Investing a student loan. Yes or NO?
May 12, 2019
There are five kids in my family and I’m the youngest. When my older brother went to Otago University his education was FREE. By the time I got there in 1994, it was not, user pays had entered the tertiary education sector, thanks to the Government, and the student loan scheme was introduced to help cover the escalating costs. I remember taking part in LOTS of protests against these changes. I also remember the day Winston Peters, wearing a pinstripe suit, came to campus and told us we were all a “bunch of whingers” and that he “grew up in a tin shack and we didn’t know how easy we had it”!
Photo from the book The Crash of ‘87 and words from Winston Peters.
He was the first politician I had ever really heard speak, and he was nasty and horrible and he was booed off stage and off campus. It was at that point that I thought, “if that is the government spokesperson, we are all f**ked”.
Here is a photo of me, at a protest where I think we all ended up in the Proctor’s office. Photo courtesy of the ODT taken by my very own sister who was a photographer there at the time and was sent to cover the protests - only to find her little sister in the front row. Awkward!
Here I am protesting. Those were the days! Photo: ODT
So, I got a student loan. I had no choice. There was no thought in my family of saving up for years to go to university and I’d never really been taught to save up for anything, so why start now? In hindsight, OF COURSE I had other choices but the damage was done.
So when I rocked on up to the Otago University campus in 1994, at the age of 21, the first place I went was probably to the lengthy queue to apply for a student loan. My Dad had encouraged one of my sisters and I to get a loan because “you will never have to pay it back,” advice that came back to haunt us both. So I signed up for as much as I could get to cover both my course costs and living costs. Next, I went to my bank and was given an interest free overdraft of $1,000. And finally I applied for, and after a lot of paperwork proving that my parents were indeed poor enough (refer to comment above which indicates my Dad’s ability to handle money), and was granted, a student allowance (thank goodness). And I got a part time job.
What a terrible mess. What a way to begin my academic career.
Interestingly the biggest debate at The Gardies pub often centred around not the fact we were all starting to get ourselves into debt at such a young age but the UNFAIRNESS that just a few of us got student allowances and the others did not. Many wealthy parents had some great accountants and they managed to swing the system to benefit their kids, others, like my parents, just simply not that well off.
My first year of my science degree could best be described as academically ‘average’, however socially it was “excellent” and in year two there was improvement in both areas! Hoorah! BUT, and I wish I had written down my thoughts at the time, I still must have felt a lot of unease about my financial situation.
My student loans were about $7,500 by the end of my second year, which does not seem a lot now I know but to me the whole thing was just such a struggle. The total cost of my “credit finance rate” which included interest and administration fee was 8.82%. I just remember thinking it completely sucked that not only did I have to borrow money to get an education but I also had to pay a pretty high interest rate on top of it, plus don’t forget that overdraft that needed paying back too because that interest free term did have an end date. I felt that pressure and I don’t know what was going on with me but I just knew in my heart that this would become a major weight around my neck in the future - if I let it.
At the end of my second year, I finished up all of my exams and spent WEEKS finding a full time job to tide me over until the new academic year started the following year.
Getting a job was a whole other story, but long story short, I ended up driving dump trucks in a gold mine (yes I have my truck licence). And when the university year rolled around I decided to keep working because I hadn’t been able to work long enough to save enough for the coming year and I could just see the path ahead where I would fall deeper and deeper into debt. Plus, driving dump trucks was freaking cool!
As soon as I had saved up my total loan balance I headed into the IRD to pay it all off. I actually went to the bank and asked for a cheque, yes a cheque, for that amount. Which they told me would cost TWENTY FIVE DOLLARS. SO, I took out over $7,000 IN CASH and walked on down to the IRD with my pockets bulging and paid it all off. I figured that institutions had made enough out of me already and they would not be getting a penny more. I was buzzing with a feeling of being such a grown up and paying back my debts but unfortunately, the lady behind the counter could seriously not have given a s**t. A sour note in an otherwise perfect day!
I then went back to the mines, working long hours, working hard, saving really hard and after a two year hiatus I returned to Otago, finished my Psychology degree and a Graduate Diploma in Management. I paid for everything in cash and then I left, without a penny to my name, but I was blissfully DEBT FREE.
