Media release: Interest-free student loans poor use of $6 billion taxpayers’ dollars
Wellington (18 August 2016): New Zealand’s interest-free student loan scheme has not achieved its policy objectives and fails to help students from poorer backgrounds access tertiary education, according to the latest report from The New Zealand Initiative.
Launched today, the report ‘Decade of Debt: The cost of interest-free student loans’, found the scheme has had little influence on improving equitable access to higher education. More than $13 billion has been lent to students since the interest-free scheme was launched by the Clark government in 2005. Since then, almost $6 billion in interest charges has been written off. More than $600 million was written off during 2014/15 alone.
Despite this significant subsidy, the report found that the scheme has failed to meet some of the goals set when the policy was launched. Tertiary education participation rates have fallen by 3.8 percentage points since 2005, students take longer to repay their debt, and debt owed by overseas-based borrowers has soared.
“Interest free student loans do relatively little to help poor households access tertiary education,” says Dr Oliver Hartwich, Executive Director of the Initiative.
“Instead, the government has had to ration loans to keep richer students from borrowing money to invest in term deposits, and this hurts poor families who struggle with living expenses during study. Too much of the scheme is a subsidy to upper and middle class households who can afford to pay their own way. If we truly care about students from poor households, we should look more closely at the real barriers to tertiary study.”
More broadly, the interest-free student loan scheme, which lent $1.5 billion in the 2015 financial year, puts a considerable burden on all Kiwi taxpayers. With the additional interest subsidy, taxpayers provide over 80% of direct costs of tertiary education for each student. This is an unfair cost on the many taxpayers who might not ever benefit directly from higher education themselves – and especially where the interest rate subsidy does not improve tertiary accessibility.
The report notes that New Zealand’s interest free student loan scheme is an outlier among OECD countries that charge for education, where targeted financial assistance schemes were commonly used to specifically help poor households, and interest was charged on loans otherwise.
The report argues this money could be better spent elsewhere.
For example, the reintroduction of interest on student loans would allow the government to raise or remove the cap on borrowing for living costs. This would allow students from poorer backgrounds to focus more on their studies and less on making ends meet, at the expense of a slightly longer loan repayment period.
More fundamentally, enhancing tertiary preparation at secondary school offers more promise for substantial improvement in tertiary accessibility. Redirecting some of the hundreds of millions of dollars currently subsidising student borrowing could yield greater returns.
You can view the report, and report summary, on our website.
Dr Eric Crampton is available for comment.
To arrange an interview please contact:
Communications Officer, The New Zealand Initiative
Phone: +64 4 494 9109
Mobile: +64 21 2937 250
About The New Zealand Initiative
The New Zealand Initiative is an evidence-based think tank and research institute, which is supported by a membership organisation that counts some of the country’s leading visionaries, business leaders and political thinkers among its ranks.
Our members are committed to developing policies to make New Zealand a better country for all its citizens. We believe all New Zealanders deserve a world-class education system, affordable housing, a healthy environment, sound public finances and a stable currency.
The New Zealand Initiative pursues this goal by participating in public life, and making a contribution to public discussions.
For more information visit www.nzinitiative.org.nz