A lot of people have done well out of the past decade of interest-free student loans. But that hardly means the policy is what is right for the country.

A decade on from the Labour government’s wiping of interest from student debt, the annual subsidy provided to students through the student loan scheme is over $600 million dollars – and is forecast to increase. For every dollar lent to students under the programme, about sixty cents gets counted as an asset on the government’s books. The rest is written off.

What has the government received for the billions of dollars spent on interest rate subsidies? Reduced tertiary enrolment rates, longer student loan repayment times, greater overall student debt, and a host of controls that have had to be placed on access to student loans to prevent outright rorts of the system.

This week, The Initiative launched its decade-on retrospective look at the zero percent interest scheme. It echoes many of the conclusions reached by the Child Poverty Action Group’s report released last week. We both find that the restrictions that are a necessary part of interest-free lending come at a very high cost in terms of access to student loans.

In short, you just cannot lend out enough money at zero percent interest to cover the costs of the student with greatest financial need without simultaneously encouraging everyone else to borrow to that maximum amount and put the money into term deposits. The restrictions on student loans then have to make students in real financial need worse off – doing otherwise, without means-testing, would make the scheme’s costs balloon further.

Introducing interest on new student loans would slightly lengthen student loan repayment times. On reasonable assumptions, a student graduating with a Bachelor’s degree following the typical earnings path would take an extra year to pay off the debt. But under income-contingent repayments, the fortnightly burden on the paycheque would not change. And students would again be able to borrow what they really need to finance their study and cover their accommodation costs.

If the point of the interest-free loans scheme was to improve access to tertiary study, it failed. If the government wants to improve tertiary access, it needs to redirect resources away from student interest rate subsidies and toward means-tested funding and improving tertiary preparation at secondary school. Six hundred million dollars per year makes room for a lot of options.

Read the report, Decade of Debt: The Cost of Interest-free Student Loans, on our website.