The Moral Issue Of Interest-Free Student Loans

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 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 at 7%. Labour famously campaigned in 2005 on making loans interest-free.

There is no better example of these distorted incentives than students taking the maximum available and investing some or all of their student loans. 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 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 subsidising 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 incentives 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 recognise 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 us money for nothing we students will exploit it until they stop".

Lest We Forget

April Fools’ Day – 1 April
April Fools' Day (April 1) is widely recognised around the world as a day when everyone plays all kinds of usually good humoured jokes, hoaxes and pranks on unsuspecting and gullible family members, friends and workmates. The earliest recorded link between foolishness and April 1 is found in Chaucer’s Canterbury Tales (1392).

Traditionally, in New Zealand, Ireland, the UK, Australia, and South Africa, the jokes only last until noon, and someone who plays a trick after noon is known as the "April Fool". In other countries such as in France, Italy, South Korea, Japan, Russia, The Netherlands, Germany, Brazil, Canada, and the U.S., the jokes last all day.

The best April Fools’ joke I’ve seen today appeared on Kiwiblog this morning. The blog post suggested that a deal had been done around the slot left open on the Labour list following the resignation of Darren Hughes. Judith Tizard would return to parliament until May so she could give the valedictory speech she had previously been “robbed” of, at which point she would resign and let Louisa Wall – Labour’s favoured candidate – take her place! The best jokes are of course the most plausible and even some journalists were apparently April Fools this morning after being taken in by the hoax.
ENDS

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