Progress Report on You Can Avoid Student Debt
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In November 2016 I wrote about student debt (You Can Avoid Student Debt) and in that blog I spoke to a young woman who was in the process of finishing up her final year of school and was preparing to leave home and begin a two and a half year course at a tertiary institution in Christchurch. Having spent quite a number of years at University and Polytech myself and unwittingly accumulating debt, which I have since paid off, I was really interested to hear how she had been preparing herself for the potentially expensive adventure ahead.
Almost one year on I caught up with her when she was home for a two week break and we sat down for an update. She had just had a night on the turps so I fed her a high sugar, high fat breakfast as we spoke. Ok, so that part of being 18 still has not changed.
When we spoke last she was quite vague on the details of how much her course was going to cost, how much her accommodation would cost and how long her upcoming academic year was. Thank goodness she is a lot sharper on those details now.
The summer before she left she worked full time and managed to leave home with $6,000 in savings. Herein lies her first regret. If she could go back to four years ago when she started getting part time jobs during the school year and full time over the holidays she definitely would have started to put money aside in her account instead of spending it all. The reason why this never happened was because she didn’t know what she needed to know, she had no idea at the time what she could/should be saving for so she simply spent all of the money that came in.
With her $6,000 in the bank off she went to study and she described the first 20 weeks out of home quite succinctly: Party party party, drink drink drink!
Now for her next lesson, learning how to budget. When you live at home you watch your parents head out the door to trade their time for money; aka work. Then the cupboards magically fill up with food, cars fill up with fuel and the lights stay on. It is now the end of September and she has six weeks of study remaining. And $500 of the original $6,000 remaining…
She did some math at the start of the year $6,000 / 38 weeks = $157 per week to spend. This would be her food money, going out money, car money etc. She is a really bubbly social young woman so did a lot of eating out and enjoyed the freedom she had never had and as a result spent without thinking about it. For example she would buy groceries and then go out for lunch. She said there was a lot of unnecessary spending and not thinking things through with money, particularly when she was drunk.
But by the end of the second term she realised she had overspent her allocated $157 many many weeks in a row and put on “fresher 5” weight (an extra 5kg), done no exercise, was drinking to the point where it was over the top, was feeling unhealthy and just didn’t feel like her old self. And she was extremely homesick. She realised that moving out of home gives you freedom, but the novelty soon wears off and you soon realise it’s not such a big deal anymore. She cut back her drinking and spending and began to be more clever with what she does. Extended family now play a big part and each week she dines with them at their homes so she can enjoy some family time and also to reduce her costs a bit.
She also took on a small job. She works 5 - 8 hours per week and gets paid $15 per hour. It felt great to have a bit of income coming in but she soon started to realise that a chunk of that money gets used on fuel to drive to and from her job. But at the end of the second term she worked out that if she was extremely careful she could live on that money alone and to add to the pot a little more she has picked up other small one off jobs where she can.
While she is not fortunate enough to get a student allowance because her parents earn above the threshold of $91,000, she WAS fortunate enough to pick the right parents and they have been extremely supportive of her this year for which she was really grateful. They give her $50 a week to go towards her food costs and will pay for her petrol when she wants to come home for a visit. With $207 a week to spend she is getting by.
Her first year of study was reminiscent of mine. Both of our cars got nicked! She had no car and apparently no way to get around so her parents got her another cheap cheap one to get around in. See what I mean about having the right parents? A week after that they recovered her old car dumped just 1km away... Mine didn’t have quite such a happy ending and got smashed up and written off so I was back to walking for the rest of the year until I could scrape together enough to buy another one.
What about the rest of it, like the course she is taking and accommodation costs etc?
She lives in a central city apartment accommodation, right beside where she studies. Her rent is $190 and includes electricity, water, rates and get this, a cleaner! When I compare this with the rubbish accommodation I experienced in Dunedin, I am very envious! It seems like a reasonable cost for accommodation which has so many inclusions.
This is where her student loan comes into it. Her loan is called “Study Link” and directs $178 a week into her account to go towards her accommodation costs which are due every Thursday. Instead of giving a lump sum each semester it is released weekly which is a good idea for helping a new budgeter. She tops this up with her own savings to cover her total accommodation costs each week.
