As German-American journalist and satirist H.L. Mencken once explained, “Every election is a sort of advance auction sale of stolen goods”.
 
To prove him right, White House-hopefuls, blazing their campaign trails, are doing their very best.
 
The common tactic employed is to find something people really want and promise to give it to them. More often than not, this is achieved by taxing one person to satisfy another. It is robbing Peter to pay Paul. And sometimes, it is robbing Peter to pay, well, Peter.
 
Student loans are one of the issues at the forefront of these podium debates. Total student debt in the US currently stands at just over USD$1 trillion. This has inspired many POTUS-aspirants, like Hillary Clinton, to promise to lower interest rates as a solution to the growing student debt burden.
 
But just how effective is lowering interest rates levied on student loans?
 
Brookings Institution Senior Fellow Susan Dynarski argues that, based on the empirical evidence and economic analysis available, lowering interest rates is a blunt, expensive and ineffective policy tool. There are much better ways of encouraging greater tertiary education participation and reducing loan defaults than through low-interest student loans.
 
Sure, the lower the interest-rate, the lower the lifetime costs of tertiary education. However, as Dynarski points out, there is no compelling evidence that she can find to suggest that lower interest rates on student loans boosts tertiary enrolment. That’s probably because students are concerned about the principal cost rather than the interest when deciding to enrol in tertiary education.
 
A lower interest rate also does little to reduce loan default. While it does reduce the weekly payments required to cover both the principal and interest, any effect is small given that the size of loan repayments tend to be determined by principal, and not the interest rate.
 
Further, low interest rates benefit every borrower, including those with higher incomes who have little difficulty repaying loans. It is a poorly-targeted, expensive policy instrument if the aim is to improve affordability and participation among poorer cohorts.
 
If lower interest rates are a crude instrument in the US, how does New Zealand’s interest free student loan policy stack up? That question will be answered in June when the Initiative releases its tertiary education report, A Decade of Debt.
 
For those wanting a peek at our findings in advance, the moral is beware the uncounted costs associated with expensive electoral bribes.