Dump interest-free student loans

OPINION

Eric Crampton

Is targeted assistance better than interest-free loans for all? (Pictured: Otago University students)

Eric Crampton on interest-free student loans - "It's hurting students, the tertiary sector and tertiary accessibility"

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Should the govt charge interest on new student loans?

Yes
63%
No
37%
Total votes: 389

The train-wreck was utterly predictable but we should still look back to see how it happened, how bad it was, and how we can keep it from happening again.

This week, The New Zealand Initiative released its decade-on retrospective look at the government’s interest-free student loan policy.

Ten years on, the government has provided billions of dollars in interest rate subsidies. Writing interest off of existing loans in 2006 cost over $1.4 billion. Since then, the government has written $5.75 billion from the value of its $13.4 billion in loans to students. This past year alone, the government lent $1.5 billion under the student loan scheme, and immediately wiped $602 million from the value of that asset.

Big numbers – in the hundreds of millions per year – need benchmarks for scale. In 2015, the government provided $504 million in means-tested student allowance and accommodation benefit programmes for students. The interest rate subsidy, provided indiscriminately to any student wanting a student loan, exceeded that means-based spending by almost $100 million.

What good has the government accomplished with the billions in subsidies offered under the interest-free student loan scheme? Not much. But there have been rather a few downstream consequences that are less than laudable – even if they were entirely predictable.

Student numbers flat
Tertiary participation rates peaked in 2005, when Labour announced the ‘zero percent’ loans policy. It declined every year since then and now stands at 10.2%. The number of full time students plateaued in 2004/2005 and has been roughly flat since. Work by Nigel Healey and Philip Gunby at the University of Canterbury showed that age-standardised university participation rates did not improve with the policy change. Rather, existing increasing trends flattened a bit.

The policy also did nothing to reduce students’ debt burden. If anything, the fortnightly repayment burden increased.

All else equal, loans attracting no interest should be faster to pay off than loans on which interest is charged. In 2005, before the interest-free policy was adopted, half of all student debt was repaid within 6.7 years. By 2011, the most recent year for which figures are available, that repayment time had increased to seven7 years. Why the longer repayment time?

New Zealand runs a sensible income-contingent student loan repayment scheme. Every dollar earned over a set income threshold, currently $19,084, attracts a repayment tax until the debt is paid off. Students can voluntarily pay more than that minimum requirement.

Because graduates can be reluctant to pay off debt that attracts ‘zero percent’ interest when saving for a house deposit or when starting to pay off a mortgage that does carry interest, the government had to increase the repayment tax from 10% to 12%. Consequently, student loan repayments, for those preferring to make only the minimum repayments, take a bigger chunk out of fresh graduates’ paycheques now than they did before the interest-free policy.

Students have borrowed more and have less reason to pay off their loans quickly, so repayment times lengthened.

The policy has also had a few negative implications for the tertiary sector.

Every dollar borrowed by a student to cover tuition costs is forecast to cost the government, in 2016, 42.2 cents. That’s the immediate writedown on the value of the loan asset. And so whenever tuition rates go up, the government bears a substantial part of the burden of tuition hikes through the student loan scheme. To mitigate those costs, the government restricts universities’ tuition increases through annual fee maxima.

Tuition caps are not new but more universities cluster around the maximum – the caps now seem more binding. Capping tuition fees can be important if borrowing at ‘zero percent’ makes students less price sensitive. But it also constrains universities against differentiating themselves on quality. If a university wanted to market itself as a higher-cost, higher-quality option, that route is barred.

It isn’t hard to see the links from the ‘zero-percent’ loans policy to other government controls on borrowing.

Because students only repay if earnings are above the threshold, no interest accrues, and debt is expunged on the borrower’s death rather than being covered by the borrower’s estate, the government has had to restrict access to loans by those nearing retirement. Some would be taking the loans out, knowing they would never need to be repaid, because taking university courses can be a pleasant way of spending one’s retirement – and not cannot. Others would be trying to re-train in a changing job market and can no longer access student loans to do it.

Similarly, without caps on borrowing for living costs, students may be tempted to borrow rather a lot of money at ‘zero percent’ and put the money into term deposits. The scheme would collapse without caps on borrowing. But with caps on borrowing for living costs, students without family resources to rely on have to take on part-time work to cover rising accommodation costs. They would often be better off if they could take on more debt, even at interest, and pay it back when in employment. Instead, these students struggle to juggle employment and study.

