Student loans and opportunity costs

You may be surprised to learn, as I was, that it is possible to amass more than $100,000 in student loans. I had heard of this happening more often overseas, but apparently there are close to 4,400 people who have done just that here in New Zealand, according to Inland Revenue.

Thankfully the biggest group (149,000 or so) have borrowed in the $5,000 to $10,000 range, which feels much more manageable. Because while a student loan may feel at first as if we’re being paid to be a student, it’s all money that, of course, has to be eventually paid back.

Here at Sorted we think student loans are ‘smart debt’ – as opposed to the dumb kind where you pay high interest and fees for months and even years for items you didn’t really need in the first place. With your student loan, think of it as investing in an asset that will become more and more valuable over time: you and your career.

Since your student loan is interest free (unless you head abroad), there’s less of a rush to pay it back. This year, however, the government did move to require former students to pay back their loans at a faster clip, with 12% instead of 10% being deducted from your wages when you start working and earning over a certain threshold.

Any debt to repay, whether interest-free or not, is a drag on the finances. The question is: how much do you need to borrow these days for a degree? And how can you be sure it’s worth it?

What will it take?

Setting aside living expenses for the moment, let’s look at the main university costs to be covered each year.

• Typical course fees: $5,000–$7,000
• Textbooks: $500–$1,000
• Student services levy or fee: $540–$726

Which means that, if we’re looking at how much different degrees cost, here’s what it will take to graduate. It’s a fair bit.

• Bachelors: $21,500
• Masters: $15,000
• Doctorates: $22,500  

How long to pay it all back?

In 2012, most eligible students were taking advantage of the student loan scheme (73%), many for the first time (27%). The average amount they were borrowing was $7,800. Of course, that was only for 2012 – over the years the loan amounts certainly add up. At 30 June 2013, the average loan at Inland Revenue was just above $19,000.

Just a bit more than half of repayments (57%) were collected through the PAYE tax system in the 2012–13 tax year, and the rest directly from borrowers looking to pay back their loans early.

But how long does it generally take us to pay them back? For those who finished their studies back in 2009, for example, Statistics New Zealand estimates that those who are based here in New Zealand will take 6.7 years on average to pay back their loans. For those who are not always based in country, it will on average take significantly longer: 12.1 years.

Where does it all lead?               

Another way to look at this is to look at what you might earn in the years following study. Let’s say you finished studying in 2011, when the median salary nationally was $34,200. Here are some Ministry of Education median salary estimates for two years and five years afterwards. Those degrees make a difference.

What field of study you choose, and whether your career is highly sought after in today’s world, is also important. Have a look at Occupation Outlook, which has just been put out by the Ministry of Business, Innovation and Employment. Along with the Careers New Zealand website, the report is one of the first places you can look when you consider possible career options. It shows what your chances are of getting a job once you have finished studying, with dashboard dials that show potential income, fees, and future job prospects for 50 key occupations.

So for example, while things are not so rosy for actors (low income, low fees, low prospects), they are decidedly better for software developers (high income, low fees, high prospects). There are even growth forecasts for some careers through to 2021.

It’s good to know what you’re borrowing for, and whether you’ll be able to use your studies to launch your career. Think of it as an investment in yourself.