A cunning plan to help pay for a child's education...
Sep 1, 2019
I’ve been interviewing people for my podcast and every time I do this I learn something new from each and every person I speak with. But a recent conversation really had me thinking because it presented a completely new and different view on how I could help my daughter (or you could help your child) through her tertiary study once she finishes school.
So, full credit for this goes to Tracey and you will hear more from her soon when I release her podcast episode. Just a heads up: she has an incredible story to tell.
I have mentioned before that Jonny and I do plan to help our daughter cover some of the costs of her tertiary education. Goodness knows what she might want to do, she is currently only eleven, but it’s on our radar that in the future she will most likely do some form of study and that she, Jonny and I need to be financially prepared for this well ahead of time. I talk in detail here How I Help My Daughter Invest about how we help our daughter learn about finance and investing at this young age and how we are constantly educating her around money. We think that as parents this is our job and much to her eye-rolling horror, we take our job pretty seriously!
Earlier in the year I also blogged about my thoughts on investing your student loan and I read it back again as I was preparing this blog post. Yep, I sure am an expert in my own opinions and you can read them here: Investing a student loan. Yes or NO?
Because I’m averse to debt, my thinking had always been to pay cash for her fees as they come due for payment. But thanks to Tracey, I’ve now got a new strategy to mull over since I heard about this ingenious plan, indeed “a plan so cunning you could put a tail on it and call it a Weasel” (thanks Blackadder #oldschool).
A plan so cunning you could put a tail on it and call it a Weasel
Let’s say she decides to do a three-year degree at Otago University, the closest campus to us.
Leading up to beginning her study our expectation will be that she gets a part-time job in her final year(s) of school and that she saves at least 75% of this pay and earmarks it “university expenses”. During the holidays prior to uni starting and throughout her three-year course semester breaks, she would be expected to get as much paid work as she could and save the bulk of that money too. This money would be to pay her living costs (housing, food and transport etc) and we would likely help her out in her first year by part paying these costs too. Remember that at this point in time (2019) the first year of study is free in our wonderful country so she will ‘just’ need money for living, a big enough expense in and of itself.
She then takes out a student loan
This is the part where it gets interesting, for each year of study, she takes on an interest-free student loan (eat your heart our America) to cover all of her course costs which includes course fees and study materials. She borrows the lot (that is a sentence I never thought I would write).
The payback begins
At the end of her study, when she graduates and gets a full-time job paying over $19,448 (before tax), the government will then begin to deduct student loan repayments from her salary. They take 12%.
This example shows how much she would pay back per year once she is working:
Student loan repayment calculator on the Inland Revenue website.
You can find this calculator at: Student loan repayment calculator
Each month Jonny and I would then personally reimburse her $288 ($3464/12) until she pays off (and we pay her back) the entire loan amount in five years and nine months. If she chose to make additional payments to the IRD, we would reimburse her those amounts too.
Jonny and I already have our finances in order and have worked hard to be debt-free which allows us to invest for our own future and future retirement, we are not there yet in terms of how much we think we need, but being in our current position allows us to also factor our daughter into our calculations. We have already started putting money aside but during the time that she is studying this gives us ‘extra’ time to put money aside, invested somewhere where it is earning a good return (because the return just has to be higher than 0% interest); we currently invest into an Smartshares NZ Top 50 Index fund (which currently has an annualised return of 15% over a five year period and after tax and fund charges).
She pays the government, we pay her
Then as she pays her loan down via her salary, we pay HER back with the money we have set aside, leaving the remainder to continue to grow in our own accounts and be exposed to time in the share market. Each month she will end up with a FULL paycheque.
Our daughter is a planner, she likes to know what is coming up and how she should prepare for it. So, as a family, we would put some expectations in place, we can’t boss her around, she is her own person, but we can hopefully come up with a workable family plan:
Before beginning, she needs to have sussed out the course she wants to take and be happy with her choice (not like me who embarked on a Psychology degree for some pretty vague reasons - I should point out that it all turned out alright in the end).
If she fails a paper, she has to pay that cost.
If through indecision and buggering around she switches her degree partway through, she can cover the cost of any paper that is non-transferrable to her new degree choice. University is such a short blip in your lifetime, we want to work hard, complete what she started, enjoy herself and then move on to the next phase of life.
Tracey also made the point that if her child then chose to go overseas to work, after six months their student loan would begin to attract interest (currently 4%), at which point she would just reach over and pay the remaining amount off from cash they had set aside.
You don’t get into something unless you have a plan to get out
Tracey also pointed out something else that stuck with me: “you don’t get into something unless you have a plan to get out”. And getting an education is a prime example. How many school leavers are ‘advised’ that when they go to uni they just borrow the money to do it? Many. How many are educated about what happens at the end of that process? Not many. That’s why we would be very clear BEFORE she began about what she is taking on, what we would and would not pay for and how she clears the debt at the end of her study. Forewarned is forearmed.
Jonny and I have done and will continue to educate our daughter about how to use money as a tool in life. If and when she goes to uni our thinking would still be that she borrow as little as possible and live within her means.
It’s another seven years before her going to university is even a consideration, so really, who knows what the future will bring, but I have to say, I really got a lot out of hearing about this method and it’s given me real food for thought and has helped my own budgeting. She might get to 18 and decide her parents are complete morons who don’t know a thing and she might go and do things her own way, however she might also see we have her best interests at heart and that we want to help her succeed in life. The government might change the current system. Who knows! If I’m still blogging in 2026 I’ll let you know!
I thought you all might enjoy hearing about this concept too, that it might give you food for thought as well? So thanks Tracey for sharing your wisdom and giving me the go-ahead to share it with fellow Happy Savers.