The Child Poverty Action Group’s report on student debt, released last week, reaches some similar conclusions. It has further found some students at the bottom have turned to credit card debt to make up the gap between living costs and what they are allowed to borrow at zero percent. The constraints established to keep rich students from rorting the system have real costs for those at the bottom. And more than twice as many students from decile 9-10 schools go on to tertiary study as do students from decile 1-2 schools. Does this make sense?

Interest on new loans
New Zealand is also an outlier internationally. Government-backed loans are common. Lending at ‘zero percent’ is not.

If the government introduced interest on new loans issued starting in two years, it could afford to do many other nice things. Most obviously, it could relax some of the restrictions it has had to put on lending to avoid the rorts that would inevitably follow if students could borrow without limit at zero percent. Student loan repayment times would increase – by about a year for a graduate with a bachelor’s degree on the typical earnings path. But the student’s university experience could be rather better.

Importantly, some of the resources used to provide interest rate subsidies to university students could instead be directed to measures that could really improve access to tertiary study.

Labour has suggested improving guidance and career counselling at secondary school but that is only a start. Subsidies provided through the interest-free student loan scheme cost over $600 million a year. If even half of that were reallocated to primary and secondary schools to help improve preparation for tertiary study, that could cover over $100,000 a school. What sorts of programmes could be piloted, trialled and rolled out with those kinds of resources?

It is time to stop seeing the government’s interest-free student loan policy as simply being “bad economics, but good politics.” It is bad for a lot of students, bad for the tertiary sector, bad for tertiary accessibility, and bad for equity. Train-wrecks should not be good politics.

Dr Eric Crampton is head of research at The New Zealand Initiative


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Make them pay for their loans

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I have a student loan payments gong back to when I was 29 years 30 years old and being on a WINZ benefit income money I can't afford to pay it off limited cashflows need real money to pay it off now am 50 years old with a big student loan payments behind me latter in my old age

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Can we ask why you took a loan in the first place if you did so to do a degree when you could never earn enough money to pay it back after that length of time?

If you have suffered sickness or catastrophe then fine, but if not then you really are the poster child for why loans should not be automatic and interest free.

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Well if that is the case you can look forward to your NZ Super payments being deducted by a certain amount each week can't you!! your case is no different to the thousands of disappeared Fathers, who have failed in their child maintenance repayments that we/I as a NZ Tax Payer have had to stump up with on your behalf, I hope they nail you and nail you good, as you are nothing but a self confessed PARASITE!!! I couldn't afford my repayments either, but I made them right up to the very last cent!!

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“Don't you find it odd, that when you're a kid, everyone, all the world, encourages you to follow your dreams. But when you're older, somehow they act offended if you even try.”

Don't judge a book by the first sentences of page 298... ;)

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I'm up to page 290 but have had Cataract surgery so have had to put it on hold, perhaps I should have started on page 298 and gone backwards, ohh $7800 and a few cents for both Eyes or it was a 3 year wait.
It was the way we were bought up, we had a Father who never ever owed anyone a cent, so myself/Sister & brother are all the same as are our combined kids, all they have is mortgages thankfully, it was hammered into us, beware of the "Yellow Peril" and Cash is King, everytime a bell rings it rings in our Ears!!.

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John Keys legacy. He doesn't have one. Not a single bold decision of any significance. A complete non-event. Just skirting around the fringes of everything.

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You are wrong his legacy is uncontrolled immigration from China and India and he has changed NZ forever

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Xenophobia, common trait among NZ Caucasian settlers.

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Hypocritical comment.

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Sorry but that immigration policy was all started by Clarke & Cullen, go look it up and see.

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Student loans was a labour bribe genious

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*that's genius, er, genius.

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If 18 year olds didn't have the vote, interest free loans would never have happened. Pure election bribery. The same with " Working for Families".

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I would have really struggled to pay off my loan if it wasn't interest free. I think its a fair system. As for bribery - you could argue that for many things - such as superannuation paid to anyone over 65, regardless of their income and assets. We vote in our own interests - democracy.

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NZ Superannuation payments have been contributed to over the entire working life of the recipient, for the recipient it has been a proportion of their taxation payments every week, week in week out, a loan is a self inflicted proposed DEBT over a period of time as determined by the debtor, how you can lump them into the same category really does show you level of intelligence, other than fund your Alcohol intake and your collection of Electronic devices, what else did your Student loan fund provide for you?

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Observer, that would make sense if a portion of tax paid was withheld from the current budget and allocated to future pension requirements (like the super fund does) on the basis of future entitlements. We all know that is not the case, tax deducted is used for current budgets - what you state here is an absolute fiction. Tax paid 25 years ago is not an entitlement to future superannuation. NZ Super is a benefit just like any other benefit even if people like to pretend otherwise.

