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BUDGET PREVIEW: student loan millstone around neck of the nation

The 2012 Budget saw a range of changes to the student loan scheme to manage the ballooning cost.

This included limiting access to loans – based on age, the length of a course and the undertaking of part-time study – and increasing the repayment threshold, which took its first bite out of pay packets this month.

Despite these changes, student debt remains a millstone around the neck of both the country and students.

When the scheme was first introduced, it was on the basis of ensuring that students, who benefit from the education obtained, paid for their enhanced earning capability.

The fact that there was an additional benefit of moving what was previously direct government expenditure to a loan “asset” on the balance sheet, would have made most 1980s creative accountants envious.

The problem with the student loan regime is the unintended effects, as often happens with well-meaning and principled policy.

Anyone who understands the concept of liquidity understands the problem student loans represent to this country. The asset that is “student loans” is written down in the government's books as soon as it is loaned.

The current carrying value of the loans as at June 30, 2012, is $8.5 billion (yes, that’s billion) compared to its face value of $13 billion.

Any banker would agree that when you keep lending to someone who struggles to repay and you write off a portion of the loan the day you lend it, this is a pretty poor loan account.

Do not make much sense

Large cash loan outflows compared to long-term and uncertain loan repayment inflows do not make much sense.

When you combine this “negative current account” problem with an unintended “flight or pay up” syndrome, the problem is compounded.

Some students graduate with a small mortgage and a nebulous “education” as their only asset, struggle to find work in New Zealand, then face the prospect of an ever-increasing cost of an unaffordable first home, only to receive the call from their mates overseas to leave it all behind.

The intention of educating our young to enable them to contribute to society has instead created a growing debt due to the Crown, a negative perception of their obligation to society and an incentive for students to run away from their debt.

While recent policy changes are targeting debt collection from overseas borrowers, so far this has not had great effect.

These measures are effectively encouraging the intellectual grunt and innovation we need to develop our economy and secure the country’s future to stay away from New Zealand permanently.

Sounds like the definition of a millstone.

The 2013 Budget is the time to rethink this strategy and develop one which fosters education and supports the development of a productive and prosperous New Zealand. 

Greg Thompson is national director and partner, tax, at Grant Thornton New Zealand, chartered accountants and business advisers. Email: greg.thompson@nz.gt.com

More by Greg Thompson

Comments and questions
42

I'd love to know how much student loan debt students and former students voluntarily paid off in months prior the end of March. I for one did as I'm finishing my studies and, with little post-doc opportunities available here, will be leaving the country in the next 12 months.

So please tell us, did you study and graduate in a field that has obvious employment opportunities. Or did you study something obscure that offers few opportunities, employment-wise, anywhere?

I am not being smart. I would honestly like to hear your answer and, hopefully, learn where you anticipate being employed. What country and what field? Thanks and good luck.

My field is human geography, while my present topic is considering how people improve their lives not just from a traditional economic perspective, but a from a wider well-being perspective. The field and results are increasingly important as we transition from a narrow view of success as individual economic success to one where well-being and happiness also contribute to our measure of success.

I continued in my field to this level primarily because it is one that I have excelled at and one that I have been interested in understanding better. I am heading to the New England area initially.

Good on you for paying off your student loan before leaving NZ. The fact is, however, that we taxpayers still funded about 75% of your university education, that you are now going to exploit in the USA. Good luck, but please acknowledge what we did for you, rather than focusing on your student loan.

I appreciate how much 'we taxpayers' of New Zealand have contributed to my entire upbringing. After all, I am a taxpayer as well and have worked in the private and non-private sectors.

In terms of my university education, the cost of my entire tertiary education has been far less than the amount my most recent research would have cost had it been completed in-house by a similarly qualified employee in a government department or consultancy firm. I consider that good value for money.

As to 'exploiting' my education overseas - you are welcome to your interpretation. Apart from a very select few fields, it is where many post-graduates have to go in order to further develop their experience. Opportunities to get that experience pretty much don't exist here and there is a flow of earlier graduates who have gone offshore and are now returning having gained that experience. Maybe five, ten years down the road I will return to New Zealand like them, or perhaps the country will have lost me for good.

You may consider your research good-value for money. Not sure how it would be known definitively, though. Value isn't only a function of the cost of replicating - something an economist would be quite aware of. For example, one could attempt to build obsolete technology, like a typewriter, and one could calculate the private cost for that. The value? Probably nowhere near the cost.

