How to Pay Cash for Tertiary Education
07 Nov, 2021
This blog post results from a brief yet alarming conversation I had with a 15-year-old who has three years remaining at school before they head off to university. I’m impressed that they already know that this is what they want to do (I had no idea at that age), but I’m less impressed with how they will fund it.
In answer to my question, “how are you going to pay for it,” they quickly replied, “with student loans, because they are interest-free”.
It was not my place to comment at the time (although in my head I was screaming to say something), but given I write a blog, I’ve created a space where I can give their response some thought.
So, I will.
It shocks me that a 15-year-old is considering taking on an unknown amount of debt at just 18. It shocks me that it appears this is the only option taught, that this is even in their vocab and that as quick as you can say “up to my eyeballs in debt, how the heck did that happen” they knew that they would borrow money to study.
I’ve spoken with far too many debt-laden former students to dismiss what was said by this 15-year-old. Because I know for a fact that students regret taking on student debt. Most never felt it was a problem while studying (particularly if they have parents who are not good managers of their own money and pass on their relatively crappy financial advice). Still, once they are done, they all wish that someone had given them another option.
Every time I have a conversation with someone, I think about what I can learn from them to apply to my journey, and this brief conversation was no exception. There is not a snowball’s chance in hell that my daughter, who has just turned 14, will be taking out a student loan to study.
“Why not”, you ask?
Or perhaps “how could you avoid it”?
Because why would you borrow money for something that YOU KNOW is on the horizon? There are years of lead-in time before she will incur this cost. University can be planned for, and debt is not required if you save up in advance.
This blog s for the young Kiwi’s, their parents and caregivers, who also cringe at the thought of someone so young taking on debt.
For the people who read this and think, “why WOULDN’T you take on student debt? It’s interest-free”; or for those who have confused “interest-free” with “free education,” you might just want to move on to my next blog. But if you want to know why taking on debt should not be a foregone conclusion and how you can pay cash for your education, keep reading.
We can’t predict the future, but we can expect that it will cost money.
Debt is insidious. Layer by layer, it sneaks up on you if you let it. Life is simple when you are young, but it just quietly becomes more complicated as we head out into the real world and start to gather up experiences and people to join us in our journey.
First, you might borrow money from your parents to buy a car
Then you might borrow money from the taxpayer for tertiary study
Then you might get a credit card to buy stuff
Maybe a couple of Afterpays and a store card or two as well
Then the biggie, a mortgage
We can gather up monthly payments little by little where we forgo a portion of each paycheque to pay off things we have already bought, done, or used up.
If you join your life with someone with a similar view of debt, well done, you just doubled your liabilities.
My take on it is: Do not take on any debt in the first place.
In most cases (apart from a house), it is unnecessary, and if you can work out the rough costs upfront, you can save up and pay cash for them.
The cost of a three-year degree
Here is a fictional example of the costs of tertiary study for my daughter, who has just turned 14, a young person who is already vaguely thinking that she might want to head to tertiary study when she finishes school. She has four full years remaining before she devastates her Mum (me) by moving out. Honestly, I’m going to cry for a week.
We talk about what it might cost to do a three-year Bachelor of Science (BSc). The only reason we talk about this is that’s what I studied; it’s just a way to get some rough numbers around the cost of study. Because Alexandra is unlikely to open a uni anytime soon, she will be moving to a campus town. We’ve based our numbers on Otago Unversity because it’s closest, and it’s my alma mater.
There is plenty of information on their website about how much it costs to study and live in Dunedin, and I have used this to come up with some rough numbers. This is what I encourage you to do. Don’t get bogged down in the details; you are thinking about the big picture costs here.
Year One: $21,306
The breakdown:
Fee-free in the first year! $0! Thanks, NZ Government!
The NZ Government will pay up to $12,000 to cover tuition fees and student services fees for one year of full-time study. If you are studying part-time (so you can work perhaps), this can be spread over more than one year. You may also be eligible for two years’ training fees-free.
But you still have to pay for accommodation and all personal costs for the year, and the stats I found base this on a 40-week academic year. Luckily any uni you are looking at will have some standard living cost statistics to use as a guide.
First-year students love to go into a Hall of Residence, and it’s a great way to make friends for life etc. But it’s expensive. The University of Otago has calculated the standard living costs for a 40 week year to be $21,306 if you go into a Residential College and $17,640 if you go flatting.
If you live at home? $0 plus personal costs and entertainment.
OK, so now we have a ROUGH idea that a first-year student will need to pay up to $21,306 for a 40 week year. There is allowance in that amount for personal costs and entertainment. But no mention of phone upgrades and vehicle costs! A discussion will need to be had about where they might live outside of these 40 weeks and what that might cost.
