcome this mountainous burden, but at what cost!