If Labour forms government after the election, it will forgive a portion of some student loans.
The policy announced on Sunday aims to leave graduates “with less debt, more of their income in their pocket, and a better chance to build their lives here in New Zealand.”
The policy will certainly reduce the outstanding student loan balances of eligible borrowers. Their loan balances will reduce by ten percent.
People can and should come to their own views of whether it’s a good policy. But a few effects are predictable and could be weighed in that assessment.
First, a bit more detail on the policy.
On 1 April of next year, domestically-based borrowers who have finished study, who are not in arrears on their loan, and who did not benefit from the Fees Free policy would benefit from the loan-balance reduction. And the same thing would happen again in 2031, and every year afterwards, for new cohorts of eligible student borrowers. Those later cohorts would also be eligible for a full loan write-down if their balance is $2,000 or less.
One News reports detail on Labour’s costings that is not available on Labour’s website. They say it means an $813.5 million headline reduction in student loan balances. A loan that carries no interest charges is worth far less than its face-value to the lender, so the actual cost to the government is far less than the headline figure. One News reports that Labour puts the cost of the write-down at about $460 million.
In short form, if you didn’t benefit from fees-free study and are up to date on your loan payments, your student loan balance will be decimated next April. For future cohorts, three years of New Zealand residence will also be required, but will come the additional low-balance write-off benefit.
The distributional effects of the policy are not what you might normally expect from Labour. The largest benefits are for those with the largest loans and who earn enough to be able to pay the thing off over time. Someone who accumulated large balances, stays in New Zealand, and does not earn more than $24,128 may have no repayment obligations. Someone earning $25,000 would be paying about $105 annually toward their student loan and, for a large loan, may never pay off their balance. The reduction is worth more to someone who otherwise would have repaid the loan more quickly.
That effect follows mechanically from the structure of the student loan scheme and is not any particular flaw of Labour’s proposed policy. Reducing any income tax rate similarly provides larger benefits to those earning more than the top of the relevant band than to those within the affected band.
The student loan scheme currently provides little incentive to pay off one’s loan more quickly than is required, at least for domestic borrowers. Inflation reduces the real value of loan balances that do not carry interest, and other borrowing tends to charge more than zero percent.
The proposal further reduces most borrowers’ incentive to pay down outstanding balances more quickly. Waiting until after April would mean a larger government contribution toward those repayment efforts - with two important exceptions.
Borrowers who can clear any arrears will benefit from the write-down, so there is reasonable incentive to do so.
And those whose loan balances are within sight of $2000 will also have very good reason to pay down their loan more quickly – or at least for future cohorts of borrowers. The most reasonable reading of Labour’s policy document has that benefit only applying from 2031 onward, but it is not entirely clear. Other parts of the document say the benefit would apply for any graduate who has been in New Zealand for three years following their study.
For eligible cohorts, if you can get your balance down to $2000 in time, the government will wipe out your entire balance. If you only reach $2001, the government wipes $200.10 from your balance.
As of 30 June 2025, 16% of New Zealand based borrowers had balances under $5,000; another 17% had balances between $5000 and $10,000. Those with available cash and higher earnings could have very strong reason to get their balance down to $2000 by the eligibility deadline to get the full write-off. Those without the available cash will only get the 10% write-down instead. For anyone still owing more than $20,000 at the assessment date (42% of domestic borrowers in 2005), the ordinary 10% reduction is worth more than $2,000.
For borrowers whose balances are wiped out, the policy really would affect money available for living costs. For everyone else, effects on disposable income only come with a lag. Each fortnight’s loan repayment depends on your income, not on the remaining amount of outstanding debt, until the debt is paid off.
If borrowers with balances above $2000 hurry to get their balances down, the cost of these write-offs could be higher than Labour expects. But at least the government gets some of its money back more quickly.
A different margin could be more costly.
Currently, every incentive in the system encourages borrowing the maximum amount, whether the money is needed or not. Any money not actually needed for living expenses can be invested in term deposits.
Imagine a student who gets no Student Allowance because parental income is too high, finances tuition fees with a student loan, but uses savings to cover living expenses rather than borrowing. That student already has strong incentive to keep their savings and to borrow at zero percent interest to cover living costs.
Under Labour’s policy, that student’s return increases considerably. Rather than just earning the margin between zero percent and the term deposit rate, they will see a 10% write-down in their balance three years after completing their studies. If they hadn’t already maxed out their loans, they would have stronger reason to do so.
Of course StudyLink can stop payments if the loan is not used for purposes intended by the scheme. And it would not be an option in any case for a student who already needs the full amount for actual living expenses. So it’s an option that is more feasible for richer students than for poorer ones.
So we should expect that borrowing will increase if students expect loan balances to be partially written off three years after graduation. How many students will decide to stay here rather than move abroad after graduation is anyone’s guess. But moving abroad already means facing actual interest payments on student loan debt.
New Zealand’s Student Loan Scheme is already heavily subsidised. Every year, the government writes down the value of its lending, largely because that debt attracts no interest. In the most recent annual report, the subsidy provided through new student loan lending amounted to $585 million – the cost of the initial write-down.
That ongoing subsidy would increase under Labour’s proposed policy, in addition to the up-front cost of about $460 million, with some odd distributional and incentive effects.
I suspect there are better uses of hundreds of millions of dollars. But it is an election year.
To read the article on the Newsroom website, click here.