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BUDGET 2014: $600m a year: Are interest free student loans value for money?

In 2013 we saw the average cost of providing student loans increase to more than 40c per dollar lent. This is forecast to increase to 42c by 2016/17, which equates to an annual cost in excess of $600 million. 

In conjunction with this significant economic cost, our universities’ world rankings have slipped. This raises the question: In its current form, is the student loan scheme a good investment for the New Zealand taxpayer? With the 2014 budget fast approaching, should the government be looking at ways to improve this scheme to achieve a better return on investment for New Zealand taxpayers?

One of the key policy considerations underpinning a student loan scheme is to share the cost of tertiary education between the government and the student, with the government receiving returns in the form of human capital, labour skills and the eventual repayment of the loan principal. This is an admirable approach and one that allows any student to have access to tertiary education. But perhaps New Zealand is too generous when it comes to who can utilise this scheme.

New Zealand has one of the most liberal student loan schemes when compared with other developed countries. For a non-citizen to obtain a student loan in New Zealand, they only have to hold a residence visa and to have been present in New Zealand for three years.  

Both Australia and the US restrict eligibility for student loans to citizens or permanent humanitarian visa holders. The Australian government has recently agreed to a small concession for New Zealanders who have been long-term Australian residents to be eligible for government funding in certain circumstances to take effect from January 1, 2015.

In New Zealand, 15% of those enrolled in tertiary education are not citizens, triple that of Australia. These students are considered “domestic students” for fee purposes and are eligible for support under the student loan scheme. Assuming that these students all have average student loans, this is costing the economy approximately $90 million per year.

To start, a sensible solution would be to restrict interest free student loans to New Zealand citizens. It seems unreasonable that the taxpaying public should subsidise students (and their families) who have not contributed to the tax base.  

However, my personal view is that this is not enough. The economic cost of Dr Cullen’s historic election bribe of removing interest is too significant to ignore. The next adjustment would be to ensure loans were only interest free while studying (with set criteria as to length of study) and charged at a lower rate (say, aligned with the cost of borrowing to the government) thereafter. Not charging interest removes the borrower’s incentive to repay their obligation faster, which is a further drain on NZ Inc.

At the risk of sounding middle- aged, interest was applied to student loans when I studied.  It was a burden I didn’t want to face, so you know what I did?  I worked 30 hours a week in hospitality to pay for my education, sacrificing many social occasions as a consequence.

Shelling out interest-free loans to all and sundry does nothing to stop this incessant mentality of entitlement, which is becoming all too common with the younger generation (now I really sound old).  

We need to empower our youth to take responsibility for their decisionmaking, and accept the consequences of those decisions.  People are less likely to take something for granted if they are required to pay for it.

Dan Lowe is an associate, tax, at Grant Thornton New Zealand

Comments and questions

I agree that it should be re-looked at. I think the balance was right before the last change. Interest free while studying, low interest while working but capped so it your repayments were lower than interest, the interest was forgiven (except for the inflation component).

That way aligns everyone's interests.

Given a choice between student loan @0% and the dole. I take the loan. What is the annual interest forgone on the money advanced to the unemployed over the last 10 years?

In fact we need to structure a way to apply paid tax against the loans. That model needs to incentivises earning good money and getting good jobs

My local shearing contractor used to employ many students. In particular, Nov-Feb.
When interest free loans become available he never received one application for work.

Interest free loans. Just another election bribe never changed or altered by John Key. Always a politician, never a leader.

Yes, let us get some common sence back. I know it is supposed to have died some time ago, but.....

Perhaps interest free loans to target the professions we desperately need. Scientists, engineers, medical but an alternative set up for massage and beauty courses.

The biggest problem with having 0% loan is the mis-allocation of capital. This scheme has misrepresented the true economic cost (interest on loans borne by the state (taxpayers) instead of the individual) of studying vs not studying.

This has caused a lot of people to take up studying when they shouldn't have and studying courses which have very little economic merit. Think students who get C averages studying the arts or polytech courses such as beauty courses.

So many people now have student loans which could have been easily avoided. This scheme which was set up to help people has burdened people and the state with so much debt and no future benefits that will outweigh it.

Actually, pretty much no domestic students have contributed significantly to the tax base before they start studying - at least with foreigners the taxpayer doesn't have to pay for their primary and secondary school too.

It never ceases to amaze me how politicians never seem to be able to forsee the consequences of legislative change. As well there is all the secondary changes behind the initial reaction.

We would have had more well thought out policy if 18 year olds never had the vote. This whole scheme was nothing but vote bribery from Auntie Helen.

The balance is not right.

While university education has its benefits, the majority of student come out with high debt and a relatively poor paying job.

More focus should be on the job education. Theres far more value in this, and is likely to be tax deductible for the employer. Fulltime study only works for academics.

Unfortunately, most young students are no different to sheep. They follow the leader, when alot would be better off studying on the job.

As for no interest loans, this teaches students nothing about how real society works.Study should not be about free lunches.

Course numbers should also be controlled by the number of current jobs available and in the future. Perhaps subdises/levies should be placed on employers to fund education in there area; especially where there is a shortage of skilled workers. This would upskill locals, instead of importing offshore for the good times.

Some ideas to further discuss to get the balance right.

Anyone who has studied economics knows that any government interference in the economy or subsidies creates an imbalance and in the long term and the economy and everyone in it loses.

Without government involvement, student loans would be more difficult to get, and certainly not at 0% lending. Those who wished to go to university would have to have a good reason to do so, and would no doubt be prepared to earn the money to do so either with a couple of years between school and uni or working part time.

