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Why ignoring your student loan while overseas could be a costly mistake

Katrina Shanks is the chief executive of Financial Advice New Zealand.

OPINION: Businesses struggling to find staff would have been concerned by recent estimates from government officials that up to 125,000 Kiwis could leave the country in the next year as borders reopen and young people head off on their big OE after two years of being locked in.

Ministry of Business, Innovation, and Employment officials did say it is more likely to be closer to 50,000 who will leave, but that’s hardly better news for industries already struggling to fill jobs before the borders opened.

It’s certainly a long way from the 12,000 who opted to permanently move overseas in 2020, most of them to Australia.

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And you can see why. It is expensive for a young person to live in New Zealand. Rents are up, mortgage rates are on the rise, and it seems the cost of everything, from food to oil, is up – but wages don’t appear to be keeping up.

Comparing our starter salaries with those across the Ditch paints the picture for us.

According to the Hays Salary Guide 2022/23, a graduate accountant in Auckland earns on average $45,000 to $50,000 but in Sydney it’s $51,000 to $60,000. For a paralegal it’s $46,000 to $70,000 vs $55,000 to $90,000. For a contact center operator it’s $47,000 to $57,000 vs $49,000 to $70,000.

With differences like those young people are taking the opportunity and who can blame them.

Businesses struggling to find staff would have been concerned by recent estimates from government officials that up to 125,000 Kiwis could leave the country in the next year as borders reopen.

Seth Wenig/AP

Businesses struggling to find staff would have been concerned by recent estimates from government officials that up to 125,000 Kiwis could leave the country in the next year as borders reopen.

Many of these will be graduates keen to take advantage of better pay in a different country after years of study, and this brings up the issue of student loans, the cost of which increases if you are living and working outside New Zealand.

Although the number taking out loans for course fees and costs and living costs has decreased in the past year, the numbers remain very high.

According to the Ministry of Education, last year there were 679,000 loans in existence, with the average borrowed each year $10,479. The average amount owing was $23,915. They are big numbers, but they are serving a great purpose.

Of real concern, though, is 102,927 of those borrowers had overdue payments, and 74% of those were based overseas. And that’s where student loans can be a problem, because that 74% are having interest added.

The situation with student loans works like this.

If you’re living, studying or working in New Zealand long-term your loan is interest free, with repayments based on your income automatically taken out by your employer and paid to the Inland Revenue Department.

But if you’re outside New Zealand for around five out of six months (depending on if you’re traveling a lot), you might be regarded as overseas-based and your loan will stop being interest free. At present that interest rate is 2.8%.

At that stage, your repayments will be based on the size of the loan’s balance, and the loan could start growing.

Working out exactly when you become overseas-based can get complex, especially if you’re traveling a lot, and there’s a calculator on IRD’s website that will help you find out when your status will change.

Basically, if you leave New Zealand for 184 days or more you will be classed as being overseas-based if you are away for at least 153 of those days. You remain New Zealand-based if you are back here for at least 32 of those 184 days.

If you’re based overseas, you need to make minimum repayments on your loan or apply for a temporary repayment suspension.

Katrina Shanks is the chief executive of Financial Advice New Zealand.

Supplied

Katrina Shanks is the chief executive of Financial Advice New Zealand.

If you don’t make those minimum repayments, you could be charged late payment interest on the overdue amount, or penalties, and if that happens your minimum repayment amount may go up. Interest for late payments is currently a steep 6.8%.

A temporary repayment suspension will give you a break from payments for up to 12 months while you’re travelling, but it’s important to remember the loan will still be gathering interest, so it’s a good idea to make additional payments.

There’s also an incentive for letting IRD know if you are going to be late with your payments. You can arrange an installation plan to pay off your late payment amount, and if you stick to it, they can switch you to a reduced rate, so you pay less interest. That’s 4.8% compared to the 6.8% for late payments, so there are big savings to be made.

What are the main learnings from all this?

Though you’re likely to be earning more in your overseas job than you would in the equivalent one back home, you’re paying interest on your loan while you’re away. You’re ahead if your overseas job pays more, but only as long as you make regular payments.

If you default on your repayments, the advantage of a higher salary overseas can be quickly whittled away after interest of 6.8% and penalties, and when you return home you’ll be faced with a loan that has quickly ballooned thanks to compounding interest.

The big thing is to not go overseas and forget about the loan till you return. Make sure you keep up with those regular payments while you’re away. You can even leave money here and have someone else manage the payments for you.

In our family we have a graduate heading off at the end of the year to explore the world. And, yes, I will be ensuring the student loan does have a priority among all the excitement of a new city in a new country.

As my financial adviser would say, a debt out of sight is still a debt you have to pay. Have a plan and execute that plan. In other words, set up a process to keep paying it.

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