Forgetting we live in the real world

Depositphotos_78455986_original.jpgIt’s been a long while since I’ve posted here, so a bit of a reminder. I am a tertiary student, and a former Director of the Waikato Students’ Union. I’ve been around tertiary education since 2010, and have no idea of how the New Zealand Initiative can fail to see the flaws in its conclusions on interest free student loans.

Now, I have only had a quick read through the report, so I’m sure there’s a lot more details in the document. However, my understanding is that they’ve basically said interest free student loans have cost $6 billion over the past decade, and are not getting impoverished New Zealanders into tertiary education. They’re also saying that students should pay a larger portion of the costs of their education which should be able to increase at an unlimited rate.

Yes, impoverished New Zealanders are still lagging behind middle and upper New Zealand in their rates of higher education. That’s something I’m happy to concede. That doesn’t mean the interest free policy has failed, however. As was said in the report, the two main intentions of the policy (ignoring the politics of the matter) were to reduce the overall cost to tertiary students and to improve the accessibility of tertiary education to New Zealanders. Accessibility being the key point in that second intention.

Obviously, the policy has been successful in its first aim of reducing the cost of tertiary education – it’s clearly done so by a net amount of $6 billion. What I would contend is that it has also increased the accessibility to tertiary education.

Let’s look at some theoretical numbers. Assuming a constant interest rate of 5%, that your salary increases by 3% on an annual basis, and you start by earning $50,000 per annum. On a $45,000 student loan, you’d be paying nearly $20,000 in interest. Just because impoverished New Zealanders aren’t taking up the option of going into tertiary education doesn’t mean that it hasn’t become easier for them to access due to the interest free loan scheme – at least in terms of fees.

The New Zealand Initiative also wants the Government to scrap fee caps, while also increasing the amount that students will have to pay themselves. Do we really want to make tertiary education that inaccessible? Not only are students going to have to pay interest under their plan, but they’ll have to pay more of the overall cost, which in itself will be higher. If we want to have highly educated New Zealanders, this is the wrong way to go about it.

The point that gets me the most though is that supposedly, this has “cost” the Government $6 billion. That ignores two very important points. Firstly, if interest was introduced back on to student loans, the number of people in tertiary education would decrease, reducing the revenue the Government receives from loan interest – and of course, there’s also the decrease from the unlimited increases in fees, a higher percentage of which is to be paid by students. There’s also the fact that the student loan scheme is not there to create a revenue stream for the Government. It’s there to make tertiary education more accessible to all New Zealanders.

Now, on a personal level, I completely believe in the free market being the best option in most situations. However, when there’s social benefit to a good or service being consumed in higher rates, taking this out of the hands of the free market, at least partially, makes sense. Yes, it creates market inefficiency, but we live in the real world, not an economics textbook. Economics isn’t the only thing to take into account. In this case, I’d trade off the market economics that the New Zealand Initiative clearly wants to work within for the social benefit we receive from tertiary education.

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Posted on August 20, 2016, in New Zealand Politics and tagged , , , , . Bookmark the permalink. 2 Comments.

  1. Couple notes:
    1) We don’t dispute that there are some positive external benefits from a more educated population. But the broader public is currently paying 82% of the cost of each student’s degree once the subsidy from zero percent loans is factored in. In the mid 90s, the Ministerial Forum report on tertiary ed recommended two options, one that would increase the private share of tertiary costs from 20% to 25%; the other suggested raising it more than that.
    2) The constraints imposed by zero percent make for real difficulties for some students’ financing of their education;
    3) We hear a lot of horror stories about kids taking out tens of thousands of dollars in debt and winding up unemployed. That isn’t an argument for zero percent loans. That’s an argument for much better career guidance in the high schools and for much better tertiary preparation.
    4) Whether the loan is with or without interest, the only thing that changes on the repayment side is how long the repayments go on for. A student leaving tertiary with a bachelor’s and with the median loan balance (about $16,700, half will have more debt, half less) would take only a few extra months to pay if off were interest charged. At an interest rate of 7%, it would take about an extra year. I’m not saying that that’s what the interest rate should be, I’m rather trying to give an anchor point for thinking about the effects of interest. Lower interest rates would mean there would be fewer added months.

    Check my piece on some of this here. http://www.interest.co.nz/opinion/83183/nz-initiatives-khyaati-acharya-eric-crampton-argue-better-tertiary-preparation

    • Thanks for your comment, Eric.

      I stand by the fact that all of this is working on the basic assumption that the student loan scheme should be a revenue stream for the Crown. If that isn’t the case, as I strongly believe it is not, then the cost of zero interest loans is zero, because the Crown isn’t foregoing anything by not charging interest. While there is obviously costs to running the student loan scheme, those should be covered by either StudyLink’s establishment fee of $60 per year a loan is taken out or IRD’s administration fee of $40 per year. If that’s not that case, then maybe those fees should be increased slightly.

      Yes, it is certainly true that people leave tertiary education without employment. And you’re certainly correct in saying that there needs to be better career guidance. However, that doesn’t change the fact that potentially having thousands of dollars added to your student loan every year while you’re unemployed, particularly if that unemployment is at least partially due to a system failing the student, is intrinsically unfair. Could a system where you don’t get charged interest if you’re not in employment work? Maybe, but that would add unnecessary complications.

      Something I only thought of after writing this as well, is how do you propose interest be dealt with for students who current have loans and would also continue to study after the introduction of interest. You say those with current loans shouldn’t have interest added, because they’ve agreed to being interest free, yet those same people will be signing new contracts every year until they continue studying. Would you propose charging interest on the new loans but not the old ones? What about repayments? Would they be applied to newer loans first, therefore reducing the amount having interest charged, or would it be older loans first, therefore you’re not only having interest charged, but you can’t pay it off? Adding interest is not only unnecessary, it also adds unnecessary confusion.

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