Author Topic: Zero Percent Sudent Loan  (Read 1448 times)

strandystrand

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Zero Percent Sudent Loan
« on: July 10, 2016, 06:21:49 AM »
Dear Mustachians,

I live in New Zealand. We have a government student loan system that is 0% interest as long as I do not leave the country for more than six months of a calendar year.  If I do this the interest rate changes to 12% of the remaining balance, from the date of departure till I return. The original plus whatever interest incurred becomes my new 0% interest balance after I return.  I have $52,000 New Zealand Dollars (~38,000 USD) in student loan debt.  A portion of my pay check depending on income level (currently 3%) is garnished by the government to go toward repaying my loan. 

As far as I can tell I think I should continue to pay this minimum 3% of my pay check while investing the money I would have paid above that amount (in amounts as if, as MMM would say, I was being stung by a swarm of bees and paying would make them stop) and earn money off of it instead. 

A few questions:
Do you think that the benefits of earning interest on the money earmarked for paying off the loan justifies the risk of not officially paying it off?  (If I somehow spend (not likely!), lose, or otherwise misplace the loan money I am taking care of, the government will still want the total amount owed on their books).

Should I continue paying the minimum 3% of wages even when the amount of money I have collected equals or exceeds the balance of the loan or should I pay back the full amount and start collecting retirement money from scratch?  It makes sense to me that unless I am moving overseas I should not pay back more than the minimum 3% of my pay and if I am moving I should pay the total of all the money saved to reduce the interest payments and perhaps (hopefully) clear the loan entirely?

Have I got the right idea or is there something I'm missing here?

Thank you for your time.

« Last Edit: July 10, 2016, 06:36:09 AM by strandystrand »

WerKater

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Re: Zero Percent Sudent Loan
« Reply #1 on: July 10, 2016, 06:58:03 AM »
Should I continue paying the minimum 3% of wages even when the amount of money I have collected equals or exceeds the balance of the loan or should I pay back the full amount and start collecting retirement money from scratch?  It makes sense to me that unless I am moving overseas I should not pay back more than the minimum 3% of my pay and if I am moving I should pay the total of all the money saved to reduce the interest payments and perhaps (hopefully) clear the loan entirely?

Have I got the right idea or is there something I'm missing here?

Yes, that is precisely how I would do it. Keep your money working for you as long as possible. Once you move overseas (and I suppose it is unlikely that this will sneak up on you), liquidate enough investments to pay it off, since the investments will probably not beat a guaranteed 12% return.
It sounds to me as if there is actually no risk (except moving, which you have control over) to not paying the loan off. If you lose your job and have no income, you would not have to pay anything toward the loan anyway, if I understood you correctly.

strandystrand

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Re: Zero Percent Sudent Loan
« Reply #2 on: July 10, 2016, 07:03:05 AM »
@Werkater

Thanks, you have understood the situation correctly.  I'm just a cautious person and I wanted to idiot check the plan before making big changes.

human

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Re: Zero Percent Sudent Loan
« Reply #3 on: July 10, 2016, 07:15:30 AM »
Just don't do like my brother and keep the money in cash. I tried convincing him not to pay off his piddling mortgage and invest. It seems I made a mistake because now he's undecided. He would have been better off paying the mortgage than doing nothing . . .