Paying off your student loan
When signing up to study at a tertiary level thoughts of career prospects, learning about subjects you’re really interested in and student parties are most likely top of mind. For most New Zealanders, university or polytechnic life also means signing up for a student loan.
Debtfix advocates paying off the most expensive debts first and the advantage of a student loan is that while students remain in New Zealand, they have an interest free loan. It doesn’t get much cheaper than that.
However, there are other considerations about easily attained student loans that enable higher education, but also launch many young adults into serious debt.
Student loan repayments are taken from all income by IRD
When a person with a student loan starts earning a wage or salary over a threshold, they are required to make loan repayments. IRD automatically collects repayments via the PAYE system that collects tax from wages and salaries.
What if I am still studying?
Repayments may start if you have a job while you are studying. It depends on; how much you earn and if it is your main or secondary job.
How much are student loan repayments?
Repayments are 12% of every dollar you earn over the repayment threshold. The repayment threshold depends on how often you are paid.
As at February 2022 the thresholds were:
Weekly: $390
Fortnightly: $780
Four-weekly: $1,560
Monthly: $1690
Are there any exceptions to making student loan repayments?
Yes. People can apply for an exemption to making student loan repayments if they are full-time students, living in New Zealand and expect to earn less than the annual repayment threshold. This could happen when you earn above the payment period (weekly, fortnightly, four-weekly, or monthly) threshold but you only work for part of the year, perhaps during the semester or summer breaks.
Are student loan repayments made if I am self-employed or run my own business?
Yes. People with student loans who run their own business will need to arrange loan repayments themselves, as it is not automatically deducted from their wages or salary. In fact, any additional income from things such as dividends, interest, rental properties is included in your adjusted net income and is included in your end-of-year repayment obligation.
Currently, repayments for self-employed people and any other income, are also 12% for every dollar over the annual repayment threshold.
Can I make additional or bulk repayments to my student loan?
Yes. However, when your student loan is interest free it may be more worthwhile to invest any surplus cash you have into something that will increase your total income or reduce any other debts you may have. On the other hand, if you want to apply for another loan, it may be beneficial to repay a bulk sum towards your student loan and increase your borrowing capacity. You can also increase your regular payday repayments through your employer or set up a direct debit to IRD.
Will student loans impact on my ability to borrow?
Yes. When you apply to borrow money, perhaps a mortgage to buy a house, a car loan or even a small personal loan, your income and all your existing debt will be reviewed. Therefore, if your student loan has a significant outstanding balance and 12% of your income will be required for repayments for a long time, it will reduce the amount of money you can borrow.
What happens if I miss student loan repayments?
If you are late making a repayment the IRD can charge late payment interest. This is only charged on the overdue amount, which must exceed $334. The interest will continue to be charged until you catch up with repayments. Currently, the late payment interest rate is 7%.
Can I apply for hardship when I can’t repay my student loan?
If you are late with a student loan repayment you should contact IRD and arrange a payment plan, which could reduce the interest rate to 5% if you stick to the repayment plan. You can also apply to decrease your regular repayments if you are financially struggling due to the student loan deductions. Debtfix can help you with this process or you can go directly to myIR or the More section of your student loan account.
Are student loans still interest free if I travel overseas?
You can travel outside of New Zealand for less than five to six months and your student loan can remain interest free. When based overseas you need to continue making minimum repayments or apply to temporarily suspend repayments. The minimum repayment required can increase with the addition of interest or penalties. You become overseas based, when you depart New Zealand and after 184 days, you are out of New Zealand for at least 153 of those 184 days. Then your student loan is no longer interest free and the interest is backdated to the day after you left New Zealand.
Our young adults enter significant student loan agreements at a time when they have limited financial literacy, minimal life experience and loads of freedom. Add a student bank account with a free overdraft, a credit card and a couple of buy now pay later deals, and you have young people ingrained into borrowing lifestyles.
If you need help sorting out your student loan, contact the Debtfix Crew now. Make your education achievement work for you and not against your financial freedom.