Let's take a little trip down Memory Lane.
Back in September 2005, when student loans were interest-free while the student was studying but not after graduation, I wrote the following in response to a reader's letter about maximising loans:
"I surrender.
"This sort of question has come up every year or two in this column. Until now, I've questioned whether it's ethical to take out a student loan that you don't need, with plans to invest the money during the interest-free period while you are studying and pay it back when the interest bills commence.
"An example is what I wrote earlier this year: 'It means that taxpayers are subsidising (students') investment. Is that fair?'
"Now, though, both Labour and National have said they will make the student loan scheme more generous. And it seems ridiculous to expect people not to make the most of it. When Father Christmas hands out presents, is it reasonable to ask children who don't really need them not to take them?"
After its election victory in 2005, Labour fulfilled its promise to get rid of all interest on student loans. And since then, I've dropped the moralising and gone with the argument that if some students are making the most of the student loan scheme, it's only fair to tell others how to join them.
Was this a good decision? Clearly not in your eyes, and others agree with you. Read on.
Ethical bankruptcy
The letter about repayment/investment of student loans and its response had me fuming.
The query demonstrates much that is wrong with the system. This student has had the benefit of an expensive education. Government has invested tens of thousands into every graduate. The student fees are a token towards the cost of tertiary education.
The dilemma of "to repay or reinvest" is morally and ethically bankrupt, and my advice to your correspondent is: Your son should repay his dues. Student loans are not a right but a privilege. The more they are abused the less there will be for future generations.
NB: I have a child in tertiary education. We will be helping repay her student loan when she completes her degree, not when she decides to repay the system!
The fact that you're planning to help your daughter repay her loan suggests you may be in a position to simply pay all or part of her fees in the first place, so she wouldn't need a loan - or at least as big a loan.
If that's right, isn't your family also taking advantage of the lack of interest - albeit only until your daughter graduates? The next correspondent seems to think so.
Debt repayment lesson
I have read your article on student loan choices and I am very disappointed that people take the attitude about what is best for them in regard to a loan made by the people of New Zealand for their education.
The small gain by this particular student in not repaying his debt is multiplied when this attitude is taken by so many in his position. If his parents were in the position to fund his education in the first place why did he have a student loan?
Why should the taxpayers fund him into a term deposit? Are these same parents hoping for NZ Superannuation funded by the government?
The country is owed billions of dollars by former students who have taken the best education this country can provide and taken the benefit overseas, with no moral consideration for the continued supply of education to future generations.
I am nearing 60 and have worked all my adult life. Retirement is looming, and I look at the state of New Zealand and the world. Repayment of debt is the major issue in all this fiasco.
We are not teaching the younger generations about saving and reducing debt. It is so easy to get credit that even world governments have succumbed to overspending. How about encouraging a moral stand and looking at the bigger picture of what's better for our country?
Have you always paid every cent of tax you owe? Have you never paid a tradesman in cash, knowing full well that income wouldn't be declared to Inland Revenue? Have you never used a trust to reduce your family's tax, or set things up so you get a rest home subsidy from the government?
Maybe you've always played the game straight, but many don't. And to my mind, these are all less honourable strategies than taking advantage of the lack of interest on student loans.
Still, I can understand your point of view. And apart from ethical issues, there's the worry that students will develop the attitude that debt - including high-interest debt - is just fine.
I would rather see governments charge interest after students graduate, and use that to more heavily subsidise fees so student loans are smaller in the first place.
Early payment bonus
Your correspondent querying student loan repayment choices interested us, as we are facing similar choices for interest-free student loans for family members residing in New Zealand and about to enter the work force. Fortunately, like your correspondent, we have sufficient funds to decide whether to repay or not.
We've decided to repay the loans before March 31, 2013 to receive the 10 per cent early repayment bonus before it's removed, on the grounds that it would take some years to obtain a similar after-tax return if we kept the money on secure term deposit.
If we don't repay the loans before March 31, 2013 and they remain interest-free, then we judge that there is no longer any benefit to family members paying any earlier than required.
Is there any obvious flaw in our decision?
By the way, on the IRD website we note that when repaying the total loan, the maximum early repayment bonus available is of the value of the loan, or 9.09 per cent, not 10 per cent.
Your decision sounds good to me, and will no doubt make the previous correspondents a little happier.
No Frills retirement
Last weekend, your article was somewhat bewildering in respect of Dr Claire Matthews and her ideas (oops, survey) on costs to a household after retirement with "no frills" and "choices".
I have since found part of the conference outline that Dr Matthews gave, and I am quite bemused at some of her figures. If I was to abide by them, I would probably be dead of malnutrition within a few months and it seems I couldn't seek medical attention as that is rated at zero dollars. As is clothing and footwear ... crazy.
Yes, I know it's a guideline, but I am stunned that someone is paying this woman to do this!
Oooh, what did you have for breakfast - nourishing or otherwise?
Claire Matthews responds: "The guidelines are based on actual expenditure by real New Zealand retired households - the numbers are certainly not 'my ideas'."
The data come from Statistics New Zealand's Household Economic Survey for the year ended June 2010, adjusted for inflation since then.
You're obviously referring to the No Frills numbers, which say:
* Single and two-person retiree households spend nothing on clothing or footwear.
* Single households spend nothing on health while two-person households spend just $3.59 a week in big cities and $5.77 elsewhere.
* Single households spend about $54 a week on food, two-person households about $95 a week.
I agree, and so does Matthews, that these numbers make you wonder - especially the zeroes. So let's look at what No Frills means.
Matthews used data for households where the main form of income was NZ Super. Statistics New Zealand says it can't say what proportion of people 65 and over would not be included, but there must be high-income households where other income exceeds NZ Super. Let's just say Matthews excluded some rich people.
She defined the No Frills households as those "on the 25th per centile", which means they are a quarter of the way up. So three-quarters of the people in Matthews' database spend more than this - plus the excluded rich.
Therefore chances are, dear indignant reader, that you are not a No Frills person.
Those who are in that group presumably just keep wearing the same clothes and shoes, or are given items, perhaps by family. And the health system must look after their medical needs.
On food, Matthews says: "I've been contacted by a number of people as a result of the report, and been advised how it's possible to make choices that enable people to eat nutritionally healthy meals at low cost, but the range of options is limited and the food would probably be described as simple and plain."
She adds: "If a person is receiving $350 per week in the hand and paying $250 per week in rent, it only leaves $100 for food, power and everything else. So some people simply have to manage on the sort of amounts in the No Frills guidelines.
"I suggest your reader needs to read the full report to better understand the numbers. It is available at http://nzcpfe.massey.ac.nz/Research/139174NZRetirement.pdf
Footnote: Today's column featured letters from two disappointed readers, one fuming one and one bewildered one. Thank goodness for the interested one. Here's hoping for a happier bunch next week.
Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.