There is a cost to student loans, but can we afford not to educate young New Zealanders? The alternative to open our universities to more full fee-paying international students, and at the same time limit the number of places for local students. That would reduce the student loan cost to the Government, and keep the tax accountants happy.

But we can ensure that the limited funds are targeted in the right places (i.e. courses for which the country is most likely to receive a return) and also that the loan paid back by the student is equal to the amount loaned (so add in an interest rate linked to inflation - it is still effectively interest free as the amount that you pay is the same value as the amount you received).

Targeting simply doesn't work. I teach postgraduate students and supervise doctoral students in an area that 'anonymouse' would probably like to abolish. However, most of my students are full-fee paying international students whose fees subsidize the education of local NZ students. NZ needs world-class universities that teach a wide range of academic subjects, including of course the favoured agri-science.

I heard that education used to be free in New Zealand (a long, long time ago). How was this done?

By debt funding it and causing all those who followed to pay for it...

There is no free lunch - those who benefit should pay.

The factory uneducated fodder and others (who never benefitted and were penalised by the elite) paid for it through their taxes.

Those who got a so called free education (like me) got no student loans (had to work to pay our fees) and then paid for our degrees with a 66% tax rate on any salary over $32,000. When I was on a university council some years ago, and the students staged a protest about student fees, I offered to fund the fees of any four students in return for 33% of their lifetime earnings as graduates (66% less the then top tax rate of 33%), but none of the students was willing to take up my offer, which they called "outrageous". QED

You have conveniently have forgotten that your fees were heavily subsidised and the student allowance you received to cover living cost you never had to pay back.

Ramon

Like Lindsay, I had to work to pay my course fees (yes, in the 1970s we paid course fees -- less than now, but we did pay). We did not get any living cost allowances.
When I add up the course fees I paid over my four-year degree they equated to 25% of my gross starting salary. Yes, this is less than for most students now, but the free education story is just a myth that gets repeated too often.
I am not suggesting that it isn't difficult for students now, but it was never easy.

Parallel it to having a job when you used to earn $250,000 a year, now you earn $50,000, you could obviously pay for and do a lot more on the high income. We as a country are now the $50,000 earners but still think we should be able to continue the $250,000 lifestyle we enjoyed "a long, long time ago".

This ballooning student load debt is only going to get worse, that's the fact of the matter. Our country cannot afford to keep handing out free student loans, especially when people find themselves unable to get a job after they have qualified. There are so many institutions out there offering courses that will not help them get a job but they are happy to take their money (thanks to the taxpayer)! It's unethical and it needs to be resolved.

Well, charging interest for a start would be the first logical starting point. This was a blatant election bribe (that worked) and was never affordable. The fact that National carried it on this far demonstrates politics over common sense.

You don't get something for nothing and this represents a negative real rate of interest for any student borrower.

Student loans need to be abolished or at least only available to those who can prove there is a need. I have a daughter whose tuition and living costs I fund, and I also give her a small allowance for incidentals. I said should she require party money she can find employment to fund this. No, she went and took a student loan for living costs. I thought maybe I am being taken here, but, no, a quick check via her friend's parents and they say they, too, are disappointed as to how easy their child got the loan.

Your daughter and her friends sound like spoilt muppets. The solution is for you to cut the umbilical cord, not to punish the kids out there whose parents don't pay for their education and liviing costs.

Read what I said: Loans available to those who can prove the need. I believe the system is fraught when someone like my daughter can get a loan to party. Perhaps in your world she is a muppet. However, as a person who made their money I think supporting my child is the right thing. And it is my money, not yours!

The problem is the burden of proof. I have a loan which I have nearly paid off, and although my parents earn way too much for me to have ever benefited from a student allowance, they definitely couldn't have afforded to pay for my fees. The flip side is, why should they have to pay for my fees? They aren't the ones benefiting from my education, I am.

But then how can I get the maximum amount of money each week through living costs and then invest that straight into shares? At this rate I will have enough money to cover my student loan once I have finished university. The money they are paying me each week (money which I have to pay back) is making me enough to cover my fees each year. Of course, I won't pay this back all at once when I have finished university ... I'll have a $50k interest-free loan to either start a business or use as a deposit on a house.

My son did the same, and then went overseas after he graduated. I made him pay back every cent he borrowed, plus the interest, to me, and I personally forwarded every cent to the IRD until his debt was cleared.

