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Put cash into student loan or KiwiSaver?
 
Q.        I am a final year student with $4,000 in my KiwiSaver account. I also have a student loan of around $10,000. With part-time work I have managed to save $1,000. Should I use that to pay off part of my student loan, or put it into my KiwiSaver? Is it worth it for the member tax credits or would the interest on my student loan outweigh those benefits?   
 
A.         Generally as a rule of thumb you should use surplus income to pay off debt before saving, unless you can show that the savings will give you a better return. 
 
Let’s look at the numbers. If you put $1000 into your KiwiSaver account, assuming that’s your total personal contribution for the 12 months to 30 June 2013 then you should receive $500 from the Government in Member Tax Credits. If you have already made some contributions (yourself, not employer contributions) the smart option is just to top up those contributions until they total $1042. You should then receive the maximum $521 in MTC. Contact your fund manager or register online at ‘My IR’ on the IRD website to find out exactly how much you have paid in since 1 July 2012. 
 
If paying $1042 to KiwiSaver will provide a 50% boost by way of MTC, is this better than paying off some of your student loan? It depends on whether you plan to go overseas or stay in New Zealand once you finish studying.
 
Currently a student loan is interest free as long as you are living in New Zealand. Once you start working and your income is over a certain threshold, you will be required to start repaying the debt. 
 
If you go overseas for more than 183 consecutive days, then your loan will start accruing interest from the day you leave New Zealand. Currently the rate is 6.4% but will drop to 5.9% from 1 April 2013. This is $590 on $10,000 per year and compounding, so your debt will grow substantially if you make only the required repayments, particularly if interest rates go back up.
 
Inland Revenue requires overseas students with loans of $1000 to $15000 to repay $1000 in two $500 instalments in March and September (and there are late payment penalties). On their website you will find a useful calculator to work out how much interest you will pay if you only make the required repayments. It could take you 17 years to pay off a $10,000 student loan and you will pay $6026 in interest – more if interest rates go up. So the sooner you can pay the loan off the better as you will save a lot in interest. 
 
But wait - there’s more! Do you know about the voluntary repayment bonus? Currently anyone who makes a voluntary early repayment of more than $500 on their student loan gets an extra 10% taken off their debt. So repaying $1000 will take $1100 off your loan.
 
You will need to act fast. The voluntary repayment bonus is being scrapped from 1 April 2013. Students have just a few days to take advantage of this bonus. Indeed if there are any parents or grandparents out there who have the means, this is an opportunity for you to help the younger generation.
 
If you have no plans to leave the country to work overseas, then putting your $1000 savings into your KiwiSaver account in order to get $500 in MTC is an attractive option. 
 
Your decision will depend on your plans for the future, your expectations around long term investment returns on your KiwiSaver, your confidence that Government policy on student loans will not change and whether you would be happier reducing debt or increasing your long term savings. It’s your call.
 
 
Shelley Hanna is an Authorised Financial Adviser FSP12241.  Her disclosure statement is available on request and free of charge by calling 8703838.  The information contained in this article is of a general nature and is not intended to provide personalised advice.  If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.
 
As published in the Hawkes Bay Today 26 March 2013