Interest-free student loans have been very costly. The billions spent over the past decade subsidising student loans is only part of it.
As we explain in Decade of Debt, the government had to layer controls onto student borrowing, and onto the tertiary sector, to contain the costs of the interest-free subsidy.
When every tuition increase means a substantial cost on the student loan balance sheet, tertiary tuition caps become more binding.
Graduate students needing longer terms of study butt up against constraints on the maximum number of years of allowed borrowing.
And students in real financial hardship, as explained by the Child Poverty Action Group, turn to rather more expensive sources of credit when they cannot cover their real accommodation costs through the student loan scheme.
But it would be even worse under zero-fee schemes.
Labour has occasionally mooted free tuition as a solution to rising tertiary costs, citing free tuition in countries like Sweden. And both baby boomers and current students note the free tuition enjoyed by generations past. But those systems also come at a cost.
The costs of those systems, for students, are most obvious in the OECD’s most recent Education at a Glance report. There they tally up the private costs and benefits of getting a tertiary degree in a range of countries.
The direct costs of study, including tuition and course fees, are well known. Less well recognised, but far more important, are earnings forgone by students while in study. The extra earnings that come with a degree have to be at least enough to compensate for the time spent in study. And, critically, those benefits have to be measured after taxes.
The tuition-free system enjoyed in New Zealand by the baby boomers and much envied by many current students came at a rather substantial cost: a 66% tax rate on leaving university. It is simplest to think of our student loan scheme as imposing a 12% surtax on earnings above $19,084 until the loan is paid off. And then that surtax goes away.
Looking across the OECD tables, Kiwi students earn a greater return on their investment than many students abroad facing no tuition.
Be careful what you wish for, as free is rarely costless.