Given our work/study/childcare schedule, we need around $42,000 a year net to break even.
What is the best way to rationalise our credit card debts of $15,000? There are three main options:
* Draw down the maximum amount of our weekly student loan living costs and pay off the debt at $230 per week, over and above our budgeted living expenses.
While each of us earns less than $25,000 a year there is minimal interest charged against the student loan. The downside is that when we start working full time our loans will likely total as much as $100,000.
Although our equity in our home will be fairly reasonable, will we be able to get another mortgage with student loans that size?
* Attempt to refinance our mortgage to incorporate the credit card debt on to the mortgage.
At current fixed mortgage rates, we would then need total income of $45,000 a year. But we would need only half the student loan living costs money to help fund this, so our loans would stay smaller. But will banks lend against scholarship income and student loan living costs?
* Sell up, pay off the mortgage and student loans (as much as possible) and rent.
To rent a similar home in this area would be around $290 to $330 a week, which would raise our required annual income to $48,700 a year, so we would still need to draw down on a student loan. Given our income we are not entitled to any accommodation supplement from Winz.
We are committed to completing our courses and providing as stable a home life for our children as possible. We would welcome your suggestions.
(PS: Contrary to Steve Maharey's assurances, Winz still do not inform clients of all their entitlements, which is one of the problems that contributed to our need to draw on the credit cards in the first place.)
A.Running up $15,000 on credit cards! Horrors!
Just the interest on that, at a typical 19 per cent, is $2850 a year. If you left the debt untouched, it would more than double in four years.
There's got to be a better way for people to fund their education, whether it's better service from Winz, bigger student allowances or loans or whatever. Fingers crossed on the Government's current review of student support.
Obviously, one solution would have been for one of you to study while the other worked, and then the reverse. But no doubt you had good reasons for doing what you've done.
The good part, now, is that you're planning to get rid of the credit card debt.
Which of your options seems best? A combination.
From my reading, on www.ird.govt.nz/studentloans, all full-time students plus part-time students earning $25,378 or less qualify for a full interest write-off. So at this stage you should be paying no interest at all.
It would be great, then, if you could just add a lump sum to your student loan and pay off the card that way. But it seems that you can't.
So, if you settle for your first option, reducing the credit card debt by $230 a week, you'll still be paying high interest on the outstanding balance for many months.
It would make more sense to pay off the card debt pronto by either selling your house or increasing your mortgage.
What if you sell? As you've said, your rent would be higher than your current mortgage payments, so your student loan would grow more. And you would miss out on appreciation of your house.
Also, when you're renting, you never know when a landlord might kick you out. Neither you nor your kids need that insecurity. So I would keep the house.
That leaves adding to your mortgage.
Mortgage broker Rob Tucker of Loan Plan, who is former chairman of the Mortgage Brokers Association, notes that you have enough equity in your house to top up your mortgage by $15,000.
But, you ask, will banks lend to you when your income is scholarships and student loan funds?
Provided the lenders have confirmation that the money is being paid, that's pretty guaranteed income, says Tucker. It's more secure, in fact, than many jobs. So lenders should be quite happy.
Once you've added to your mortgage and paid off the card debt, you could then switch to your first option.
As long as your student loan interest rate is lower than the mortgage interest rate, borrow to the max on the student loan to pay off your mortgage as fast as possible.
You worry that ending up with a total loan of around $100,000 might harm your chances of getting a mortgage later, presumably for a better house.
Again, Tucker is positive. Lenders don't regard student loans in the same light as other debt, he says, although the loans do have some effect on the total amount you can borrow.
Let's say you two earn $120,000 when you've finished your degrees. Your student loan repayments would be 10c in the dollar on income above $15,496 each, so that would take care of $8900 a year.
When a lender is calculating what they will lend you, they would take into account that commitment. But, Tucker says, that won't have a huge effect on your ability to borrow.
Your history will be on your side, too. "From the credit point of view, they've got degrees. They got the ability to stick it out," says Tucker. "On the character side, the borrowers are A plus."
One last point: Once you both graduate and earn more, you will start to pay interest on your student loan.
At that stage, it would be great if you make a concerted effort to repay either the mortgage or the loan, whichever is charging higher interest, as fast as possible. Then, perhaps, take on the other debt.
I wouldn't expect you to remain as frugal as you are now. But, when you get a big boost in income, it's great to use the extra for debt reduction.
Q.We are a single-income family of four.
Our yearly income is $35,000 gross. Combined debts (mortgage, credit card and hire purchase) total $107,000. I have approximately $50,000 invested in a super scheme with my employer. Because the super scheme is being restructured, I am now able to withdraw this amount if I wish. This is a one-time offer.
I feel I have three options:
* Leave the amount untouched and continue saving for our retirement.
* Withdraw the amount and use it to reduce debt.
* Withdraw the amount and upgrade the house.
Your thoughts would be appreciated.
A.Another person with three options. Its almost enough to start an options exchange in New Zealand!
I like your first and second options better than the third.
It would be lovely to have a flasher house. And upgrades are sometimes great investments. But, quite often, people seem to get back less than they put in.
All in all, it's rather a risky business.
The choice between the other two is trickier.
Conventional wisdom says that paying off debt, particularly high-interest debt but also mortgages, is a good plan.
To do better, you need to go into an investment with higher after-tax returns than the interest you are paying on your debts.
Such investments are always risky, whereas repaying your debts and mortgage is risk-free. So only those with a high appetite for risk should prefer investment over debt reduction.
But there are some arguments that counter this.
Psychologically many people like to build up retirement savings while paying off their home. And it gives them better diversification; a chance to learn about how markets work over the years; and time in the markets to recover from bad downturns.
In your case, too, your work super scheme might be subsidised. The company might, for instance, put in 50c or even $1 for every $1 you put in, or it might pay all fees for you.
Such subsidies effectively boost your returns, perhaps to the point where you are handsomely rewarded for taking more risk than you would by repaying your mortgage.
Having said that, though, its unlikely that the super scheme would be a better proposition than repaying credit card or hire purchase debt, which has a higher interest rate than mortgages.
If you can withdraw enough from the scheme to pay off the high-interest debts, I would do that.
Beyond that, I lean towards keeping the rest in the scheme, especially if it is subsidised.
It is worth quoting a letter to this column a month ago. A retired man said of some pensions he receives, "If I had cashed them in at the time I left the companies, I would have nothing to show for it now."
If you use your super money to repay part of your mortgage, you might end up just spending more when you are finally mortgage-free.
You can remove that temptation by keeping as much as you can tied up in the super scheme.
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