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

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

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

At the end of September, $1.7 billion of the $16.1b owed on student loans was debt that should have been paid off, but had not.

Centrix says at just over 15% arrears, that compares very poorly with the arrears rates it tracks on other forms of loan.

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* Student loan arrest: Debt at ‘crisis level’

At the end of December, it says, the default rates for 18-24 year-olds for 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 this happen?

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

It was this: the collection of student loans from those who remain in New Zealand after they study is automated, with deductions straight from their salary.

But as soon as a debtor heads overseas, they have to make payments themselves. If they fail to do so, interest starts compounding at 6.8% on overdue payments.

The vast majority of those rapidly-rising arrears are on the loans of people who are now overseas – just over $1.6b.

Someone overseas who owes between $15,000 and $30,000 must make two $1000 repayments each year.

Interest, even if they are making repayments, is added at 2.8% a year for overseas borrowers.

There are just over 76,000 debtors living overseas with overdue debt, which is around three in four of those with student debt who are living overseas.

Now, it is fair to say these adults are failing to meet their legal obligations in repaying their share of the cost of their tertiary education, but it’d be a big leap to think of them all as debt-dodgers.

How many would be young people who have stuffed up, stuck their heads in the sand, and may now feel themselves as exiles from a country of low wages and high house prices?

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

I hate to think that many of those overseas New Zealanders have given up any idea of ever returning to these shores to help with the skills shortage, or may be too afraid to come home at some point to see their homeland, or visit sick or dying relatives.

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

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

Like other grand experiments in people’s money lives (KiwiSaver for example), we’ve done a poor job of studying the outcomes for the country, and the guinea pigs.

For parents of young people who intend to head overseas after studying, student debt is a threat they need to worry about.

It’s patently clear that people with student debts who head overseas, even temporarily, pay a high price.

I quote directly from the 2020 student loan report (the 2021 report is overdue being published): “Half of the borrowers who remain 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 overseas, half can expect to take 12.7 years to repay their student loans while three-quarters will take 24.8 years.”

Those who go on shorter OEs are less at risk, but this is a reminder to us all that the fatal flaw in the student loan is having real-world impacts.

GOLDEN RULES

• Student loans are not simple, or risk-free
• Don’t assume your young people are financially competent
• Remember responsible lending laws don’t cover student loans