Author Topic: Interest-free student loan  (Read 2843 times)

Miss Webb

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Interest-free student loan
« on: August 31, 2014, 04:26:40 PM »
Hi,
Apologies if this question has already been addressed; I'm new to the Mustachian forum and after a little bit of advice.

Currently my only debt is my c.$40k student loan. In New Zealand we don't have to pay interest on our student loans. I'm paying it off at the minimum amount, which is about 8% of my income, directly debited from my pay. I'm also saving 8% of my income into a kiwisaver account (401K equivalent I guess) and saving another c.10% of my income into a personal savings account earning 4.5% interest. Both of these I intend to put toward a house deposit within the next 5 years.

If you were in my position would you pay of the interest-free student loan as quickly as possible by diverting more (interest earning) savings towards it or would you continue to pay it off at the minimum?

Cheers,
Miss Webb

Gin1984

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Re: Interest-free student loan
« Reply #1 on: August 31, 2014, 04:47:25 PM »
Personally, I don't pay off zero percent loans, so I would put your money other places, if I was in your situation.

MDM

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Re: Interest-free student loan
« Reply #2 on: August 31, 2014, 09:24:52 PM »
+1

Why would you pay more on a 0% loan instead of putting money toward better uses?

MGeegs

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Re: Interest-free student loan
« Reply #3 on: August 31, 2014, 10:27:07 PM »
Miss Webb we are almost in the same situation! I am not paying any more than the minimum on my loan. I would prefer to save any extra money or invest it.

I thought the min. payment was 12% though?

Dicey

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Re: Interest-free student loan
« Reply #4 on: September 01, 2014, 01:22:10 AM »
Ditto for the don't pay it off early vote. If it's really bugging you at any point, you could start a sub account which you earmark for paying off the loan and then just pay it off in one whack at the end. In the interim, it could serve as your EF and perhaps help you sleep a little easier. A higher priority at your age is to stuff your retirement accounts full. The earlier you start, the less you have to save.
I fell in love with your city when I visited in 2010, before the quake. I understand the losses were devastating. I hope things are beginning to return to normal.

Miss Webb

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Re: Interest-free student loan
« Reply #5 on: September 01, 2014, 09:39:24 PM »
Thanks guys for the advice. If I could pay it off at a lower rate I would. You are right MGeegs the repayments are about 11-12%.

Diane C I will seriously consider your suggestion of saving and paying it off in full from a sub account. And thanks for your kind words about Christchurch. Things are getting back to normal but the roads are still quite messed up which makes the cycle to work somewhat chaotic.

lemanfan

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Re: Interest-free student loan
« Reply #6 on: September 01, 2014, 11:14:26 PM »
Will the student loan affect your ability to get a mortgage?  If not, I would not pay off an interest free loan quicker than necessary either. :)

theadvicist

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Re: Interest-free student loan
« Reply #7 on: September 02, 2014, 02:47:16 AM »
I agree with everyone else not to pay off a 0% loan early.

Also, something to bear in mind: in the UK we pay our student loans back directly from our pay (as it sounds like you do). My husband asked why I don't include his loan in our net worth (as a negative amount). The answer is this: He only repays it if he is working, and if he earns over a certain amount. So I see it as more of a tax. In the event that he doesn't have a job for any reason, no payment will be due. I don't count other future tax liabilities against our net worth, so I don't count this either.

I don't know if your loans are also only repayable if you are in work, but if that is the case, I would caution against paying it off early, just in case you are ever unable to work for any reason.

Miss Webb

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Re: Interest-free student loan
« Reply #8 on: September 04, 2014, 12:13:40 AM »
Paying off student loans in NZ is basically the same as another tax, the loans are even managed by Inland Revenue (the tax department). The same situation as Theadvicist describes.