Interest-Free Loans: Bad Economics, or Smart Investment?

Sunday, 18 March 2012, 1:02 pm
Press Release: NZUSA

Interest-Free Student Loans: Bad Economics, or a Smart Investment?

Prime Minister John Key said last week that the Government had plans to rein in the student loan scheme "in a big way", but committed to keeping loans interest free, stating that the scheme was politically popular, even if it "may not be great economics".

NZUSA President Pete Hodkinson wants to know what the government's plans are, but agreed with Mr. Key’s comments around the unsustainability of putting interest on loans, given this will essentially double student loan debt. “It’s certainly no solution”, he said. “But it goes beyond a popularity issue for the current government. It’s not “bad economics” and it is much more than just “good politics”, it’s a smart investment in a smarter New Zealand”.

“Aside from the societal benefits, New Zealand needs a skilled workforce in New Zealand, not chasing higher incomes or avoiding their debts by living in Australia or the UK. We need to encourage our graduates to come back and contribute to the growth of Aotearoa, not to stay away."

"The debt affects far more than the student who actually has the loan, we are talking about New Zealanders with families and careers. This is grandparents that want to see their grandchildren in a position to buy homes and it’s parents that want to see their kids come back from overseas."

Mr Hodkinson expanded on the futility of adding interest to student loans: “Over half of student loan debt is written off, not because people don't pay - New Zealand based borrowers pay 103% of their obligations - but the longer it takes to come back the less it is worth. This is called a calculation of Net Present Value. Just as $50 won’t buy you nearly as much gas as it would 10 years ago, the value of money owned now decreases into the future”.

NZUSA has calculated the Net Present Value using John Key's own example (a $50,000 debt without interest taking 8 years to repay and that same debt turning into $90,000 and taking 15 years to pay off with interest). It is revealing. The extra $40,000 the student pays due to interest results in only an extra $3,000 in the value of that loan to the government. "Taking $40,000 out of the spending potential of that graduate for such a limited return does more than encourage that person - not to mention their family and friends - to vote against interest on student loans: it's bad economics," said Mr. Hodkinson.

NZUSA also expressed concern at the outstanding equity issue from loans which are still being paid off from when there was interest on loans - a significant percentage of loans in excess of $100,000 are still largely from that period. “The logistical difficulty for those graduates was a large loan accruing interest, and students spent years after their graduation paying off interest and never actually reducing the principal of their loan."

In the United States interest-bearing student debt has just hit $1,000,000,000,000 (one trillion dollars). The US House of Representatives is considering a Bill that would wipe all debt after 10 years of repayments; for fairness but also as a desperately needed economic stimulus measure. This is a logical response to their problems, but it’s an ambulance at the bottom of the cliff. We should avoid getting closer to that cliff.”

“Surely the bottom line is that we need to be prepared to invest in an innovative and educated country that will allow us to be competitive in an increasingly competitive world. That’s not just smart politics because of an election; it’s smart because it’s practical policy for a better New Zealand,” Mr Hodkinson concluded.

NZUSA is the national representative body for tertiary students and has been advocating on student issues since 1929.

ENDS

© Scoop Media

NZUSA - New Zealand Union of Students' Associations

We stand for opportunity, for all.

NZUSA is the New Zealand Union of Students' Associations, the national body that represents New Zealand's students' associations and the interests of New Zealand's 400,000 students at universities, polytechnics and in trades training.

We conduct original research, advocate to Government and through the media, and support New Zealand's students' associations to be more effective on behalf of their members. We advocate alongside Te Mana Akonga – The National Māori Students' Association, and Tertiary Women New Zealand – The NZUSA Women's Caucus.

Since 1929, we've believed in a society rich in opportunity, where anyone from anywhere can become any thing. We support accessible, affordable quality public tertiary education.

Contact NZUSA - New Zealand Union of Students' Associations

• Website - www.students.org.nz
• Twitter - @studentsnz
• Email - president@students.org.nz
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• Physical Address - Level 8 Education House, Wellington, 6011
• Postal Address - PO Box 101091 Wellington
• Phone - +64 27 868 4989