National has adopted the interest-free student loan policy because, in John Key’s words, “we lost the last election“.
National’s willingness to do another 180-turn when it suits them politically (this time on student loans) further exposes their complete lack of principle but the kicker is in the detail: If you made voluntary loan repayments of more than $500 on your loan above the automatic repayment, National would repay a further 10% of your voluntary repayment. If you repaid $1000, you would get $1100 wiped off, a return of 10%, better than if you kept the money in the bank.
Sounds good but who would benefit from such a policy the most? Why those on high salaries, of course. If you graduate with a trade qualification and go into initially low paid work you are not going to have the spare dosh to make voluntary repayments on top of the 10% of your gross wages automatically deducted in loan repayments. It’s going to be much harder for you to spare $500 for a voluntary loan repayment than it’s going to be for a new lawyer or engineer. It’s the well-paid graduates who would benefit from National’s policy by getting those loan reductions, while most graduates will miss out.
And, so, once again it’s the person with the most wealth who benefits the most from National’s policy, while the ordinary guy is left behind. How does National do it? Seems they can’t come up with a single policy that doesn’t mostly help those with the means to help themselves and screw everyday kiwis.
National has budgeted $15 million a year for this, meaning they think there will be $150 million in voluntary repayments each year. Problem is, in 2006 (last year I have numbers for) there were $185 million in voluntary repayments, so National will need more than what they’ve budgeted just to pay for current levels of voluntary repayment. If voluntary repayments returned to 2004 levels, $210 million, National would be paying out $21 million for an extra $25 million in voluntary repayments. And remember, this money would have come back eventually through automatic repayments anyway.
What a waste of money. It would be far better to spend this money on raising student allowances and making them available to more students, which would help those who can afford tertiary education the least.
January 31, 2008 at 5:01 pm
National’s policy is crap, but no worse than making student loans interest free, which is incredibly regressive. In fact, the whole reason voluntary repayments have collapsed is because, with no interest whatsoever, you have absolutely no incentive to repay faster. Just let the value of the debt erode over time…..
January 31, 2008 at 5:02 pm
My god have you seen Davey on this? He’s spinning like a top. I though he was able to criticise National from time to time. He should have spent one of those get out of jail free cards on this. It’s actually embarrassing to watch…
January 31, 2008 at 5:42 pm
“… National will repay a further 10% of your voluntary repayment …”
Awesome. Time they practiced what they preached, and stopped abusing the taxpayer every time they come up with another half-baked idea.
Oh ["sigh"], so he didn’t actually mean that National was going to pay, but the Government?
January 31, 2008 at 5:44 pm
I think your analysis is inaccurate? Will check the numbers later on.
Seems to me that (at 10% interest) it’s a zero sum for national in the first year, and from then on they get compounding benefit.
Assume 10% interest.
$10k loan
Cost to provide interest free facility (assuming no repayments and no inflation) is $1k/year
Cost to clear loan is $1k ONCE.
This policy is good value for the govt, and good value for students who elect to make the repayment, and no different for those who don’t want to make voluntary repayment.
I think this policy would only be attractive to people who were planning to go overseas, and so would otherwise be paying interest on the loan.
Unless I’ve missed something?
Lets say the student who owes $10k has $3k they could voluntarily repay.
There is a $300 once off benefit to them in doing so.
Or they could continue to use the interest free credit facility the loan offers, put the $3k in the bank… and at the end of the year they’ve got the $300 bonus AND still got the $3k to reinvest.
January 31, 2008 at 7:36 pm
I blame it on cheap wine , pretty girls and that damn moon, student loans at 21% 5 year loan period at 20% and a 5 year bond,before you can piss off overseas. Adopt it Mr Key, a great policy,WELLDONE
January 31, 2008 at 9:02 pm
well if you are working and you invest your student loan in an interst bearing account and pay if off in full at the end of the year not only do you make 10 percent ( or whatever the interst rate is) but you have to pay back 10 percent less as well.
January 31, 2008 at 9:09 pm
Yeah, that’s what I’m thinking about, trying to work out how to tailor the policy to avoid that issue.
You have to take into account the fact that over the course of that year you’ll pay off a percentage of the loan through working, thus reducing the amount you can pay off at a 10% benefit.
I suspect you’re actually best off to never take advantage of the incentive and continue paying off at the minimum rate. The exception is people who are going overseas, they have an incentive to pay it off anyway, Nationals policy simply makes it cheaper for them to do so.
It seems like the only thing this policy will do is provide a benefit to those who aren’t going to stick around to give a return. I really don’t get where National is coming from. It seems that from any other perspective it’s not in the students interests to pay it off, even if they’ve got the money spare. Maybe National is hoping people will be too dumb to crunch the numbers and the govt will reduce student debt WHILE making money?
