The problem with student loans? Not enough interest - NZ Initiative

In 2005, the interest-free student loan scheme was launched by Helen Clark's Labour Government. But despite this attempt to help students get a further education, it appears the policy is doing more harm than good.

Students are complaining about the time limit they can get loans for and the amount they owe after graduating. Others have fled overseas to avoid paying off their loans, and are refusing to return.

An Official Information Act request filed by Newshub found just 10 people had racked up a total of $4 million in unpaid student loans. All 10 of them live overseas and could face arrest at the border if they return.

What if these problems were all connected? What if they all have the same cause - a lack of interest on New Zealand student loans?

The New Zealand Initiative's chief economist Dr Eric Crampton argues they do. He told Newshub the interest-free student loan scheme has had little effect on tertiary outcomes, but has led to student debt well over $15 billion - which the government subsidises the interest on.

"Fundamentally, we have to ask whether the $600 million per year, give or take, the government spends on subsidies through the student loan system does the most good in increasing access to tertiary education," he says.

"A decade on, tertiary participation rates are lower, student debt is higher and loan eligibility requirements are tighter. The policy continues to cost Kiwi taxpayers millions, with little to show for it."

The NZ Initiative's report A Decade of Debt, written by Dr Crampton and Khyaati Acharya, argues that the scheme disproportionately benefits the children of wealthy parents.

The interest bill for their education is paid for by taxpayers - including poorer and working class, who are less likely to be accepted into university. And money that could go towards tertiary preparation in low-decile secondary schools is sucked up by the interest-free policy.

"The government should reinstate interest on student loans while improving means-tested financial assistance for academically capable students and trialling programmes to encourage higher academic achievement among at-risk groups earlier in their schooling careers," he told Newshub.

But instead of adding interest and using the savings to solve New Zealand's socio-economic problems, the Government is taking the cost away. Education Minister Chris Hipkins has announced a policy of one-year fee-free study for students new to post-school education.

He says the Government plans to extend fee-free education out to three years over time, with the next free year planned to be added in 2020.

The fee-free policy is expected to cost $340 million a year, and the increase to student support a further $270 million a year.

However Dr Crampton believes this will only make things worse.

"Fees-free study compounds the problems already present under zero-percent loans," he says.

"It makes it harder for universities and training colleges to innovate - a school wanting to set a higher quality standard at higher fees cannot do that where government abolishes fees.

"And it does not address problems earlier in the education system that can prevent students from progressing to tertiary study in the first place."

And yet it seems unlikely things will ever change. Former Prime Minister John Key acknowledged the flaws with interest-free student loans, but said it had too much support to remove while he was in power.

"Years ago I once said the economics is terrible, the politics is good. The real simple version is nothing probably with greater predictability doubles the repayment time of your loans, and that's going to motivate a lot of people to vote against that sort of policy," he told Paul Henry in 2016.

"Even if you brought it back in, someone would campaign to take it back out."

But Dr Crampton argues that, at least as of 2016's data, interest charges for a student with the median loan balance would add about ten to fourteen months of repayments.