Mary Holm: Student-loan player gets a goal

Q. As a current student with a $17,000 (and counting) student loan I'd like to respond to some of the criticisms of the Government's interest write-off policy.

The tone of the question and your response in your column two weeks ago suggests that savvy students are going to grow rich on the backs of taxpayers (many of whom owe their salaries to the degrees they got for free).

Sure, in theory students can invest their loans and "grow rich". But I'd like to see a study of exactly how many are able to do this and, of those, how many do.

Many students do not have the luxury of investing their student loans. Like me, they need this money to buy their textbooks and course requirements (the $1000 maximum will not cover the yearly bookstore bill for many students) or to cover incidental costs (a bicycle for transport in my case) and emergencies.

The $150 (less any student allowance entitlement) weekly living costs portion of the loan often supplements meagre allowances or part-time incomes, going towards rent and food. (And, despite popular opinion, not all students are inveterate boozers).

Do you really think students don't care about beginning their working life with a $15,000 (the national average) debt?

The interest write-off will mean that I and many like me will stop ignoring our student loans, which continued to grow even with compulsory payments from my fulltime work, and begin to view the possibility of paying off their loan as a more readily attainable goal.

A. Interesting psychology, which we also see with retirement savings goals.

When somebody in their forties, fifties or sixties is told they need to save a huge chunk of their income to have a decent retirement, they sometimes throw up their hands and stop saving altogether, deciding they will just have to get by on New Zealand Super.

But if they are given a reasonable savings figure - or perhaps told how much easier it will be if they continue to work part-time in retirement - they seem more likely to save.

It seems similar reasoning applies to you - which just goes to show that the rule about making goals realistic makes sense.

In answer to your question, some former students care about being in debt; others don't. Who knows how many are in each camp?

I did say two weeks ago that, "Having debt could make it harder for you to get a mortgage or other loan." For people like you who have lived off their student loan and so been unable to invest the money - and who therefore can't quickly repay the debt if it gets in the way of a mortgage - that could be quite a problem.

But the huge growth in household loans suggests that many New Zealanders don't seem to mind being in debt. And now that student loans are interest-free, those loans must be the least of many debtors' worries.

Still, I take your point. I have perhaps been rather cavalier in the way I've written about students bludging from the rest of us. I'm sure many are like you, just trying to get qualified and making excellent use of your borrowed money.

And while the majority of taxpayers don't have degrees that "they got for free", quite a few of us do. We had a good deal then, and we should be grateful for it.

P.S. Did you see the Herald story the other day about older students running up debt that they are unlikely to repay?

Apparently, between 1997 and 2004, more than 6000 student borrowers aged 60-plus owed an average of about $14,250 each.

For those whose income stays below $17,160 - above which some repayment is compulsory - the debt is likely to just sit there and be written off when they die.

It's a bit different from the normal image we have of students exploiting the system.

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Q. After reading the question from a reader on student loan interest write-off, I thought I'd send you some notes from the Inland Revenue website.

In case some readers are not aware, interest on student loans is split into two parts: the interest rate adjustment and the base interest rate.

Ex-students are only eligible for "base interest" write-off (not total interest write-off) ...

A. Stop, stop! I've cut you off mid-flow, because what you're saying is no longer correct, since the April 1 changes.

Confusingly, Inland Revenue still has the old student loan booklet, which you quote, on its website - or at least it did when I wrote this. It does note on the site, though, that the booklet is to be replaced by a new one, "Interest-free student loans and other write-offs", in mid-April - about now.

You will be able to get the new booklet from the website, www.ird.govt.nz/studentloans or by ringing 0800 257 773.

A department spokesperson notes that the distinction between the two types of interest will continue to affect some people - a small portion of the ex-students who don't meet the "living in New Zealand for six months" rule for the interest write-off.

But let's not go into detail for just a few people. They can read the booklet.

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Q. I thought that you were way too polite to your correspondent of last week who had heard from a mate about that gold-mining company, and was wondering whether he/she should borrow some money and pile in.

It's idiots like him/her who continue to give the sharemarket a bad name.

You mentioned in your answer the people who came seriously unstuck by borrowing to invest in an undiversified way in 1987.

Many Kiwis have a pathological and very unfortunate fear of shares as a result of losses in 1987, despite the fact that a properly diversified share/property/fixed interest portfolio would have long since surpassed its value as at October 19, 1987, several times over.

What was it that Warren Buffett said? "Markets are mechanisms for transferring wealth from the impatient to the patient".

A. Steady on. If the man who wrote that letter had been urging others to buy shares - or, worse still, borrow to buy shares - on the strength of a mate's comment, I would certainly have come down heavily on him.

But he was merely asking if it was a good idea. That doesn't make him an idiot. On the contrary, smart people are the ones who know what they don't know and aren't reluctant to ask questions.

The second half of your letter is good stuff, though. I agree that it's unfortunate that many New Zealanders are afraid of shares because of the 1987 crash.

Investing in shares over short periods is highly risky. So is investing in just one or a few shares. So is borrowing to invest in shares. In the mid 1980s, some New Zealanders were doing all three at once. Yikes!

But investing for the long term in a wide range of shares, without borrowing, is much less risky.

As you say, any diversified portfolio should have performed well since 1987. Even those who invested in diversified shares only - without the modifying effects of property and fixed interest - would still have about twice as much money by now if they stuck with it.

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Q. In a recent column, you requested some figures on retired people's expenditure in their sixties compared with their seventies.

I have figures which show that in the last four years of our sixties our average dental and medical expenditures were $3500 a year.

We are now in the seventh year of our seventies, and our average dental and medical bills have been a whisker under $10,000 a year over the past seven years.

This is over and above medical insurance, which while not exactly cheap is proving to be cost-effective - over the past several years particularly.

Some of the higher-priced expenditures include by-pass surgery, a hip replacement, angiograms, angioplasties and both of us needing eye surgery. And in the past 12 months we have had dental bills of over $3000. Furthermore I am facing the real possibility of having to buy an unsubsidised drug at a cost of $6500 a year.

Your letter writer had a "gut feeling that in fact we will actually tend to spend less as we get older". Well, good luck and good health to him and his wife in their retirement!

Thanks for a rather sobering letter. You've had a rough run in your seventies.

We can't conclude anything from a sample of one couple, of course, but I suspect most people's medical expenses tend to rise throughout retirement.

That leads us to the next question: Do other expenses decrease? I suppose if your health is poorer, you are less likely to travel and spend up large on recreation or entertainment - if you were doing much of that in the first place.

The numbers are going to vary widely from person to person. But your letter at least shows new retirees what they might be up against in their health budget.