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