Rachel Smalley: Should we put the interest back on student loans?

Rachel Smalley,
Publish Date
Thursday, 18 August 2016, 7:31AM
Are interest-free student loans a cost to the economy -- or an investment in it?

And I ask that because a report by the New Zealand Initiative out today and says the student loan situation has created a “decade of debt” -- and it argues the point that interest should be re-applied to loans

A little over a decade ago, Labour kept its election promise and made student loans interest free. Up until then, your loan only accrued interest once you made the transition from student into employee.

Labour's theory was that it made education more accessible to everyone – which is vital for any economy – but this report argues that removing interest from student loans hasn't achieved that stated goal. It hasn't necessarily made education more accessible -- so why should the taxpayer continue to subsidise students?

It makes for interesting reading because the NZI breaks it down and says students actually carry less than 20 per cent of the cost of their education because they're so heavily subsidised now. And since the introduction of interest-free student loans, the cost to the taxpayer has been $6 billion.

Just hold on to that figure for a moment -- that policy has cost the country $6 billion.

The New Zealand Initiative, perhaps not surprisingly, recommends that interest be reapplied to student loans.

And it's worthy of a robust conversation, I think. I agree. I think student loans should be interest-bearing.

This last-minute policy of Labour's that ensured they hung on to power -- it was good politics, it won votes, but was it well thought through? Did it make economic sense? I think most economists will tell you, it didn't.

Studying is never easy. You're always juggling a million things. Money is either tight or non-existent. Always. Is it worse now then when I studied? I'm not sure. I studied in a different era. I paid interest on my student loan and because I knew that debt was accruing-interest, it incentivised me to pay it off. I worked three jobs while I studied because I didn't want to rack up too much debt. I worked in a pub on a Friday night, in a bank one day a week and I wrote for the evening post on the weekends too.

I thought I had it pretty tough back then. It was a struggle. I was juggling work and study, but I survived, and within about three years I'd paid off my student loan -- a student loan that was interest-bearing.

Would I have benefited from an interest-free loan? Of course. That loan would have been paid off earlier -- perhaps six months or even a year earlier. But in hindsight, it did teach me a pretty valuable lesson in life.

Everything comes at a cost. Nothing is free in this world.

And while it will take a bold politician to admit it, the $6 billion decade of debt that we've shouldered subsidising student loans, is $6 billion that would have been money well-spent elsewhere.

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