Why student loans need to come with a serious financial health warning

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We need to treat student debt more carefully.

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We need to treat student debt more carefully.

OPINION: Student loans must come with a serious financial health warning.

The arrears rate on student loans is now, according to credit reporting firm Centrix, higher than that of consumer loans buy now, pay later.

At the end of September, $1.7 billion of the $16.1 billion owed on student loans were debts that should have been paid off, but were not.

Centrix reports just over 15% in arrears, which compares very poorly to the arrears rates it tracks on other forms of lending.

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* Student loan arrest: Debt at ‘crisis level’

At the end of December, it is specified, the default rate of 18-24 year olds on car loans was 3.5%. It was 8.8% for credit cards, 9.6% for personal loans, 10.4% for buy now, pay later.

How did it happen?

Well, there was a fatal flaw in the student loan program (more than one, if you ask some people).

The great student debt experiment began in 1992. Proponents say it increased participation in education. Critics say it has put young people in debt at a time when property prices and the cost of living have soared.

It was this: the collection of student loans from those who stay in New Zealand after their studies is automated, with deductions directly from their salary.

But as soon as a debtor goes abroad, he must make the payments himself. If they don’t, interest starts accruing at 6.8% on overdue payments.

The vast majority of these rapidly growing arrears relate to loans from people who are now overseas – just over $1.6 billion.

A person overseas who owes between $15,000 and $30,000 must make two repayments of $1,000 each year.

Interest, even if making repayments, is added at 2.8% per annum for foreign borrowers.

There are just over 76,000 debtors living abroad with outstanding debt, or about three out of four of those with student debt who live abroad.

Now, it’s fair to say that these adults aren’t meeting their legal obligations by paying off their share of the cost of their higher education, but it would be a big step to cast them all as debt scammers.

How many young people would there be who have put their heads in the sand and perhaps now feel exiled from a country where wages are low and real estate prices are high ?

Some may be really, really struggling. In July, August and September 2021, reimbursements from abroad were 24% lower than in the same period of the previous year.

I hate to think that many of these overseas New Zealanders have given up on ever returning to these shores to help fill the skills shortage, or maybe too scared to return home at some point to see their homeland, or visit sick or dying loved ones.

Student loans as a massive experiment launched by National in 1992.

The results have been a mix of good and bad, and the overdue debt of foreign borrowers is definitely bad.

Like other great experiments in people’s financial lives (KiwiSaver for example), we poorly studied the results for the country and the guinea pigs.

For parents of young people who intend to go abroad after their studies, student debt is a threat to worry about.

It is obvious that people in debt who go abroad, even temporarily, pay a high price.

I quote directly from the 2020 Student Loans Report (the 2021 report is overdue): “Half of borrowers who stay in New Zealand can expect to repay their student loans within 7.7 years while three-quarters can expect to repay within 12.8 years. For borrowers who spend time abroad, half can expect to take 12.7 years to repay their student loans while three-quarters will take 24.8 years.

Those who opt for shorter EOs are less at risk, but it reminds us all that the student loan fatal flaw has real impacts.

GOLDEN RULES

  • Student loans are neither simple nor risk-free
  • Don’t assume your youth are financially competent
  • Remember that responsible lending laws do not cover student loans

About Judith J. George

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