For first year tertiary students, one of the most daunting challenges is how to get financial assistance without being burdened with a lifetime of debt. A student loan is inevitable for most students.
Student loans are available for compulsory course fees, course related costs and living costs, subject to eligibility criteria. There is no interest charged if you are based in New Zealand and if you make the required repayments on time once you are earning above the income threshold.
If you are living overseas, interest is charged (currently 5.9%). Borrowers who go overseas can apply for a repayment holiday of up to a year after which they make two compulsory payments a year totaling up to $3,000 depending on the size of the loan.
For as long as the loan is interest free, it makes sense to use a student loan rather than use money that is saved or invested and earning a return. An interest-free student loan can be thought of not as a loan, but as a deferred tax liability. Loan repayments have the same effect for the borrower as paying a higher rate of income tax until the loan has been repaid. In theory, a tertiary qualification should result in higher earning power which will offset the loan repayments.
The key principles for managing a student loan are:
- Borrow only what you need
- While the loan is interest free, pay off only what you are required to pay and save as much of your income as you can towards your financial goals
- Make required repayments on time to avoid penalties
- If interest is charged, for example if you go overseas, pay off your loan as quickly as possible
Adhering to these principles will ensure your student loan works well for you.