Key's student loan write-off

[AMR]

Is this a good deal? From this financial year we get 10% written off for every voluntary repayment above $500. What sort of returns will you need to get from the stockmarket to beat it? (I'm not sure it's 10% as such...for one the loan is interest free and inflation might pay a big part in the future towards reducing the size of the loan.)

[fungus pudding]

Is this a good deal? From this financial year we get 10% written off for every voluntary repayment above $500. What sort of returns will you need to get from the stockmarket to beat it? (I'm not sure it's 10% as such...for one the loan is interest free and inflation might pay a big part in the future towards reducing the size of the loan.)

No tax implications - no risk, and it's debt reduction over something that sits fair and square on the wrong side of your assetts and liability schedule. That's important for future borrowing - mortgages etc. I'd say it's a very good deal.

[upside_umop]

Its a bad deal...well not a bad deal, but you can do much much better elsewhere with your funds. I'll post tomorrow, because I am running late as it is!

[Corporate]

Interesting topic....Since i've got a big student loan I'll have to have a think about what I will do. Gut feeling though is that it is probably better pay it back as slowly as possible.

[Corporate]

This calculator is pretty useful

http://www.sorted.org.nz/calculators...loan/page1.php

[Mysterybox]

Its a bad deal...well not a bad deal, but you can do much much better elsewhere with your funds. I'll post tomorrow, because I am running late as it is!

Agreed. Best to pay back as little as possible as slow as possible. With 0% interest this debt gets "cheaper"(to repay) each year that passes.
Even with 6.8% interest the salary increase makes it worth going overseas.

[fungus pudding]

Agreed. Best to pay back as little as possible as slow as possible. With 0% interest this debt gets "cheaper"(to repay) each year that passes.
.

That presupposes you can find a 10% after tax - risk free investment as an alternative.

[Corporate]

That presupposes you can find a 10% after tax - risk free investment as an alternative.

Not according to this

Student loan calculator
What you've told usYear of birth1984Existing student loan debt$40,000Total expected additions to your student loan$0Total loan balance$40,000Starting income$45,000Income after five years (expected)$100,000Here's your answer ( at 0% interest )First monthly payment$216 in the year 2009Time to pay off loan7 years and 4 monthsAge when loan is repaid32 years oldTotal amount paid in nominal dollars$40,000Total interest in nominal dollars$0The above results are in nominal terms. Show these results in today's dollars below.
Total amount paid in today's dollars$36,664Total interest in today's dollars$0

Assuming you paid $40k off in one hit you'd pay $36k with the discount.

In seven years I think I could make a return of $664 in todays dollars.

[upside_umop]

OPTION 1

Lump sum payment - 10% discount.

You pay $500 and recieve $550 off your loan (NPV $550).
This yields an instant 10% return, but is this good?
I'll do a couple of calculations and we'll see.

The cost of our loan is nothing (0% interest), so we can borrow and invest where we choose at zero cost. All that has to be made is $50 on that $550 over the next umpteen years that you choose to pay your loan off.

Say we will use a time period of 20 years.

We can work out the internal rate of return, to give a benchmark return that must achieved elsewhere.

Using excel, financial or graphics calculator we input:

n (periods) : 20 years
I% (the rate of interest required) : we'll try find this...
PV (present value - money we have today to either payoff or invest) : $500
PMT (payments - this is our cashflow which is N/A in this calc) : $0
FV (future value - what we hope to have in 20 years after investment) : $550

This gives us a Internal Rate of Return of 0.4777%. What does this mean? It means that if you choose to delay your payment, you need to achieve a nominal (yes nominal, not real!) return of 0.4777%. From the outset this is obviously quite easy given that banks still return ~4%, and high quality bonds ~8%.

OPTION 2

Invest in term investment/bonds with 4% or 8% return (for example purposes)

The second calculation is to work out what it is worth to us to invest in either of these investments in present value terms. To do this, set the IRR = Required rate of return (return that needs to be achieved), and use a bond valuation formula (see http://en.wikipedia.org/wiki/Bond_valuation )

Formula for bond valuation:



Where the payment is equal to either 4% or 8% (less tax):

4% = 500*4%*0.67 = $13.40 per year
8% = 500*8%*0.67 = $26.80 per year

PV(4%) = 13.408((1/0.004777)-1/(0.004777(1.004777)^20)) + $500/1.00447^20

=$713.87 which is greater than $550 - no surprises here.

PV(8%) = $26.80((1/0.004777)-1/(0.004777(1.004777)^20)) + $500/1.00447^20

=$964.58 which is greater than $550 - again no surprises.

What this is saying is that in present value terms, you are better off by $163.87 ($713.87-$550) per $500 at 4% and $414.58 ($964.58-$550) per $500 at 8% if your payment is delayed by 20 years.

So in short, only pay minimum payments (10% of your wage over ~$19000 I believe), and invest your lumps of cash elsewhere.

[Stranger_Danger]

Here is a crazy idea.

Perhaps pay it all off asap, if you can afford to, regardless of the consequences.

After all, a Government is a lender of last resort, or at least should be.

Presumably they gave you a student loan because otherwise you wouldn't have been able to afford an education.

Having received the education - and now profiting from having had an education - why not pay it back asap so the next guy can be lent those funds for an education?

You're either for socialism or against it, and you were definitely for it when you took the money. Witholding nanny states money from the next socialist, in order to invest it, does not a capitalist make.