Working to get to university would be the best thing a student could ever do. Work ethic and understanding of value, will put more students on track to be responsible and productive adults than the what we have at the moment. It would also mean that students choose wisely what they will study. The current education system is turning out a greater proportion of unbalanced people than decades ago.

Today society is filling up with adults with plenty of knowledge but no commonsense; we have more people aware of their rights than their responsibilities; we have 'educated' bureaucrats that pass laws that they themselves would not be prepared to live under. We have more people will do not lift a finger, making decisions about dispersing the wealth created by others. There are many people who working in govt departments, supporting political parties or vying for parliament seats that are almost unemployable in the real world.

A budding student might think twice about working long hours to pay for a political science degree that will fill their head with anti free enterprise ideas. The prospect of hard work might actually put them off such a large investment and cause them instead to get a real job.

Too many people enter the govt workforce with a govt subsidised degree. These people form the core what we loosely describe as govt bureaucracy.

Many student loans go unpaid. With no interest you are not teaching people (and at a formative age) the value of money. They do not learn that any form of credit has it's price and you have to be extremely motivated to limit costs and get into producing a return so that the interest does not mount up.

Give money away and you devalue money. Sell someone something that they can purchase with money given away free and you devalue that thing. We are granting credit before the recipient has learned the value of credit.

If students, as suggested by Richard S, come out of uni with poor paying jobs, clearly uni is not working. I agree, learning on the job is far better. By offering interest free loans, we are luring many people into uni education who would be better served learning a trade or profession on the job.

Apprenticeships are almost non existent however. Society acknowledges that a uni education is a process of paying out money to be educated, and has a huge cost. If an employer provides on the job training there is a huge cost involved also. With some jobs it may cost the employer for anything up to 2 or 3 years until an employee is no longer a financial burden on the employer. However with govt and unions dictating a minimum wage, they are cutting out the jobs and apprenticeships where the young could learn a trade, while still living at home.

Stopping interest free loans for education would put the onus back on the individual to make rational choices about his or her future. Then and only them, will we raise a generation of adults with back bone and values.

Where government and it's agencies have slipped up is in not effectively obtaining repayment of those loans.
Too many recipients have moved overseas and have escaped the authorities.
In short, we need to improve the chasing of repayments.

The scourge of cheap or free money for a particular use over others is more often than not a mis-allocation of that capital.

We have seen it in share market, and property, and finance issuer booms and busts - an allocation of easier money driving inherent prices up and value down.

The value of a tertiary degree in the wrong hands was always questionable - in the '70's a BA was seen as plain useless - and in 2014 those who distinguish themselves from the ruck are less likely to have either the debt or any piece of paper, let alone one that consigns them to a long queue of dismay.

Excessive A grades are now required to distinguish one degree from another - yet pursuit of that accolade may rob the very degree itself of any of its socially redeeming features - the use of the time to allow youth to be set free, to grow up, to reflect and to party hard etc. Youth can do that any time with or without cash.

However, the real distortion occurs amongst providers of said degrees, not the borrowers of cheap money.

Why, because they are less accountable to their customers.

if you don't believe me take a look at the tragedy that has just occurred at University of Canterbury.

In the name of keeping their human capital together post 2010quake the Uni has squandered a 150 year legacy and $150m endowment fund - all in the name of sustaining an excessive staff - who dont want to resign or move. They were misguidedly kept on to service students who aren't there because the absentees cant afford to live in chch or just prefer a varsity career not punctuated by grid lock, dust bowls, after shocks, floods and disorder.

That uni has at last count 120 full time employees looking after its students association. In the 70's we did all that more or less voluntarily, albeit with the same size roll that Canterbury is heading for, sans any capital funds, - about 6,000.

The problem with cheap capital is that it supports this sort of waste.

When the cheap cash runs for Canty's academics and for the NZ Uni system generally, only then will customers demand something that allows them to pay the cost of it back.

I always thought that a good mechanism would be to forgive some student debt similar to: First Class Pass in a unit, forgiving of 100% of direct costs of taking that unit (i.e., not including accommodation costs, etc): Second Class - forgive 80%: Third Class - forgive 50%. But bring back interest.

A thought provoking article. Here's a few points to think further about.

Firstly university fees (I'm basing this on a commerce degree) have risen by 190% from the mid 1990s to 2010 (approximately $3,000 a year extra paid in fees). Are students today getting more value than their predecessors? This appears to be far more than inflation levels and also around the same if not more than the cost of a student loan on university fees in the 1990s with interest charged at 20+% (10 years worth of interest on the maximum loan at the end of studying). On top of this there is far more competition to find a job while studying and when you finish your degree. The minimum wage has also only risen by 70% so working while studying wont be as prosperous as it once was.

We then look at the cost of renting a property assuming you are studying away from home. Increase approximately 140%. Things aren't as bright for the student of today as the 'interest free' student loan implies.

So where is all this extra money (interest if you want to think about it in that way) ending up? Into the pockets of landlords higher up the chain charging excessive prices for their properties. Some of these landlords also get 33% of the cost of their interest back from the government as a tax credit. Also the government spends money in other places rather than university funding making up for it with these so called 'interest free' loans so the students can fund the universities out of their future own pockets.

Entitlement is something embedded deep within society as a whole. Generation after generation takes from this planet giving little back. Before brushing this aside, think for a minute and maybe you can help improve this world we all share rather than adding to the problem those before you have created.