Free student loans gives tertiary providers the freedom to raise fees and create add-ons, knowing full well that their 'customers' can add it to their student loan.
If interest to loans were applied, universities and others would have to think twice before increasing their fees, and perhaps even lower their fees, as interest baring loans would be harder to get, and in most cases have a ceiling.

This is a good point - interest free and essentially unlimited credit has distorted the pricing of universities and the choices students make.

I note the government is reforming the current credit law and presumably it will have to comply with the proposed responsible lending code (yet to be developed). Interestingly, the bill has more hardship provisions so I'm thinking the bill might make the government an irresponsible lender and give the loan recipients a way to avoid repayments. Nice one.

I love the hypocrisy - those who received a free education now want to twist the knife in my generation's back a little more.

Let's reintroduce interest rates and allow the debt spiral continue. Enslave the youth to perpetual debt so it becomes a permanent tax. The elite will have more control and NZ will have an abundance of underpaid, fearful worker drones who will be restricted from leaving NZ until their loans are cleared.

What a lovely future for NZ.

"When the scheme was first introduced, it was on the basis of ensuring that students, who benefit from the education obtained, paid for their enhanced earning capability."

Not from my point of view. It was introduced to subsidise the huge tax cuts the Baby Boomers voted themselves in the 80s after they had received their free educations.

Get the kids to pay for theirs. We'll spend the money on houses, nice cars, trips to Provence and expensive wine. Just the Boomers doing what the Boomers do. Looking after #1.

Student loans need to be on a more commercial footing, but we must remember that as a country we do want educated young citizens with the skills to build a vibrant economy.

So, we ration the number of loans, maybe by vocation and perhaps quality of applicant.
We want the loans repaid, either by settlement in cash (even with a discount) or by working in the country.
If a qualified student wants to leave the country, that is fine so long as someone pays of the loan (or guarantees it, perhaps as a lien on assets/property).
Vocations available for loans are selected as we need to encourage more students to enter some areas.
The arts can get loans but they quantum are rationed, perhaps a discretionary allocation by institutions.
Overseas students are encouraged to learn here, and some tax incentive to stay and work for up to 5 years, but not necessarily get citizenship. We spend lots of effort educating them so why not gain from their skills?
Aggressively chase down current loan laggards, more active than in Aus, and expand into Europe and US where our trained youth have fled.

Encourage parents to pay off their children's loans, the $s greatly help the economy and certainly help the youth.

Interest-free is not a big deal at the moment with low interest rates. What is more critical is the repayment of debt and the focused use of loans in the future. Malinvestment is a loss of economic wealth to the whole country and the malinvestment encourages students to study for the sake of study, not for the sake of job opportunity in a realistic marketplace.

I think student loans have stopped some students from really thinking about their options/choices before they go to university. I am absolutely amazed to hear the dropout rates in the first and second years of some courses.
My son went through a few years back and I remember looking through his class results online of a first semester test (after 5 weeks of lectures) and the number of Fs on the list because they did not turn up for the test amazed me -- 5-6 weeks earlier they had just paid $600-$700 for the course.
So some toughening up on the scheme might be doing many students a favour in the long run.

The same people saying we can't afford to hand out free student loans are going to be the same people saying "we can't afford " in a few years when the extra fees hit the economy. Or worse yet, said skilled worker has gone overseas to get paid what they are worth to pay off debts.

I think the Student Loan scheme (SLS) works relatively well. Here are some thoughts to consider...
1. Don't think of student loans as true "loans" in a financial sense. They aren't. Tertiary education in NZ is still state-funded. The SLS simply enables the state to shift a portion of education to the student for a short period of time. This is useful to consider when weighing up the opportunity costs for the state. The student-funded portion of the cost has freed up cash for other things, such as tax cuts for National voters.
2. The state compels repayment. Sure, it won't repossess your house, but as long as you are working in NZ (and, I believe now, Australia, although I could be wrong) your earnings will be garnished.
3. The vast majority of "borrowers" repay their relatively small "loans" (the average is $18k) within a short period (5 years). Check out the Annual Reports on Education Counts website.
4. Related to 3, overall, very few borrowers run off overseas and skip payments. Most of those defaulters overseas come back and still have to pay.
5. Interest-free loans were an election bribe but we are stuck with them now and a whole generation of students have relied on them. That is the political reality. Most people have student loans because it's the most realistic way to get a decent education and a job, and dutifully repay them.

