Recently, many New Zealanders have completed their studies and graduated (if that’s you, congrats!). Like over 700,000 others, you’ve probably got a hefty student loan and are now faced with the daunting task of paying it off.
Debt is generally seen as something to avoid, but some kinds of debt (like your student loan) are much better than others.
This article will provide tips on how to approach paying off your student loan debt, without having to become one of those ridiculously frugal people you see on “Extreme Cheapskates.” (Seriously, it’s great. One guy bubble-wrapped his whole house!) Some of this is pretty basic, but I figured it would be useful to have all this information in one spot, so you can avoid wasting your life listening to Studylink’s hold music.
The good news: Student loans are interest-free
As long as you are living in New Zealand, your student loan will be interest-free. “Well that’s just great,” you might be thinking, “I still owe $37,559!”
Your loan being interest-free might seem pointless and unhelpful right now, but it will make a huge difference to how long it will take you to pay it back since the balance won’t ever grow. That means that even if you owe a soul-destroying amount, you can chip away at it slowly without interest being piled on.
This sad example from thebillfold.com illustrates how much better an interest-free loan is. A woman in the states had managed to pay $30k off her loan in 5 years… but due to interest, not only had she made absolutely no dent in her loan, but the balance had actually grown by $53! She then did the only logical thing, raged about it on Twitter. Makes you a little happier to be a Kiwi!
How your student loan repayment works
In The Simpsons, Krusty gets caught evading taxes, and the government say they are going to “garnish his salary” until he’s paid the money back.
This is pretty much what automatically happens to you. If your pay is below $367 a week ($19,000 a year), you won’t pay back anything on your student loan. On anything above $367 a week, 12% will go towards your loan.
Interested in how long you might need to pay off your student loan debt? I’ve built a calculator that can give an estimate. It takes into account your salary and future pay rises to estimate when you’ll be debt-free!
If you spend more than six months overseas, it’s a little less straightforward…
Can’t I move to Argentina and pretend my loan doesn’t exist?
Recently there have been instances of overseas student loan defaulters being arrested when trying to enter or leave the country. These people have avoided paying off their student debt for years or even decades!
When you are overseas, you have to pay a yearly amount based on the balance of your student loan. The yearly amount you need to pay ranges from $1,000 to $5000 depending on how much you owe. This yearly amount is the same whether you’re travelling, working, or volunteering at the Derek Zoolander Center for Kids Who Can’t Read Good – so make sure you know what your obligations are before going on that extended trip.
Interest is currently relatively low at 4.8% but you can also be charged penalty interest on top of this if you aren’t meeting your payments. This is how your balance can balloon into a ridiculous figure if you’re not careful.
If you’re already overseas or planning to go in the future; get in touch with the IRD and explain your situation – it’s likely you can work out a payment plan that’s reasonable. IRD employees aren’t sitting there maniacally laughing to themselves at the thought of arresting student loan dodgers. They simply want to know that their money will eventually come back to them.
The key is to just suck it up and make a plan for paying off your student debt, rather than pretending it doesn’t exist and letting it get wildly out of control.
What’s better right now – saving my money or paying off my loan?
I know the title of the article is “Tips for tackling your student loan” but there are really only two options: paying it off fast or paying it off slow.
It does depend on what your long term goals are, but if you live in New Zealand, there’s no real need to pay off your loan right now. An excellent way to tackle your student loan is to simply do nothing! Let the percentage come out of your pay until your balance trickles down to zero. Finally, a problem where laziness is the solution!
However, if you’re one of those people that simply hates the idea of having any kind of debt, you may as well go ahead and pay it off as soon as you can. Being debt free is definitely a great goal, and by paying your loan off in full you’re essentially giving yourself a big pay rise (since your contributions aren’t coming out of your wages anymore).
If you want an easier way to pay it back faster, you can tell your employer to take a bigger percentage out of your pay and that way you don’t have to think about it.
As long as your aren’t living overseas and ignoring the IRD, there’s no need to worry too much about your student debt. If you’re overseas, make a plan for tackling your student debt or else run the risk of being led away from the airport in cuffs!
How do you approach your student loan debt? Do you pay it off as slow as possible? Do you pay extra? Let me know in the comments below.
All images used with licence from Pixabay