Student Loan Investments and Bankruptcies
With the average cost of study at $12,000 per year most of us consider a student loan as an evil necessary to provide study opportunities. However small groups of student entrepreneurs are bucking this trend and using their loans as an investment to create considerable wealth. At the same time, and at other end of the spectrum, some students are dealing with the burden of their loan by declaring themselves bankrupt. Salient feature writer Rob Addison investigates how to get rich quick and wipe off your loan using the system.
Paul, a Victoria student who amassed $80,000 in student debt, says declaring bankruptcy was the best thing he ever did. “I’m loving life now,” he declares. “I don’t feel guilty or anything and I don’t feel depressed. To me it’s really exciting to know I had a … student loan and that I could just flick it off.” Fellow Victoria student Mark also becomes enthusiastic when asked about the interest that he makes through investing his student loan. It seems that both Paul and Mark have good reasons to be satisfied. Despite choosing to be anonymous for this article, these two students have never done anything unlawful and have never vented the system. Through above-the-board financial practices, Paul and Mark cruise significantly calmer financial straits than most students, but financial freedom can come at a cost.
Despite how he now feels, Paul says he never set out to become bankrupt. Before declaring insolvency in 2006, Paul says his money “addiction” led him to accumulate $35,000 in credit card debt alongside an $80,000 student loan and numerous other arrears to small businesses around Wellington. It didn’t take long for the interest on his debts to spiral out of control, which led Paul to seek help. “I went up to the Ministry of Economic Development (MED) and I talked to one of the advisors there. I showed him all my debts which came to about $120,000 at that point, and he actually said I should go bankrupt.”
Paul turned down the suggestion and didn’t make contact with MED for several months thereafter. But the interest on his three credit cards continued to climb, and Paul returned to the doorstep of MED, where he was once again advised to go bankrupt. Realising that he had no other choice, Paul agreed to declare bankruptcy. After filling out a one-page form and making a brief visit to the High Court all in the same day, Paul was officially bankrupt.
Initially thinking he would only have his credit card debt wiped, Paul soon realised that his status reached far further into his affairs. Despite being eligible for an interest-free write-off, Paul was deemed incapable of repaying his student loan.
So on the same day that he visited MED for advice on his credit card debt and arrears to some businesses around the city, Paul had $35,000 in credit card debt, an estimated $15,000 in small loan oaths and $80,000 in student debt erased. This equated to $135,000, gone with the stroke of a pen.
Paul’s story is not uncommon in New Zealand. Joanne Basher, an official assignee with the Insolvency and Trustee Service, says that while she is unable to determine the number of people who have declared bankruptcy as a direct result of student loan debt, says that 765 people with student loans have declared bankruptcy since July 2006. “People go bankrupt for various reasons”, says Basher. “Relationship breakdowns, incurring credit beyond their means, losing employment et cetera. But the main relief for debtors is the removal of the debt burden and a release from the pressure brought by creditors pursuing their debt.” While Paul identifies with this, he is still mystified by having his student loan wiped. “Obviously the student debt wasn’t out of hand.” he says.
Like many students, Mark claims weekly living costs as part of his student loan. However, unlike many students, Mark’s Studylink payments do not go towards rent or get frittered away on cigarettes and alcohol. Because for every week of each academic year since February 2004, Mark has placed $150 of living cost payments into a managed investment fund. With zero administration costs and a handsome interest rate nearing nine per cent, Mark matter-of-factly says that he has stockpiled close to $20,000 and has accrued nearly $2,000 in interest – a figure that he hopes will ultimately rise to “$2,500, if I’m lucky”.
Still uncertain on what he plans to do with his gains, Mark says that the interest-free option means he’s in no hurry to pay his loan back, suggesting that he may invest his accrued earnings elsewhere. He frankly dismisses any criticism that people may have of how he uses public money. “I don’t think it’s unethical at all … I’m not doing anything terribly wrong, in my eyes.”
But it soon becomes clear that Mark’s investment strategy is as much an act of defiance as it is a display of financial ingenuity. “The Government doesn’t make it easy for students. We’ve got to look out for ourselves. We are the future of this country.”
Meanwhile, Paul laughs when I ask for his thoughts on the conditions of his insolvency. “My life’s much better because of bankruptcy”, he declares. He is quick to dismiss the severity of its implications, describing his personal bankruptcy with hindsight as being “kind of like a blip in my life, it’s like nothing … it’s like a little setback that is a few seconds for the rest of your life”. However, Paul explains that “I don’t have the desire for anything big in my life beyond what I already do … but if [students considering bankruptcy] have dreams of becoming great politicians or lawyers or whatever, then they may be worried about it”.
When our conversation turns to finding jobs, it becomes clear that Paul hasn’t found insolvency as cruisey as he would like me to believe. Paul tells me of the time when he, ironically, applied for a job with a major bank. Charming his way through the interview stages, Paul was eventually offered the middle-income role. It was at this point that his conscience caught up with him, and he informed the bank of his status.
Soon afterward, he was declined the position solely due to his bankruptcy. But Paul suspects that it doesn’t end there.
“Last year … I applied for a number of jobs with government agencies. I never told them I was bankrupt but I think they knew … because Inland Revenue does data-matching with different government departments and I’ve applied for different jobs … and I’m always turned down.”
