Question:

I am 24 years old, currently studying my second degree, and have only just begun to take a grip on my personal finances in the last six or so months. I have made sure that I have fully funded my KiwiSaver to get the member tax credit, work part-time, receive the Adult Student Allowance, and by the time I graduate (end of 2018), I should have around $35,000 in student loan debt.

I save around $400 a month into a 3 per cent interest account, with occasional bonuses from scholarships. At present, I have about $5000 in there.

I am wondering if having this lump sum in a savings account is the best use of my money. The career I hope to pursue is likely to take me overseas, but I am having second thoughts about holding that money in a benign saving account as opposed to investing it.

Ideally, I would not want to pay any student loan interest to IRD, thus the current plan of building a giant lump sum that can be used to write off the loan upon graduation.

I am highly enamoured with investing in exchange traded funds, and the thought of an early retirement certainly appeals. However, NZ has a rather unique system, especially with interest-free student loans – if you’re living here.

There isn’t really a wealth of information on this subject, and I was wondering what your opinion was? Should I bite the bullet and start investing – or should I remain a bit more passive and risk-averse?

Response:

There are a couple of issues here. One is your best move financially. The other is the “system”.

Opponents of the interest-free feature of student loans will point to the fact that you are saving $400 a month, plus scholarship money, while running up your debt.

Clearly you don’t need to borrow as much as you are borrowing. And the interest you earn on your savings – enabled by your borrowing – is really a gift from the taxpayers of New Zealand, whose government offers you an interest-free loan.

Ten years or so ago I criticised students in this column who took advantage of this situation. But then I stopped the criticism. The system more or less invites you to do it, quite legally. And many others do it. It’s the rules that should be changed, rather than your behaviour.

That’s not to say a rule change is simple. Many people – including me – like to see students who otherwise couldn’t study being able to do so because they can borrow interest-free. The government needs to somehow separate students in need from the others.

Anyway, that’s not your problem. You’re working within the rules. And you’re obviously savvy not just in this respect. For example, you’re evidently contributing at least $1043 a year to KiwiSaver so you get the maximum tax credit – something other students should also try to do. Note to parents of students: It’s great if you can help with this.

So what should you do with your savings? Given that you might move overseas fairly soon – and would then have to pay interest on your student loan, currently at 4.8 per cent – I suggest you concentrate now on building up your savings account balance. Hopefully you’ll be able to pay the loan off in full just before heading overseas. If not, the more you can pay off the better.

Note that I said “just before” leaving New Zealand. You mentioned repaying the loan on graduation. But the loan is interest-free as long as you live in this country, so you might as well keep the money compounding in the meantime.

Why not save in an exchange traded fund (ETF), which is a type of low-fee share fund? After all, over the long term we expect such an investment to grow faster than a bank account. The trouble is that your balance in any share fund will sometimes decrease. If you’re expecting to move offshore any time in the next eight to 10 years, there’s too big a chance that sharemarkets will fall at the wrong time.

However, once you’ve got enough set aside to fully repay your student loan, by all means save for that early retirement in an ETF.

By the way, you might want to look into moving your savings every now and then into a bank term deposit if you can earn more interest there. Check on Interest.co.nz for rates. Just make sure all your deposits will mature before you’re likely to head overseas.

Source: The New Zealand Herald

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