Invest in your loan, but have fun too

By MARY HOLM

Q: I am 21 and about to graduate from Auckland University with a $40,000 student loan. Recently I have become very interested in planning my financial future.

My query is whether I should use the money I have in savings ($5000) to pay off part of my student loan, or whether I should be looking at different investment options such as:

* Saving for a deposit on a rental property, or

* Shares of some form, or a managed fund.

Will it simply be a matter of weighing up the comparative interest rates (loan versus investment returns)? And will having such a huge student loan affect my ability to borrow money, or raise capital when I start a business?

Is there a mentor programme for young people starting out to get advice and see how things work?

Currently, it looks as if the best option will be to go overseas, pay the loan off ASAP and then start an investment portfolio. But the thought of putting it off for a few years disturbs me, as I wanted to get started early.


A: You're quite right that it's important to weigh up the interest you're paying on your loan and the investment returns you might get.

Repaying a 5 per cent loan increases your wealth in the same way as earning 5 per cent on an investment.

But that's not all you should look at.

To get a higher return than your loan interest rate, you would need to go into investments such as the property, shares or share fund you suggest.

Those investments all have fluctuating returns and it's quite possible, especially over the short term, to lose money in them.

Because of their riskiness, many experts say you should repay all your debt - which is the equivalent to making a virtually risk-free investment - before you make any other investments.

That's all well and good. But you're not an automaton. You're a person, who:

* Is taking an interest in investment;

* Has managed to save $5000 while still a student and would like to do something exciting with that money.

* Can benefit from getting into the investment habit early, and

* Has the chance to be in the markets over several decades, in the process acquiring a depth of knowledge.

That doesn't mean you should forget the loan repayment.

The logic of the repay-first experts is irrefutable. And there's no doubt that having a student loan will make it harder to borrow money or raise capital.

Students who are not interested in investment should get rid of their loan as quickly as possible.

In your case, though, perhaps you should invest $2000 or $3000 and put the rest against the loan.

With that amount of money, a share fund is your best choice.

Then you can perhaps drip-feed $100 more each month into the fund, but also put at least as much into loan reduction.

The sooner you get rid of the loan, the sooner you'll be free to invest more seriously.

In answer to your other question, no, I don't know of any financial mentoring programme for young people. Does anyone else?

You can, though, learn lots by reading or going to a short adult education course run by a university or high school.

And, by the way, I applaud your desire to start early. Compounding interest is your friend.

If you invest $100 a month, at 5 per cent - which is a pretty high rate after fees and taxes - you'll have about $15,500 after 10 years.

After 30 years it will have grown to almost $82,000 - more than five times as much.

And, if you can keep going for 50 years, you'll have more than $257,000. For less than $25 a week.


* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or email: maryh@pl.net Letters should not exceed 200 words.