Insolvency impacts upon more than just employment opportunities, as Basher reminds me when she recites its long list of conditions. These include being unable to: incur credit over $100 without disclosing its status; travel overseas without the consent of an Official Assignee; enter into business or be employed in a family owned or operated business without the consent of the Official Assignee; and having to consult the Official Assignee on most matters.
Financial Advisor at Cameron Chote Financial Services, Malcolm Dixon says that the stigmatisms associated with bankruptcy endure long after the official status has been dismissed. Dixon says insolvency is less sensible than it has ever been due to the interest-free option leading to student debt being paid back slowly. “There are significant future implications with declaring bankrupt at the age of, say 25, that once they reach 45 they will regret having done it”.
Bradley Nuttall Financial Advisor, Doug Johns agrees that the long-term implications of bankruptcy will make it non-worthwhile to most people. “Banks won’t touch you so you’re going to end up with loan sharks … or second-tier finance if you want money for getting hire-purchase or anything”, which Johns warns could mean paying interest rates in excess of 20 per cent. “So the advice, would be to stave that off, there’s no free lunch there.”
But Johns does suggest that investing student loan payments could lead to several thousand dollars worth of free lunches. With personal ties to people who have financed house deposits through student loan investment, Johns openly throws his support behind the scheme, saying that given a student’s overall position with interest-free loans, it would make sense to do that.
Malcolm Dixon is more reluctant, saying that while he doesn’t wish to discourage people from being adventurous with their money, says, “I wouldn’t encourage it or make it a piece of advice because I think the gains outweigh the effort.”
When I raise the issue of ethical use of public money with Dixon, he clearly becomes quite uncomfortable. While assuring me that he wouldn’t say that it’s an appropriate use of the money, he admits he would assist the scheme “if someone was insistent”.
Doug Johns agrees that there are ethical issues associated with investment of this kind, but is quick to clarify where financial advisors stand. “If [students are] entitled to that money … and they can use it for another purpose, that’s their personal decision – that’s not our decision.” Financial Advisor Kevin McGavin says student loan investment can impact upon ordinary people by “diddling the tax-payer out of some interest. But we’re not the local police and we don’t police those sorts of things.” McGavin admits that he would be uncomfortable with assisting someone to use Studylink money for investment purposes, but refuses to be drawn on whether or not he would actually facilitate it.
So it seems that if a student decided to follow Mark’s lead and invest their loan, they could not only gain financial assistance in Wellington, but they would most probably be spoilt for choice. However Mark, who pays no associated costs on his investments, warns that top-tier financial advice on top of administration costs can be very expensive. Mark says the viability of the scheme depends on the costs for brokers and administration. “If [those costs] are fairly low then you should probably go with it, but if they’re high then it might not be worthwhile.”
But Mark will happily access his gains long before Paul’s bankruptcy ends. He’ll be bankrupt until mid-2009, which he assures me that’s something he’s comfortable with. He acknowledges the strings attached, but has no doubt that his decision was the best one given his circumstances. He discourages against people declaring bankruptcy unless they really need it. “I wouldn’t recommend going bankrupt if you have small debts – especially if it’s $12,000 or less,” he says.
When pressed on whether or not he thinks bankruptcy is a good way for anybody to vent the system and rid themselves of their student loan, Paul lends his advice. “I’m stuck [with bankruptcy] because I had lots of other debts and I’m stuck because I didn’t know my student loan was included in that – but it was in the end. So therefore, if someone came and asked that question about the $80,000 loan I’d probably say something like ‘well, I probably wouldn’t do it.’ Because I probably wouldn’t if I just had a student loan. You don’t take on that amount of debt just thinking you can wipe it off.”
Five ways to invest a student loan
1. Contact a financial advisor who can find a portfolio to suit your needs
2. Put your weekly payments into a fixed term bank investment.
3. If you own a house, increase your mortgage payments, thus minimising your debt, and you`ll get an increase in the WINZ accommodation supplement.
4. Use it to pay for your loan to get a deposit for your investment property.
5. If you’re up for it try the stock market, probably best to read up about what’s hot first before getting burnt
How to Go Bankrupt
You can become bankrupt in one of two ways:
Voluntarily – you can voluntarily file a Debtors Petition for bankruptcy at the High Court.
Creditor initiated – one of your creditors can apply to the High Court to make you bankrupt.
There are several steps in the bankruptcy process. These include:
Notice to bankrupt – When you become bankrupt, you receive a formal “Notice to Bankrupt” which sets out your obligations as bankrupt. You can use this notice to show creditors that you are bankrupt.
Statement of Affairs – Soon after you become bankrupt, you will be contacted by an Insolvency Officer from the Insolvency and Trustee Service. This person gets information from you to get an understanding of your financial position. They require you to complete a Statement of Affairs form and you may be required to attend an interview.
Advertising – A notice advertising your bankruptcy will be published in newspapers in your area, and where the majority of your creditors are based.
Insolvency and Trustee Service Database – Details of your bankruptcy are made publicly available on the Insolvency and Trustee Service Database – you can access the database on the Insolvency Service website.
After you become bankrupt, the Official Assignee can sell any assets you own, and ensures that the proceeds are fairly distributed among your creditors. They may call a meeting with creditors or conduct a house inspection to assess whether you have any assets that can be sold to raise money to help pay the creditors.
During bankruptcy, you continue to manage your own bank account, income, and any debts you incur while bankrupt.