So, that is MY student loan story and that’s why when I receive questions from time to time from people asking about student loans and whether I think it’s worth taking one on to invest the loan amount and make money out of taking on debt, you better believe, I’m interested!
Now, to be clear, you can’t borrow $10,000 on your student loan and just pop it into your bank account and then buy shares or whatever with it. So what some (and I would imagine very few) are doing is actually saving $10,000 through sheer hard work prior to starting uni and then using a student loan to pay for their course costs and living costs. So, they are proposing to invest their OWN money, whilst borrowing the same amount from the government.
But where could they invest this money to “make it worth their while”?
Via email, I’ve been chatting to someone who invested $23,000 at 3.5% in a term deposit for 180 days, at the end of which they received net interest of $265. That’s $10.30 a week.
I’m sorry, but for all the time, effort and paperwork this end result seems hardly worth the effort. I could find a minimum wage job, work two eight hour shifts over a weekend and get the same amount of money.
So, it's’ worth taking MORE RISK right? More risk (sometimes) equals more return. So, they could invest it in our share market, after all in this last year it’s returned 15%. That is sounding more worthwhile BUT I don’t know about you but my ability to see into the future is POOR, looking back is the easy bit, but projecting forward could see me really inflate the returns and I could end up completely wrong.
And short term investing is risky because markets are volatile and you need a decent amount of capital and a decent amount of time to let money grow. If you are embarking on a three year degree then neither of these things are going to be true. It’s just too risky that markets could take a downturn and you are left out of pocket.
There are very few young students who have the financial knowledge to make a sound investment. And if they did they have probably worked a job since they were fifteen and have a pile of cash in an account earmarked “university” and they would not be foolish enough to put that money at risk for a few extra bucks. Our share market has had fantastic returns but we never know what’s coming next, more growth, or a decline? Chasing higher returns in a short time frame will always involve more risk and sometimes it will pay off and sometimes it won’t.
Investing a student loan and just looking at the math seems FANTASTIC in theory and I’m sure there are just a few people out there that have made it work. But I would wager a guess that there are more people out there for whom it didn’t work for the following reasons:
Number one reason would be that you forget your original hypothesis: Invest the exact same amount of your own money that you have borrowed in student loans. Immediately when your studies end you pay back the amount you borrowed IN FULL and you get to keep the interest or dividends you earned. A “perfect world” scenario!
Get to the end of this ordeal and then think that “oh well, I’ll just pay this student loan down over the next 15 years of my working life” and use any invested money you have managed to scrape together to give you a head start in your new career or as a house deposit - forgetting that the entire point was to make money and then pay the entire loan back and keep the difference.
Mismanagement opportunities are high - that money that you ‘invested’ in a term deposit sure might come in handy when it matures and you need to use “just a little bit” to tide you over...to go on a quick trip to Oz...to fix up your car/bike that just broke, to pay the deposit on next years flat...Pretty quickly you could be left with a student loan AND having spent all the money you invested with the intention you make money off it and then pay your loan back. Any investment must be locked up tight because I kid you not, you WILL find some way to spend it.
People change their minds. That course you signed up for because you were determined to have a fantastic career in IRISH STUDIES might not sound so good midway through your second year and you pivot and take on an entirely new course and start all over again. Having wasted a year and a half of fees.
Interest free loans are only interest free while you remain in NZ. There is a big wide world out there to explore and the day you settle into another country, they will start adding interest to your loan. Many of my friends say they can NEVER COME HOME because their loans have climbed so high they have ‘given up’ on ever paying them back. Sorry Mum and Dad, you will now have to fly to visit them instead. And sorry to the taxpayers of New Zealand too.
You’ve mapped out your three year degree at Otago University, living with your Aunty rent free while you do it...but suddenly a BETTER opportunity to study in Auckland comes up and you don’t have an Aunty in Auckland, so all living costs are now ON YOU. Things just got a whole lot more expensive.
Borrowing to invest might sound doable in year one, you may have worked since you were 15 and saved hard, but by year 2, 3, 4, 5 etc the chances of being able to earn such a big chunk of cash in the holidays that you can then turn around and invest are SLIM to NONE. There are very few people who are consistent enough to do this strategy over a long period of time; most can’t see one year ahead, let alone five.
