Hi Accounting fans! Let’s kick off the day with an awesome collab post between Sam Harith – The Comic Accountant and Shivan Sivakumaran of shivansivakumaran.com.
Now, Shivan is a really sharp dude who is an optometrist by profession but writes about a wide range of subjects, including personal finance and life hacks.
Today we are going to tackle a tricky subject for our readers who are thinking about travelling BUT have a student loan they haven’t paid off.
Note that this article contains advice more specific to an NZ context, that being said we will tackle some commonly asked questions about student loans which should be applicable for anyone around the world who has a student loan to pay off. The answers will be written by me (SH) and Shivan (SS).
To kick it off, let’s start off with some questions for those of you who are thinking of getting a student loan:
I’m thinking of getting a student loan. Do I really need one?
SS – A university will cost you a significant amount. Statistics from figure.nz show that the bulk of student loans can range from $10,000 all the way up to $80,000, depending on how long your study is for and what you decide to pursue.If you have been in the personal finance game for a long time, you will think taking a loan is taboo. So taking out a loan in those numbers would sound like heresy!
The majority of the time, debt should be avoided.. However, education is one of those exceptions. Education is a high-value item; it is an act of investing in your biggest asset – you! Instead of saving years for education or wiping out your investments, your emergency fund, and any fun money, it would be wise to take the loan. You are investing in yourself and the potential to earn more income. After you graduate, you will be able to pay off this loan. It makes more sense since the student loan is interest free if you plan to stay in New Zealand after you graduate.
SH – Echoing what Shivan just said, you only take a loan if you know that it will result in a greater pay off in the future. Yes, a loan that big sounds bonkers but if that loan results in you landing a well-paying job – then I’d say it is a loan well worth taking.
I already have a student loan. Should I pay this off as soon as possible?
SS – If you plan to live in New Zealand, then you should take as long as possible to pay back that loan. Since the loan is interest-free, the longer your pay off the better thanks to inflation. A $10,000 loan today is much less 5 to 10 years later. The only reason to pay for the loan faster is if you wish to live abroad for over 6 months. In this case, interest will start to incur and this will start to hurt you. Another reason is purely psychological; it feels better to have no debts owing.
SH – Psychology aside, there is this little thing called the ‘Time Value of Money’ – basically, the value of money erodes over time due to inflation. Therefore, an interest-free loan actually ends up losing its value over time – hence why commercial loans charge hefty interest rates! So if you are paying off an interest-free student loan – drag that payment out as long as legally possible!
Can I start putting money in other investments if I haven’t paid off my student loans yet?
SS – The natural order of personal finance is once you have a decent emergency fund is to start tackling your debts with full force and then focus on investing. However, this is not the case with the student loan. If you are living in New Zealand and plan to do so for a long period of time, we want to pay off this student loan as long as possible because the loan is interest free and, as Sam mentioned, inflation will eat away at it. That means with any excess money, instead of hosing down the student loan, aim for the fires of high yield investments.
SH – Yep. What Shivan said. Only interest bearing debt should be a high priority when it comes to paying off debt. Interest free debt should be a low priority.
Ok, with that out of the way, let’s look at some advice for those of you with student loans – but are thinking of travelling or working overseas!
I plan to go overseas after I study, should I keep the money for travel and a bit of luxury or should I put most of that money against my student loan?
SH – Now I’m a bit of a miser when it comes to travelling and luxury (no thanks to my accounting training) but that being said, I do believe that travel broadens one’s horizons and if you can afford it, you should do it. Any money that you save shouldn’t be mostly put against your student loans – rather you should be placing them in long term investments, like exchange traded funds or term deposits, depending on your investment goals. Bear in mind that making trips overseas of fewer than 5 out of 6 months in a year won’t cause you to pay interest on your student loans.
SS – Yes, travel broadens one’s horizons and despite being expensive, travel is another form of investment on yourself. Because you have interest accruing when you go overseas for more than 5 out of 6 months in a year, this should not be the reason to avoid a work engagement overseas. Focusing on your high yield investments, this can expect to grow more over a period of time compared to the interest on your student loan, in the long run.
I am already overseas and I am paying off my student loan, should I pay it off at the minimum or up my contribution?
SH – Given the NZ context of charging interest on your student loan if you are deemed to be overseas, then the advice to take your time with paying the student loan changes as well. You should definitely look at upping your contribution if you are working overseas. This is because allowing interest to accumulate on your student loan means that you have less money to put away for your future!
SS – Contrary to what was mentioned before, we don’t ditch our payments to student loan payments just to focus on investing. It’s a balancing act. Just a little bit more contribution made on your student loan will lead to less interest accumulated to pay later, leaving you with more, as Sam says.
How long should I stay in New Zealand until I can afford to go overseas?
SH – If you have a student loan to pay off – stay in NZ until you pay off that loan – this is the most cost-effective solution in the long run. However, if you received a super awesome-tastic offer overseas that is paying 3 times more what you would get in NZ – go for it. Use the extra money to pay off the student loan before the interest accumulates. In most cases, you won’t get a super job offer straight after graduation – and NZ is a pretty decent place to start (we’re still the envy of nations when it comes to our handling of the COVID-19 Crisis!)
SS – When we make a decision, there are usually multiple inputs that are required to make that output. One of those inputs would be cost-effectiveness of staying and paying off your loan before your head overseas. Sam also points out other inputs like increase in pay and also broadening yourself as a person by going overseas (when the borders do open). You just need to way up the pros and cons of making the decision and see the value gained in going abroad.
Would you buy a house then go overseas to work?”
SS – My thought would be that it is old fashioned. I know if you can buy a house and then rent it out it is an investment that can pay itself off. But there are still things that can go wrong and you won’t be there to fix it. There will be some decision that the property manager cannot make without your input. So, trying to coordinate from a different location and different timezone can be very stressful.
I’m thinking putting money into an index fund would work better and be less stressful.
SH – If you are planning to travel long-term (IE work in a different country) then you need to be sure your property is well-managed and maintained while you are away. This usually means hiring a property manager – which will cost more money. But hey, at least you have your own home to return to when you come back.
We hope that you’ve found this post on student loans helpful and if you have any travel plans or plans to work overseas, this piece should help you make a more informed decision about your future work choices!
If you need a refresher on what interest rates are, head on over here. Remember that compound interest can work for you OR against you, depending on how well you plan your finances!
By the end of the day, it all boils down to what your personal financial goals are – while we both advocate the paying down of interest bearing debt immediately, at the same time, we acknowledge that there is value to be had from working overseas. Have a think about what suits you the best based on your personal situation.
Take care and most of all:
Stay positive!