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May 16, 2011 | by  | in Features |
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Easing the Burden

In a television interview last on month, John Key expressed his view that Labour’s decision to remove interest from student loans in 2006 was poor economic policy. Tertiary Education Minister Stephen Joyce noted in a Q+A discussion with Paul Holmes in April that for every dollar lent under the scheme, the Government loses 45 cents.

A question that arises from these statements is why the Government continues with an interest-free policy that it seems to believe is haemorrhaging public money. As Holmes queried with the conviction characteristic of an interviewer backed by incensed taxpayers across the couches of New Zealand, how can the Government “justify handing out free money that you won’t get back for years?”

It seems that for the Government, as with much of the political jousting around student loans, the answer comes back to numbers. The approaching Budget announcement presents a prime opportunity for the Government to put interest back on student loans, eliminating in Key’s words the “message it sends to young people to go out there and borrow”, as well as increasing revenue in these cash strapped and disaster stricken times.

However, 580,000 people have student loans and a significant portion of these debtors will vote in the November election. Putting interest on student loans could lose National the election. As well as being a political lemon, it might not be as economically fruitful as its supporters would contend. Interest on loans is likely to result in longer repayment times and could result in a higher proportion of students travelling overseas to work—if interest accrues regardless of location, then it is only sensible to work where you are paid the highest salary.

With National conceding what Joyce calls “the political consensus on interest-free student loans,” the Budget is not likely to pose an unwelcome surprise for students in this respect. But other changes to the student loan scheme have been fore-shadowed by the Government, including restricting access to some student loan borrowers and targeting overseas debtors. The prominence given to the loan debate in the lead up to the Budget and under Sir Paul Callaghan’s HEKE campaign has caused many to ponder alternatives to the way student debt is currently managed in New Zealand.

Growing Debt

According to the Ministry of Education annual report, in 2010 New Zealand was home to $11.145 billion dollars of student debt with the average student loan held by Inland Revenue totalling $16,731. For those staying in New Zealand, the median predicted repayment time in 2006 was 4.5 years.

A 2010 survey by the New Zealand Union of Students’ Associations has found that only 12 per cent of students in 2010 were debt-free by the end of their qualification and the average student debt has risen 31 per cent since 2001.

Maria Goncalves-Rorke, Manager of the Victoria Financial Support and Advice service, observes that debt can be a common source of stress for students and might have an impact on a student’s ability to study and general wellbeing. The broader effects of debt are also supported by the New Zealand Union of Student Associations’ survey that indicated that 58 per cent of students feel stressed about their financial situation. More than half of students with loans perceived debt as a factor when making future decisions about travelling overseas, saving for the future and buying a house. 37 per cent of those with a loan said that debt would influence their decisions about whether and when to have children.

Far from treating loans like a grown up version of Monopoly money, these statistics indicate that loans are a serious and often worrying consideration for students in determining future plans.

Changes to the Student Loan Scheme

Last year the Government developed several reforms aimed at curbing the public cost of the student loan scheme. A voluntary repayment bonus scheme was introduced as well as performance requirements and a time limit to loan scheme access.

The performance requirement introduced by National was a particularly controversial restriction. Effective from January this year, the policy means that after approximately two years of study a student must have passed at least half of their courses to continue to be eligible for the student loan.

Grant Robertson, Labour’s Tertiary Education spokesperson at the time, was highly critical of the fact that this policy change had retrospective effects. Robertson contended that it was unfair to hold students studying in 2009 to a performance requirement when they were operating under a different policy and set of expectations.

In a statement published on the Labour website, Robertson notes “the classic situation here will be a student who enrolled in a university in 2009, found that they could not cope and failed their courses. They may well be at a polytechnic this year and doing much better, but if they fail just one paper they will lose their eligibility for student loans”.

Fast forward to this year’s Budget announcement and the Government is again considering significant penny-pinching changes to the student loan scheme. These include rejecting student loan applications where a student is already behind with repayments, reducing loan entitlements for trainee pilots and students over 55, and measures aimed at collecting overseas debt.

Overseas debt is a significant issue with a total of 85,000 loan debtors abroad. On average those with student loans living overseas have slower repayment rates and are much more likely to be behind in their repayments compared with those who reside in New Zealand. While people living in New Zealand have loan repayments automatically deducted through the taxation system, loan repayments overseas are voluntary in practice due to a lack of enforcement mechanisms.

