'No compelling policy' for interest-free student loans - report

(Getty file)
(Getty file)

A new report has suggested interest needs to be put back onto student loans.

Interest-free student loans have been in place since 2005, introduced by the then-Labour Government.

Prior to that, loans were exempt from interest while students were still studying.

But the report A Decade of Debt by The New Zealand Initiative says the scheme is costing the country too much.

"While it was a superb decision in political expediency, a decade on, and evidence shows the policy has had little effect on tertiary outcomes," says report author Khyaati Acharya.

"There is no compelling public policy for interest-free student loans: it has not improved tertiary participation, it has barely reduced overall student debt, it has not improved access to tertiary education for poorer students."

So far it's cost taxpayers $6 billion in interest write-offs.

The New Zealand Initiative says getting rid of interest hasn't meant people pay off their loans quicker.

Before the days of interest-free loans, half of borrowers paid back their loans in 6.7 years. Today it takes about seven years, and the report says students with zero-interest loans are less motivated to pay.

Even though most of the benefits of a tertiary degree accrue to the graduate in the form of higher future earnings, Kiwi taxpayers contribute over 80 percent of the direct costs of tertiary education per student, the report says.

It suggests the Government makes some big changes.

"It would be a much more effective and fairer use of Government revenue to restore interest on student loans, use extra revenue to fund high school programmes aimed at improving educational outcomes among low performers, and provide means-tested tuition aid," says Ms Acharya.

"It is hard to believe that the split of benefits from tertiary education, based on the public-private cost share, is 80 percent public and 20 percent private. Increasing the private share of costs would far better reflect the benefits that accrue to individuals."

There seems to be little appetite for change though. Just last week Labour's Andrew Little said he'd consider wiping existing debt for people wanting work a public service job in the regions.