Diana Clement: Why you should pay off your student loan ASAP

To pay or not to pay? That’s the question when it comes to student loans. It’s interest-free, and the temptation with “free money” is to pay the mandatory minimum and leave the rest
ticking for as long as it takes.

Minimum repayments on students are mandatory, once you earn $21,268 per year (or $409 per week) before tax. This is a fixed amount of 12% of your pre-tax income above a minimum threshold, and it will be automatically deducted from your salary before you receive it. You’ll also pay 12% on every dollar you earn if you have a side job.

The question is, should you pay more and hit that debt on the head faster than necessary? The short answer is that there are times to pay and times to wait.

By all means, pay the minimum for a while. There’s nothing like getting a regular full-time salary for maybe the first time in your life. Indulge yourself a little – even if getting into the habit of spending it all is a slippery slope to forever being broke.

Then there are the big expenses of life. You may be getting married or buying a house. Student loan can be overlooked when saving or borrowing for these.

The top three reasons to double and pay off your student loan faster are:

1. Buy a house

Student loans and repayments do not affect your credit score. But here’s the catch: If you want to borrow to buy a home, your student loan minimum repayments will factor into bank affordability calculators. Simply put, whatever amount you pay in student loan repayment will be deducted from what you can afford to pay on the mortgage, reducing the amount you are allowed to borrow. It’s hard enough for most first-time home buyers to borrow to buy a home, as it is with the Consumer Credit Agreements and Finance Act (CCCFA) and other roadblocks. road factors such as minimum loan-to-value ratios (LVR). The only “but” here is that if you have any interest-bearing consumer debt, it must be paid off first.

2.OE

If you go abroad to travel or work for more than six months, your loan is no longer interest-free. Interest is backdated to the day you leave, as you are no longer contributing to the New Zealand economy. The current rate is 2.8%, but it could well rise in 2023 if interest rates remain high. If you jump overseas and don’t pay, the late payment interest rate is currently 6.8%, which is pretty painful. Be careful, you could be prosecuted by debt collectors abroad, or even arrested on your return to New Zealand if you do not pay. So clear the debt as soon as possible if you want to work abroad.

3. Psychological

This student loan can affect you psychologically. Like all debts, they can drag you down mentally. Conversely, paying off debt can reduce stress and even improve relationships. It allows you to look ahead and build your life free from the dark cloud of debt.

A fourth reason that won’t affect everyone is that student loans are not relationship property. I once interviewed someone who ended up with a pretty big student loan to pay off after a split. As a couple, she and her husband had first repaid her loan jointly, then separated, leaving her outstanding loan out of the division of relationship assets. Exceptions are when the loan was used for the couple’s living expenses, or the debt was incurred while a member of the couple was studying to help the couple’s business.

Finally, like everything, there are exemptions to the minimum student loan repayments. Including hardship provisions and special deduction rates. If you are still in school, there is an exemption if you earn more than the weekly, fortnightly, four-yearly or monthly threshold, but less than the annual threshold, because you are not working the whole year. For more information, visit Tinyurl.com/IRDStudentLoan.