Therefore, each week she goes $178 further into debt, totalling $7,220 for her 38 week term.
Her course fees are $10,000 and will be the same next year she tells me. She is using her student loan to pay for these as well.
To help her budget her debt accumulation and expenses her parents are actively involved in her bank accounts. She has a couple of accounts and some of them are locked to her and she needs to ask her parents to move money around. This strategy has been effective in stopping her getting drunk and spending it…
They are helping her budget for car expenses where she puts $5 a week aside, for trips to another city to see her boyfriend, for ensuring she has enough to pay her accommodation weekly etc and also to ration out her savings each week.
How is she going to repay these loans of $17,220 that she is in the processes of acquiring this year? Has this debt given her a bit of a wake up call and she is going to work her butt off over the summer to reduce the amount she has to loan next year?
Short answer is NO...
She has a summer job lined up again but once again this money will go towards her ‘living costs’ of groceries, dining out, drinking beer, driving her car etc.
Long answer is KIND OF...
She has now applied to be a Residential Assistant at the accommodation she is living at this year. In return for 15 hours a week paid work at the facility she will be given free accommodation, saving her $190 each week. If she can get this job that will knock a major expense off her budget for next year saving her $7,220 that she does not have to borrow.
She does not feel any pressure to avoid taking out a student loan.
She is not as worried “as she thinks she should be” about paying them back and the fact that they are interest free further reduces any pressure. She feels that she is young and has no commitments at this point in her life and when she is finished her study after her two and a half year course she intends moving home and living with her parents. Really? I asked her to get back to me in another two years and see how she is feeling about that plan!
I asked her what she would do if she had the opportunity to return to her old high school and advise the final year students. Her advice would not be money related but she would tell kids to make sure the course they are doing is right for them because tertiary study is very pressurized and a big step up from school study. It sure is.
She is a fine young woman and I really enjoy chatting with her but I could not help but put my daughter in her shoes and think about what I have learned from our conversation. I think she is naive about the impact of debt on her future. Speaking from experience one door closes and another opens and when you finish study with debt the path is not free and clear to quickly pay it all back. There are always new expenses to suck up your money and it is hard when you are fresh out of study to find a job that pays well enough to service any debt.
She has the makings of a good budgeter and I’m so pleased that her parents are playing an active role in helping her ration out her money. But she also is a very good consumer and has been on the consumer merry go round for a lot of years already: Make Money: Spend Money: Repeat.
It would be great to see young men and women heading off into study better financially prepared. Many have had after school jobs in the years leading up to study, but where did all that money go? $17,770 is not an insurmountable amount to save up and even if you are on the minimum wage, with a savings mindset from the get go you could have a large chunk, if not have all of your expenses covered.
What did I learn from this that I can use to help my daughter?
Here is how it’s going to play out. When she starts to earn money, she will pay half of it directly into a savings account. No excuses. I know this is going to happen because we are doing it already. She is currently nine, soon to turn 10 and the rule is that if she earns $2, she saves $1 of that. It goes into an account for her and is earning interest, albeit a small amount, month after month. She is learning the power of compound interest in real time.
IF she heads off to tertiary study once she finishes school - I don’t know what the future holds for her, we don’t yet know what she is saving for - she is going to be prepared financially. I want her time and energy spent on the reason she is there, TO STUDY, not on how to scrape together enough money to get by week by week. I made poor choices when I headed off to University, we all do, and studied things that I regretted signing up for (it turns out archaeology is NOT for me, nor chemistry), and that is how we learn but I want my daughter to learn from her mistakes and move on quickly, not spend the next 20 years paying her mistakes off slowly.
Because this is the point, debt is insidious and easy to acquire bit by bit, but ask ANY ex student if its easy to pay back and all of them will tell you NO.
Parents, arm your kids with good financial habits from the get go and teach them about money early because the decision to take on and service a ‘small interest free loan’ today then moves on the decision to take out a bigger one, with interest, in years to come. What I’m saying is that with education and planning early on it is possible to avoid ANY student loan, but our children need our help to do this.
P.S. What is with our terrible New Zealand drinking culture? It certainly came up a lot during our chat. While I am busy teaching my daughter about how to be good with money, I’m also going to be teaching her how to be a responsible drinker. From what I'm hearing from teenagers this might be my biggest challenge yet.