The spotlight has already been focused on overseas student loan debtors this year with Sir Paul Callaghan’s campaign encouraging New Zealanders overseas to become ‘Heroic Educated Kiwi Expatriates’ by making repayments on their loan as a contribution following the Christchurch earthquake.

The appeal has resulted in a $2.5 million increase in repayments to Inland Revenue when compared to the same period last year which is, as Callaghan put it in a speech to Lincoln University, “better than a cake stall”.

The Government is also increasing efforts to recoup the $2 billion student loan debt owing overseas. The three-year loan repayment holiday for those living overseas is likely to be reduced to one year and debt collectors will be used to retrieve loans in Australia and Britain.

In the lead-up to the Budget, National has suggested reducing the loan entitlement of groups with a poor repayment record. According to Joyce, the Government loans $30 million a year to trainee pilots but only receives 40 per cent of this sum back as many aviation students do not go on to be employed as pilots. Students over 55 are also targeted by cuts with this group potentially losing the ability to claim living costs. Joyce says that because these students are closer to the end of their working lives, around 70 per cent of the loan investment in this group is not returned.

Labour’s Tertiary Education spokesperson David Shearer has expressed opposition to the reduction of loan entitlement for older students. In a statement on Labour’s website, Shearer notes that the adult education sector has already been reduced by cuts to continuing education programs and extramural numbers. Shearer believes that restricting the ability of older students to retrain and upskill is not an appropriate Government response considering New Zealand’s aging population and a rapidly changing work environment.
The proposal also has the potential to be challenged on the basis of the Human Rights Act which limits age discrimination.

A Better Way?

More radical changes to the student loan scheme have been also been suggested by advocates outside of Government. Fidelity Life Chief Executive Milton Jennings has said that one way of alleviating debt would be to allow KiwiSaver members to use their accumulated funds to pay off student debt. Fidelity Life currently has 70,000 members in its KiwiSaver scheme.

In a speech to Grey Power this month, New Zealand First leader Winston Peters advocated a loan scheme where Government contributes a dollar for each dollar of student loan repayment. A student with a $30,000 student loan would therefore be debt free after paying back $15,000. Peters believes that this initiative would result in the return of the student loan scheme’s “economic exiles”—a group that would then compensate the Government for its initial contribution by paying taxes once they re-enter the New Zealand workforce.

The Greens also support a policy of student debt write-off. Under the scheme listed on the Greens’ website, a year’s worth of debt would be eliminated for each year that a person stays in New Zealand contributing through full-time paid or unpaid work. The Greens back a universal student allowance, which would mean that fewer students would require the student loan for living costs while studying.

The ACT Party’s Finance spokesperson Sir Roger Douglas has said that a low level of interest should be placed on student loans. In a press release last year, Douglas said that the interest-free scheme was “Robin Hood in reverse”, with people from generally wealthy backgrounds going on to tertiary education while those who go straight to work from school subsidise them through their taxes.

Wisdom Outweighs Any Wealth

Viewing student loans as a tax sinkhole, with politicians shouting estimates from the sidelines every so often, has the tendency to distract attention from what student loans facilitate—and that fine pillar of society called education.

John Key was correct in predicting that removing interest from the student loan scheme would create an increase in the level of borrowing. The number of student loan borrowers increased 25 per cent after loans were made interest free. Although the level of student debt increased, more New Zealanders were able to gain a tertiary education with the significant personal and community benefits that this entails.

In 2010, half of the New Zealand population held a tertiary qualification according to Ministry of Education statistics. A Ministry of Education Report highlights research indicating that people with tertiary qualifications have lower rates of unemployment, higher incomes and increased levels of wellbeing. The OECD Education at a Glance report for 2010 found that in New Zealand for every dollar invested in tertiary education, there is a return of $8.30 for every male graduate and $5.90 for every female graduate.

Goncalves-Rorke says that in the experience of the Student Finance team, students do not see the loan “as free money, more an opportunity to get a qualification and a better future”. As restrictions are placed on student loans, fewer people will realise this better future for themselves, for their community, for those who have passed before them and for those who will follow. In assembling the Budget, the Government needs to tread the fine line of limiting student debt without restricting access to education.

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