The person I’ve been emailing this week made the comment that “the banks don’t worry too much about student loans when looking at a mortgage”, so I followed up on that thought. I approached a banker and they said that is not ‘quite’ true. Yes, student debt does matter but they do treat it differently in the sense that they are not as concerned about the size of it for a couple of reasons:
If the ex student stays in NZ then the debt remains interest free.
Repayments of student debt are tied to what they earn and are deducted from their salary and wages so a bank can see what their net income after student loan payments have been taken out are. So, this means that if you are applying for a mortgage, you in effect have a lower salary and this has an impact on the amount a bank will lend.
And if this reduced salary means you have struggled to raise a 20% deposit then the bank is going to hit you with a higher interest rate on your mortgage. Or turn you down and tell you to get a bigger deposit.
And just think for a moment. If you have a $50,000 student loan and then you take on a $350,000 mortgage, $400,000 of debt is NO JOKE and it will sap a large part of your income each and every week. Perhaps you might get married too and is your new spouse bringing student loan debt into the partnership as well? This combined debt will stay with you for the next 30 years plus. If you let it.
A student debt whether you have taken it on to use it to pay for your education or taken it on to invest it muddies the waters. It’s the same as any type of debt, it just makes things more complicated down the track.
So what should a student do?
Rewind to your very first job. When you get your first pay cheque, save 75% of it in a bank account marked “University”. Make that a habit. When uni approaches, apply for scholarships, apply for the student allowance, apply for anything you can that might get you a reduced rate. Get a part time job when you are studying, preferably an online side hustle that can work around your study. Ask your parents if they are able to help support you on a weekly basis. Make it your firm goal to borrow as little as humanly possible on your student loan, and make it your intention to pay it back as soon as possible too.
And when you are at uni, enjoy it, it is a once in a lifetime experience and you will make friends for life and learn and experience things you never could have imagined. But it is just one, quite intense, part of your life. And you don’t want a financial hangover from it dragging into the next ten or 15 years.
When I got a student loan in a way I had, I won’t say no choice, but I had LESS choice. The introduction of user pays came up and I didn’t have enough lead in time to prepare for this (nor the financial knowledge that I should prepare). Had I had ANY financial education I could have worked the job I was doing before I started uni at the age of 21, harder and saved harder, but all I knew to do at that time was work, save up for something and spend EVERYTHING. Repeat. The couple of years I worked between finishing school and starting uni I paid for my flat expenses, I actually studied at Polytechnic at night (another story there too), paying cash for my course costs and then I went on a three month trip around Oz with a mate. I continually spent everything I earned meaning I started uni with $0.
We have normalised debt as a way to buy the things we want, as a way to invest, as a way to leverage off something we already have, as a way to get ahead. And it’s been pointed out to me that many people are COMFORTABLE with this, have thought through all the pro’s and con’s and are fine with the level of risk, but I know I think a little different to most. And I think that maybe instead of spending your first month at uni scheming over how to make $5.09 a week by some convoluted borrow to invest scheme, get learning your course instead. People try to get all fancy on the little stuff, while ignoring the big stuff, like the career you are creating for yourself by attending university. The very few who do borrow to invest would get far better returns from working out how they could scrape together $1,042 a year, or $20 a week, to put into their KiwiSaver so they get the government contribution of $521 a year - a 50% ROI!
Interest free student loans were NOT designed as a financial investment portal, they are funded by government money (taxpayer money) to make it possible for those who can’t afford to pay for an education with their own money but given time, and a good education, they will be more than able to pay it back in full and contribute to our economy via their salary and general awesomeness.
My loan was not interest free, which put even more pressure on me and made me make the choices I made to take a two year break, pay it off, and come back and finish up, with cash. The fact that our education costs are so high and ever climbing SUCKS when generations gone by got it for free, but hey, that’s life, so suck it up (or march and protest about it in an effort to make some changes). Now that I’m a taxpayer I’m more than happy to see my tax dollars support tertiary students - MORE THAN HAPPY - just don’t try and work the system for your own gains, because I would think that most who do try this are just not quite smart enough. And for goodness sake, when you are finished, PAY IT BACK so that there is more money back in the pot to lend to the next generation coming up behind you.
And THAT is what I think about using your student loan as an investment!
