Heather Roy

9 September 2011

Each Friday when I was in Parliament I published an article relevant to the events of that week. I called this weekly email newsletter ‘Heather Roy’s Dairy’ and emailed it to my subscribers list. I’m slowly going through 9 years worth of articles and archiving copies on my onesock.nz blog. While re-reading these articles I’m amazed at how little changes. I’ve just posted (click on the Heather Roy’s Diary tab on the menu) a diary from 2011: Retirement Age Unsustainable at 65 – same issue this election, slightly different people involved!

The article below also falls into the ‘more of the same’ category. Labour’s policy to give students their first year of university free brought back memories of the 2005 election when Helen Clark took interest off student loans for those staying in New Zealand. Same type of bribe, different Labour party leader. The market distortions these announcements cause are worth discussion so I’ve re-published my diary from April 2011 here.

The Moral Issue of Interest-Free Student Loans

First published on 1 April 2011

The most blatant election bribe I’ve seen during my political career was Labour’s 2005 promise to take interest off Student Loans. I remember door knocking in Epsom and having the discussion with many students then. Almost all were caught in the dilemma of doing what was best for the country and ignoring the bribe or voting to advantage themselves on this single issue. Many claim that this policy won Labour the 2005 election as students were swayed by self interest. Who can blame them? They were offered loans for free and still are.

We’ve since hit hard economic times. As a country we borrow $300m a week to just keep government spending ticking over at its current rate. That’s around $200 for every household. On top of this comes the additional burden of rebuilding Christchurch. Some tough decisions need to be made about how to fix the economy. In truth they are long overdue and the interest free status of student loans has been suggested by many as one area that savings should be made.

The scheme was introduced in 1992; previously students paid a nominal tuition fee and generally received a living allowance. Under the scheme students could borrow their course fees, a living allowance of up to $150 a week or $4500 over the academic year and course related costs of up to $1000 each year. Interest rates were initially based on the government cost of borrowing and were later changed to reflect 10 year bond rates.

There was some merit to the original scheme. While the state would help substantially with the cost of studying students had a very real financial incentive to borrow wisely and to ensure that their chosen field of study was going to be worth the money they were spending. These incentives have since been distorted. In 2000 Labour implemented a policy of ‘no-interest while studying’ and set the interest rate post-graduation at seven percent. Labour famously campaigned in 2005 on making loans interest free as long as you stayed in New Zealand.

There is no better example of these distorted incentives than students taking the maximum available and investing some or all of their student loan. The course fee component has to go directly to the educational institution but the student living and course related costs can be paid directly to the student. It is not uncommon for students to invest what they don’t need with a bank or in term deposits. Many don’t realise that the Government continues to pay interest on the money it borrows to provide the loans in the first place – the liability rests with the taxpayer.

In 2005 a prospective student wrote to the New Zealand Herald financial columnist Mary Holm asking for investment advice on his student loan. She answered “There are two issues here. The first is moral; the second financial.” On the moral issue “It means taxpayers are subsidizing your investment. Is that fair?” then the financial issue “with an interest-free loan, of course, any return is higher than the interest rate. You could put the money in bank term deposits and still come out ahead”. The advice of the article was essentially what students across the country have been thinking ever since; we know it’s wrong but we’d be stupid not to do it anyway.

There is now an expectation that the May budget will be an austere one with some existing areas of Government spending needing to be tackled. Changes to working for Families and reinstating interest on student loans have both been suggested as areas of focus. Interest on student loans would get the incentive in the right place, reduce the cost to the taxpayer and address the inherent unfairness of interest-free loans to one section of the community and should be seriously considered during these tough times.

In my household we have three University students all with student loans. They like the fact that interest won’t be charged on their loans as long as they stay in New Zealand but they recognize the unfairness it creates with others who need to borrow for the non-study related investments for their future. As my 23 year old son says “While the government is stupid enough to give money for nothing we students will exploit it until they stop”.