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