18 Aug 2016

Interest-free student loans: success or failure?

From Nine To Noon, 9:08 am on 18 August 2016

The government should start charging interest on new student loans, the New Zealand Initiative think tank says.

In a new report, 'Decade of Debt: The cost of interest-free student loans', the group said the no-interest policy did not help poor students and had cost nearly $6 billion in written-off interest since it was introduced in 2006.

Hundreds attended a meeting at the University of Auckland on 1 April 2016 prompted by recent violent attacks on international students.

Total debt owed to the student loan scheme was $15 billion in March this year. Photo: RNZ / Kim Baker Wilson

The savings made by charging interest could be used to provide more means-tested financial help for students from poor families and to better prepare poorly-performing secondary school students for tertiary education, it said.

New Zealand Initiative head researcher Eric Crampton said the zero-interest policy was an expensive failure.

"If the scheme [was] intended to improve tertiary accessibliity for low-income communities or non-traditional tertiary communities, it's failed magnificently in achieving that end, and it's failed to the tune of about $600 million per year in interest write-offs."

Charging interest on the loans was a "no brainer", he said.

Students paid about 18 percent of the cost of their education as a result of the policy, the report said.

That benefited rich and middle income families that could afford to pay more for their children's tertiary education, it said.

Tertiary institutions could be required to cover some of the cost of defaulted loans in order to encourage them to ensure their courses led to employment, it suggested.

As of June 2015, 730,000 people owed money to the loan scheme and by March this year, the total debt owed to the scheme was $15 billion.

The Child Poverty Action Group also recently suggested a rethink of interest on student loans.

Too many students, especially those with children, were in hardship and the government should increase both the number of students eligibile for allowances and the amount paid to them, the group said.

It might be worth considering whether interest should be charged on student loans as a trade-off for providing those increases, it said.

The no-interest policy had made it easier for governments and tertiary institutions to put more of the cost of studying onto students, the group said.