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" We vote in our own interests". So the politicians make policy for their own interests. That's the trouble?
Superannuants 600,000, Working for Families 400,000 Welfare 330,000 Interest free student loans 200,000. Without the addition of Paid Parental Leave, Gold Card, Community Card and many very suspect ACC payments,
Not against welfare for the needy and those genuine but we have become drugged on transfers and have forgotten that we have to take the money off someone else first. Someone else is always forgotten.

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Meaningless, not to mention hypocritical.

You could say exactly the same thing about reducing top tier taxes and middle-aged boomers (at the time) who decided to reduce services for the next generations so they could have more of the money pie for themselves.

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I come from a rural background. My local shearing contractor used to employ many students and also turn many away.
Since interest free loans become available not one, yes not one student approached him for employment.

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There would be a lot of people who would not choose shearing as a career path given the chance to study anything they wanted.
Young people who could not afford tertiary study were forced to work in jobs they didn't want, even if they were technically capable and bright enough.
I do know a lot of people who have worked as shearers and loved it, but it's not the kind of work for everyone.

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I wasn't necessarily meaning actual shearing but shedhands which most are capable of doing after a few hours of instruction. These jobs are temporary and a means to an end.
My sister, to her credit, did this work for weeks on end, November to February to pay her way through university. Her son, a generation later also worked 3 jobs to pay his way.

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Mr Little hinting at student debt writeoff. Oh yes Andrew and what sort of a lesson does that teach the upcoming generation?

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Harrumph... How many people reading this article got a *free* education, with no debt, and of course no interest on debt?

I'm disgusted with my generation - Boomers raised on peace and love, we had everything on a plate, good jobs, cheap housing, limitless horizons of opportunity, and a welfare safety net paid for by our parents through sacrifice and blood, so we would never experience the horrors they saw... What have we become? Selfish, embittered, grasping, heartless and old.

What's worse, we have left them a world of trouble to contend with... Climate change, Global debt, rising population, falling growth, diminished expectations, and few prospects of avoiding catastrophy.

For all this, the present generation has not yet risen up against us and our mismanagement. I wish they would. But even if they are late in waking up to their new political power, we can expect little compassion from them in our dotage, given how we have hoarded and rationed the things they needed to make their way in life. We are fools. Pray they treat us more kindly than we have treated them.

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Your generation definitely screwed kids over on housing affordability, with Boomer NIMBYs ruining the country. But not on tertiary. Kids far better off paying 12% extra tax until the loan is paid off instead of paying high income tax forever. Please read appendix table 1 of our report. It has the evidence on it.

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I'm a baby boomer, and I had a student loan. Paid it off in full too. Back in the 80s when many of my peers were at University, I was working paying taxes so they could study for free. I didn't start Uni until student loans had been brought in. Do you hear me complaining? Absolutely NOT. So as politely as I can say it, one boomer to another, why don't you shut up and stop talking BS?

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Boomers who received so much from their previous generations only to take it all away from those following so they could drop the tax rates for themselves, I can definitely attest to that (having seen it). History may well record Boomers as the most selfish generation, getting the best of both worlds - all the benefits (including cheap property, thanks to Land Tax), then little of the tax burden.

Pension for the boomers will continue to be the biggest single component of beneficiary payouts. It may well be a reasonable idea to peg student loan interest to the Reserve Bank rate (or slightly above), but we absolutely know we need to address the pension beneficiary timebomb. Although most in the younger generations recognise that Boomers have timed it nicely - the following generations will need to rely on their Kiwisaver as the pension falls by the way, but the Boomers will get to milk it to the grave.

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Don't worry about it, Smith. We (the Boomers) will fix it for you. We'll just bring in another 1 million young Indian and Chinese immigrants. Their hard work and enthusiasm will soon put paid to your sour 1st world resentments. Oh, and we must make sure that we make National Super means tested from about 2035 onwards, eh? We can't have you fellas collecting National Super and picking up your big fat Kiwisaver cheques once we've gone now, can we?

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The sentiment certainly matches the pyjamas.

"Get off my lawn!"

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I took out a big student loan payments in 1996 when I was 29 years 30 years old and am on the WINZ benefit income money monies and there's no way I can pay it back now being 50 years old its bloody impossible living in poverty coping with rentals properties has tenants rentals in Queenstown but yes I find it hard paying back a $20,000 plus student loan payments plus interest no way I can't do it now

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Punctuation is free!

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Interest free loans are good for getting students into tertiary education that their parents can't afford.
What is bad is how it is managed after that. There should be incentive for rapidly repaying the loan.
Eg, why can't we start interest free and start progressively charging more interest as the years go by?
About the article - maybe a lesson in macro economics would help? Surely there is massive benefit in getting more students into study even if subsidized. I must have missed that in the text.