I knew someone who wanted a new computer to play games all day.
So they signed up for an art course to get free money and then never went back.
It should have been limited to course fee only, if anything at all.

Spot-on assessment by Greg Thompson. Completely agree the brain drain is being exacerbated by students fleeing debt.

At the crux of the problem is NZ's relatively low-wage economy. If the government made any progress on closing the wage gap with Australia there might be some improvement.

The smart decision for most grads is to get over to Aussie, Asia, Europe and make some $$. That won't change while NZ pays a pittance, with very few work opportunities for grads.

40% recovery is greater than the recovery under fee university.

It means those who 'win' pay their fair share, while those that 'lose' are in a better position than full user-pays.

Still think their should be interest to avoid distortions and ensure 'winners' pay more.

Nothing wrong with student loans. No rule says a student must borrow. I know plenty of students who work part time or work and study part time in order to keep total principal borrowed low, or even non-existent. This is financial competence - particularly for those who are getting their education in a field that may not be high paying.

Yep, there are plenty of students and their parents who have a low level of financial competence, as shown by some of the comments posted on this article. I include in this the generation of older baby boomers who by and large voted to run NZ into the ground in the 1970s and early 1980s by a whole range of unsustainable public policies that also had the side effect of benfitting these baby boomers.

But that's history. Looking ahead, why propose a major change to student loans now? It's essentially private debt, not government debt. Repayment rates are respectable. And there is a public good to higher education, no matter how much some commenters confuse training with education.

This is easy to fix.
1. Create actuarial tables of graduates to see if they can be employed after graduating. This will mean if there's no jobs then no govt should be funding you.
2. This is the most important, if you haven't paid off your loan in full you can't leave the country! No, you can't go on holiday overseas and you can't afford it silly - you have a loan!
And tough, no going overseas to "pay off your loan". We all know you're lying, you aren't really paying it off. You're paying income tax overseas is doing nothing for NZ.
If you can earn so much money working overseas how come a bank won't fund your education instead of the govt then?

Yes, let's reinforce the ideal that young people in debt who tried to do the sensible thing and get a higher education are, in fact, "Property of the State". Debt = Control. Freedom to leave the borders are denied.

Interest rates and penalties on that debt will help secure that control.

To the dear Baby Boomers who claim they paid higher taxes, let me remind you that in your day, any graduate with a univeristy degree easily walked into a job, your earning ratio to buy a house was 1/4 compared to 1/10 for my generation. You were subsidised well and paid little indirect taxes such as GST.

Well at the ripe old age of 40, after gaining two degrees and paying both loans back, and investing in the property market, I can only say the real money still lies in real estate, not a bread and butter job. My current hairdresser and her partner, who is a car painter ,have been working for six years and can afford a bigger house than I can.
My brother and sister both had substantial loans from university in the 90s, both went overseas to pay them off as they could never have here, earned more than me - particularly my brother as an IT manager in London - and I am still better off. Gen X have also waited close to 15 years later than their parents to have children, again another reason being student loans. Many of my friends were unable to have a family as they waited too long, paying down student debt and saving for a house. This is a true sadness.

Free education would start everyone off on an even playing field, regardless of parental wealth, and living costs akin to the unemployment benefit would give people choices. Part-time work is beneficial and would provide much needed employable skills when it came time to find "a real job".
I am sure over time it costs more to administer the scheme than it would have to provide a free education. If a student fails then they would have to go out to work. New Zealand could fund the shortfall by greater numbers of international fee-paying students.
There has to be some benefit to having had 5-6 generations of family building up a country. We are giving away our hard-earned inheritance to overseas immigrants and investors so freely. We live in a global world and you can't stop people from going overseas to pursue their lives, but by limiting student debt you will later on have young people creating businesses and wealth in other ways much faster and choosing to stay in New Zealand.

My local shearing contractor used to employ many students and receive many work inquiries.
After the introduction of interest-free student loans all approaches for work ceased.

Blaming students for the student loan system is pointless and circular. Today's students don't make education policy any more than previous generations did. You work within the system that the government creates - there will always be apocryphal stories of 'the student who ripped off the system do x, y and z', because there will always be individuals who is take advantage of any system (welfare, ACC, etc).
The government sets policy (usually for short-term gain) and they actively encourage secondary students to continue into tertiary education. Why? Because there are limited employment opportunities for school leavers, and having them in an institute keeps the unemployment figures down.
Telling everyone to get a job is pointless unless you are an employer currently desperate to hire a few thousand school leavers with no experience.