What finance blog would be complete without a write up on some of the challenges to repay a student loan; so here is one.
When I graduated in 2006, my first thought was starting my career in finance, travel, and finally earning a wage which would last me through the week.
Post-graduation I moved to Sydney, and quickly picked up an entry level role in finance earning an acceptable salary of around AU$40,000.00 per year.
Being my first salaried role (prior roles ranged from helping my father on a building site to slinging bottles behind a bar whilst at University), adjusting to a monthly pay cheque took a while, and as a result there were many evenings where two-minute noodles or cereal were the forced option for dinner.
As I was living in Australia, student loan repayments were not automatically deducted from my salary, and as such I paid little mind to the loan. It was not until a couple of years later that I logged onto the IRD site and was greeted with c.NZ$45,500.00 slaps in the face that I began to pay attention.
Personally, I found the c.NZ$45,500.00 debt an embarrassment. I was studying part time, and earning enough to cover my expenses, however I still managed to draw upon the annual NZ$1,000.00 in course related costs, and the NZ$150.00 per week in living costs, and obviously have the Government fund my course fees. In short, I had no excuse to end up with a debt this large. As you can see, I did not take my finances seriously during this stage of my life.
After initially feeling sorry for myself, I realised I had to take control of my debt. To do this, my priorities and lifestyle had to change. I had to restructure my non-existent budget, sacrifice comforts, and delay my plans to head to London for the much anticipated O.E.
As with any debt, there is no magic bullet. Unless you win lotto or have both willing and able parents (I did, and they helped in the form of a loan, but not repayment), you will have to tackle it on your own.
With cash being a limited resource, the only way to conquer the debt sooner is to:
1) increase your earnings;
2) increase the repayments, being the percentage of salary allocated to loan repayments; or
3) restructure the debt, potentially paying a lower interest cost;
I chose to increase earnings and repayments. An increase in earnings would involve working hard, doing a better job than my peers, and a little bit of luck. Hopefully, promotions and pay rises would come in time and therefore I would be able to make higher debt repayments whilst not impacting my meagre lifestyle.
Given option two was within my immediate control, I worked out how much I could pay each month toward the loan and stick to it. I would also make additional payments with spare cash and bonuses whenever I could.
To ensure I made these payments, and kept to plan, I prioritised my monthly budget as follows:
1) Student Loan;
2) Rent;
3) House bills and groceries;
4) Savings; and
5) Personal Spending.
To explain my method, prioritising my student loan at number one did not mean that I would simply pay my loan and forego my other obligations. Instead, I would decide how much I wanted to pay against my student loan, and then structure my lifestyle around it.
In terms of priorities, I would categorise student loan payments, rent, house bills and groceries as essential payments. Savings and personal spending would fall behind the essential payments and would be sourced from residual cashflow from my pay cheque.
To ensure I was clear on what I could spend each month, I structured my essential payments so that these would be paid when I was paid. For example, if I were paid on the 20th of the month, my rent and bills would be paid on the 21st.
Whilst I could extract some savings from being thrifty on bills, I was quick to recognise that the real gains were to be had in reducing expenditure on rent. I felt there were two options to reduce rent, either increase my commute, or reduce the quality of my surroundings; I chose the latter. With room enough for a double bed and an Ikea wardrobe, space was tight, and with four other flatmates, occasionally six, it was less than ideal having only one small bathroom.
Whilst the living standards were exceptionally average (worse than whilst I was a student), the cheap rent enabled me to increase my loan repayments, and allowed me to spend a little more on myself.
By sticking to this strategy, in 2015 I was able to repay my student loan after nine years (within this time I had moved to London, and took the same strategy with me). When including interest payments, total repayments on my student loan amounted to around NZ$70,000, which is not an insignificant sum.
I will admit, there were times when the repayment seemed impossible, and other times when I swerved from the plan. However, through sheer perseverance I achieved my goal, and when accomplished, what a great goal it was.
I will not lie, this repayment was a struggle. I sacrificed my social life, holidays, a decent wardrobe, and even my spare time. However, finally overcoming the debt mountain was a significant personal achievement for me. Was this debt large? Yes. Was it my fault that it was this large? Yes. Do I regret going to university and taking out a student loan, I will say a resounding no.
My degree enabled me to build a career, increase my earning power, and combined with a large amount of desire, drive and ambition finally enabled me to secure a role with a global bank in London. All in all, I felt I owed it to New Zealand to repay my loan, and not complain about it (although to be fair, I did complain a little).
Without the Student Loan Scheme, I would not have obtained a degree, and would not have had the same access to the opportunities I have worked extremely hard for.
According to the most recent Annual Student Loan Scheme Report, in 2016 the average student loan balance was NZ$21,467, when I graduated in 2006 my loan balance was 107% more; the median repayment time for overseas borrowers was 14.4 years (6.8 years for those who stayed in New Zealand), I repaid mine in 9 years which put me in the 25th percentile of repayment times for the NZ$40k to NZ$45k band (as at the 30th of June 2015 11.2% of borrowers had a loan greater than NZ$40k). I should pat myself on the back; and I did.
Whilst repaying my loan was a challenge, this experience reinforced the value of money for me. It cemented a view that throughout my life, I would need to have a budget, and if left unchecked my wealth would quickly disappear down the drain.
I do feel it worth commenting on personal responsibility at this point. I signed up to the loan, I knew the cost each year, and I knew that at some stage I would have to pay it back. Honestly, I did not like the thought of paying it back, and I recognise that it delayed the purchase of a home, and overseas travel, but I felt it was my obligation, not my option. I simply had to realise that graduating was not the end of a student style lifestyle.
To anyone still repaying their student loan, with 42,870 borrowers fully repaying their loan in the year to 30th June 2016, it is possible. To anyone thinking of going to university and taking on a student loan, I would stress to keep the loan as low as possible and seriously consider if you really do need a degree for your chosen field. You may find a degree is not actually required, and as such studying may simply be an inefficient use of financial capital, and more importantly your human capital.
What I would say is that anyone looking to start a degree, consider the following:
- What interests you? You may find that a degree is not a necessity, or there are other options available to start your career. Times are changing, and a degree may not be the most cost-effective route;
- Should you decide to pursue a degree, work out how much it will cost in total. You may also wish to consider the opportunity cost of forgone wages earned whilst studying. Does the cost justify the potential career path?
- During your studies, try and minimise the amount you are borrowing as much as possible and possibly pick up a part time job if possible. My personal view is that four papers a semester were manageable, and as such there was enough time for study, spare time and part time work.
Another interesting point from the latest Student Loan Scheme Annual Report is that overdue student loan debt stood at NZ$1.2 billion; overseas- based borrowers owed 92 percent of this amount. As a thought, for those student loan borrowers who are currently based overseas, with the NZ$ not far off its five year low, it may be a good time to start making some repayments.
For those of you thinking of going to university, with the Government investing NZ$1.57bn over the next four years to pay for the first year fees of eligible students, it looks as though it is a rather good time to get a tertiary education. Who said there is no such thing as a free lunch.
mindthemoney 