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Zero percent loans have had no noticeable effect on tertiary enrollment. Shifting that spending over to means tested support and better funding for secondary schools has a better shot of improving real access to tertiary education.

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But what is the effect on the socio-economic background of university students these days, and on NZ students versus those from overseas? To simply say that total enrolments haven't changed is misleading.

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Why have any student loan payments in the first place, its just scams brudy in the first place waste of time taking out student loan payments doing courses degrees what ever at polytechnics or universities unless you have the money monies go for it but for example student loan payments is a night mare for many older and younger people yes its a classic example student loan payments don't work everything was a scam from day one till now by the last labour government having interest on student loan payments it does not work at all

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With the cost of money at such a low ebb, perhaps this a bit of a redundant argument. The idea of making tertiary tuition free once more ( for those who meet the grades ) is possibly a more relevant discussion.

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Agree with Steve Smith, Anonymous is spouting BS indeed. The main fault with us boomers is that our spawn did not get to experience hard yakka at a young age and they had no opportunity to pay 66 cents in the dollar income tax either. Very good at bleating tho'

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When Gen Y and the Millenials come into power, you'll get to experience 66% tax again. And land tax. And since you are so nostalgic for hard yakka as you imagine, you can expect to be forced out of retirement as well.

You really don't understand what a mess we've left them, do you? But no doubt you will, eventually.

In the end, when we have lost our power, and are most in need, you can expect they will treat us as compassionately as we have treated them, and that is a scary thought.

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"they will treat us as compassionately as we have treated them, "

So you are a politician and claim some responsibility for what has occurred?

That is at least noble, but almost certainly fatal.

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You sound like somebody who votes for the Green Party, or even worse, a member of it.

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Student loans payments are a scam and will always be a scam in taking out student loan payments its those 80,000 people travelling outside of NZ. Now will have pay it all back the debt defaulters collection agencies services will be in to them when they come back to NZ they won't be allowed to get personal loans payments over crafts yes the next generations will find it hard to pay off everything poverty rentals property's you name it they are the ones that can't afford to pay it back those DEBT defaulters collection agencies services will be into them living overseas in other countries and ird will hit those ones big time when they come back to NZ

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Probably time we stopped moaning about the small amounts and started addressing the biggest segment of beneficiaries - the Pension. It's not affordable, and people with Kiwisavers suspect / know it won't be given to them when it's their turn.

Perhaps it's time to start means testing the Pension against the value of property held (including as a beneficiary of a Trust), and perhaps the value in today's dollars of a free education had.

Just to even things up across the generations.

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That's fine. I'll transfer my property into a Trust and make some 20-somethings discretionary beneficiaries of it. Of course, they won't actually receive anything from it and I'll just be the Settlor, with a very long-term renewable lease at a peppercorn rent. You got to give it to us Boomers, we are inventive! We've reinvented everything!

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The current loan scheme does seem to offer the worst of all worlds. Students cannot draw down enough in living allowance payments to go and stay in a hostel away from home (or even the cheapest of flats once you had in food and expenses) while they study so still have to rely on parents if they haven't been able to get a part time job and save enough.

Students who have asset rich and taxable income poor parents get a benefit payment while those with parents with reasonable taxable incomes and much less in assets get only loans, and with a lower cap than the study benefit.

And why can't all payments to those not working (at least those with no dependents) take the form of a loan rather than a handout? Why should students have to get a loan for living expenses while the unemployed get totally free money?

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I suspect there are plenty of people who have been through a University degree course ( sometimes of little or no practical value in the real world) but would have been better off going into a trade. Why are so many students, and urged by parents parents too, so keen to go to University when other skills are so thin on the ground, as we are experiencing now. Thus the migrant inflow.

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Kiwi companies aren't hiring high school graduates. Kids coming up now are told they need extra qualifications to get into the work force. Are you suggesting boomers need to start making a deliberate effort to hire and train high school graduates?

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How about we have a Bracketed payback system for graduates - whereby the more they earn the more they pay - therefore they have to accept lower pay after Uni until it is paid off

Of course I am keen on interest on the loans, for the simple reason that I know far to many people who got a loan while at uni then had their family pay it off when they finished - so that they got interest on the money - something which has the perverse effect of increasing wealth inequality

But let be honest about the NZ sup scheme, and start to means test it so that you can only access it if you are not working (or not working full time) -as this would also stop some of the inequality as people who are still earning can get their super as well...... (and I include the Super Gold card in this)

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