Student Loans – No Interest, Doesn’t Mean No Cost

I am guessing the journalist on this story was not a student in the mid to late 1990s when you could download your entire living allowance money in one go.

That meant that many people used their money to buy cars, travel, stereos (back when CD players cost money) and alcohol of course.  Me, I bought magic the gathering cards with my first loan money (I was 17 and a career in financial advice was a long way away in my own defence).

So, none of this surprises or worries me particularly, students have spent their loan money on whatever they want for a couple decades now.  Sure there is the issues that this money is only for course costs, but that’s minutiae more than anything.

With student loans essentially free now, there are some bits relevant to students to think about.

1. Just because it has no interest, does not mean no cost. You have to pay this back when you are earning more than $19,000 a year, at 12% of every dollar you earn above that. This is going to take you a few years to repay, and the more you borrow, the longer it will take.  The longer it takes, the longer before you have the money in your pocket to do more fun things.
2. It’s going to impact your ability to go overseas with no worries. If you go overseas, you need to pay the loan back at a higher rate and so you cannot quite so carefree head off on your overseas experience.
3. The expense makes it harder to buy a home. The balance of your loan is not taken into account by the bank, but they will take the actual cost into account. For example, if your loan payment is $100 a fortnight, they take that off your available money, which could impact your ability to get the loan you want.
4. Saving will be harder, as you have less surplus funds left each pay, making saving for goals take longer or require bigger sacrifices.

The government who made student loans interest free stated that no one would borrow more money.  And they were proven to be very wrong, as governments who ignore incentives always are.  Borrowing has gone up, and voluntary extra repayments dropped 99% when the changes came in.

There is a block of young adults, (anyone who was studying in 2005 and past), who has a bigger loan than those before them, and now has to deal with it.

So, before booking that stripper on your student loan, thinking about how long it’s going to take to pay back.  Are they worth it?