Year Two: $25,140
Now you will be paying fees for the first time, and for this degree, they are approximately $7,500 for the full second-year study.
Plus your accommodation costs, which in the second year means you will most likely go flatting at the cost of about $17,640 for a 52 week year (you generally get tied into a 12-month rental lease).
As you can see, the study itself is quite affordable, and it’s the accommodation that is the kicker.
Year Three: $25,140
In your third and final year, the costs are similar to your second year - about $7,500 for your fees and $17,640 for your accommodation and living costs.
Total cost: $71,586
The total cost, in today’s money, of a three-year degree, is high. But that’s the reality, and best we know that early.
That’s not cheap, right?
If you knew today that you could potentially saddle yourself with $71,586 in debt, would you think twice about it? Hopefully, you would.
How on earth can you pay cash for such an expensive thing?
Start investing in your education early.
You start saving when you are 14, that is how. You start with doing some research and working out what it might cost to do the course you are thinking of doing, and you break it down into smaller, more achievable chunks. You then begin to save and invest and hit your monetary goals before you even walk on campus.
This is exactly how I am teaching my daughter. And that is exactly how others I’ve met help their tamariki get through their study debt-free.
There is an inkling that she will go onto some form of study after school. Then again, she may not, but there is no harm in having some cash invested if she DOES. Rather that than having the fact she needs to stump up $71,586 suddenly.
A 50% saving rate
For a couple of years now, the rule in our whare is that for every $1 you earn, you must invest 50c. No excuses and no workarounds. At the same time, Jonny and I set aside small amounts each month for her future education. You heard that right; we are absolutely going to be helping her get through her study debt-free.
For many years, we have invested $50 into the Smartshares NZ Top 50 ETF (FNZ) on her behalf every month.
The current balance is $7900. Plus, we have other investments we can access if required.
She has invested 50% of any income into her own Sharesies Smartshares US 500 ETF (USF) fund for three years.
The current balance is $3,000
Total money earmarked for “future study”: $10,900
Already, at the age of just 14, half of her first year of university study is paid.
Granted, we have done most of the heavy lifting here BUT still, not bad, considering her ‘income’ is currently just $14 each week, $7 of which is invested. Plus any other money she can scrape together from odd jobs like being paid $10 to clean her cousin’s car and birthday money etc. For every single paycheque she receives, half of it goes into her investments and look at what she has managed to invest already - $3,000!
It’s 100% likely that as she gets older, she will pick up some good permanent part-time work of some sort, whether throughout the year or just in the school holidays (in our region, there is plenty of orchard work available for kids who want it). As soon as a regular paycheque starts coming in, her investments will begin to build rapidly; plus, given they are share market investments, capital gains and compounding are already hard at work.
As an example, this is her Sharesies account:
My daughters Sharesies account which is earmarked for her tertiary education.
At home financial education
We don’t spend hours discussing university and money, and I don’t want to pre-determine her destiny nor nag and freak her out. But there is a general understanding in our whare that life requires pūtea and that from the day you start to earn money, you can set some aside for your future. Because having money readily available gives you options to follow your dreams.
As the end of school draws closer, more focus and discussion will go into setting as much money aside to pay for her education as she can. There is little chance that she will have $71,586 sitting ready and waiting when she starts uni. Instead, she will budget the years ahead and be paying as she goes. But the expectation will be that anytime she is not studying, she will be working to set money aside to pay for it. That’s what I did through my five years of study. If I was not working, I was studying. Or socialising!
We will also be guiding her to find scholarships and any other “free money” (student allowance?) to help pay for costs and find any way to reduce accommodation and living costs because that is where the actual expense lies. Plus, as I said, we intend to support her financially too. This might come in the form of a weekly allowance, or it might be that we end up living in the town she studies, and she can remain living at home for free (which is exactly what Jonny did when he was studying in Christchurch). During semester breaks, there will always be a home for her to live rent-free to work and save for her study.
The point of Jonny and I working to be financially independent is so that we can be in a position to help other people, one of whom happens to be our incredible daughter.
I don’t ever want to hear my child say that debt is her future. I don’t want to push her out of the nest to watch her flounder around and make financial mistakes. Yes, your mistakes teach you a lesson, but I don’t want to watch her spending her 30’s fixing up all the errors she made in her 20’s. Instead, I want her to feel empowered to financially pay for whatever future she decides is suitable for her. And we will be one step behind her helping her find the right path until she is ready to go it alone. It’s not ‘helicopter parenting’; it’s simply being a parent.
I’ll let you know how it goes!