January 31, 2008 at 11:38 pm
Meanwhile the incentive for the well off to borrow just got about 40% bigger.
“So let me understand this correctly.
Interest free loans is a bad idea, very very bad.
But Interest free loans with a 10%write off is an excellent idea.
4 legs good, 2 legs bad.
So what is to stop someone borrowing say 10 000 dollars as a student (rich daddy pays the fees and gives our little young nat a generous allowance), little young nat invests said 10 000 dollars at 6% interest over 4 years study. No loan repayments required.
And then at end of study, little young nat takes a high paying job with Merril Lynch, withdraws term investment. Say around 12,5000 and pays back 9000 dollars to the government.
??????????????????”
Profit of 3500 dollars instead of 2500.
February 1, 2008 at 7:43 am
So what is to stop someone borrowing say 10 000 dollars as a student (rich daddy pays the fees and gives our little young nat a generous allowance)
Because the Student loan is not made available as a lump sum at the beginning of the year, this scheme you outline does not work nearly as well as you think.
The term “interest free” seems to upset you. Let me put it this way. Course fees actually only cover about 25% of running a University. The rest is paid for by the taxpayer. If the graduate stays in NZ and benefits the NZ economy and his/her fellow taxpayers with this subsidised education… then you get a discount on your course fees. If you bugger off and benefit some other taxpayers overseas, then you pay the full whack.
It’s not complicated.
February 1, 2008 at 7:51 am
It still works though redlogix. You could do that and make money. However, now we’re arguing the merits of interest free loans WHILE STUDYING, which have been the norm for ages.
natparty, if the person you’re talking about did that then the government would be better off and the person making the voluntary repayment would be worse off. I can’t believe no one is seeing this!!! I’ve already explained it in another thread, so in breif: Take your thinking more than one year into the future and work out the numbers for the student and the govt. Who wins?
RL, your scheme ignores the fact that, by and large, NZ’ers like NZ and will come back. And pay tax. High tax. A chunk of which goes into education. Why should they pay twice?
February 1, 2008 at 8:09 am
You could do that and make money. However, now we’re arguing the merits of interest free loans WHILE STUDYING, which have been the norm for ages.
Who cares if you do make money out of the loan? It all simply boils down to the question of nett cost.
If you do have a rich daddy that has scads of cash to throw your way, then you plenty of option to “make money” by investing it in various ways many of them far more lucrative in the long term than this fiddling around with the SL
The real problem with long term interest on the SL is that it applies an unfortunate fiscal bias to education. Universities exist not just to impart vocational skills to people who will go on to be well paid lawyers, accountants and the like… their real task is to carry forward the sum of human knowledge, much of which although vital to the public good, is far less well renumerated.
February 1, 2008 at 9:00 am
“If you do have a rich daddy that has scads of cash to throw your way, then you plenty of option to “make money” by investing it in various ways many of them far more lucrative in the long term than this fiddling around with the SL”
No! The student loan is interest free credit. No one with half a brain says no to interest free credit. Rich people don’t generally get rich by being morons (with a few exceptions).
If that’s your argument then shouldn’t education be completely free? And if your education is completely free, why should you be paid anymore for the work it allows you to do?
You might as well argue that houses should be free.
I’m unconvinced that there are many people who can graduate and get a full time job and find themselves unable to pay off their loan under the old scheme.
A common misconception is that the interest would have accrued faster than people could pay it off.
That is a total load of crap. Interest writeoffs have been operating for ages, the system was set up so that (for example) if you had a $30,000 loan and you paid off $500 while accrueing interest of $3000, half of your repayments went to the capital, half to the interest, and the rest of the interest was written off. So at the end of the year, you owed $29,500.
—
As to “who cares if you make money”: Ummm…. anyone who wants to make money? Which is basically everyone.
February 1, 2008 at 9:45 am
What people will be more tempted to do is to borrow to the full extent (An example is course fees at $4,500, $1,000 living costs, and about $6,000 in living costs) and invest what they can. Those with the means to pay their fees outright can invest the money they have saved, while the actuall fees will be paid irectly to the service provider.
Over four years of study, you will have accumulated a maximum debt of $46,000, and identical savings, excluding interest that you have earned. You can then pay that all off straight away, and come away with a lump sum of about $4500 plus any interest. Otherwise, you do what you wish with said savings while paying off your loan at 10% of your income p.a.
Not sure what will appeal to people most, but I think the policy will encourage loan uptake among the wealthier types - they’ll get the most benefit as they can afford to pay their way through tertiary education.
Interest free loans helped all students and provided another incentive to further your value to society.
Payment incentives only encourage the rich to make money off the system.
However, from a governmental stance, I believe it will be of benefit. As has been mentioned above, the government will make a one-off 10% payment. Without this, the government would have the opportunity cost of the payment not made for a lengthy period of time. Take the $45,000 loan. A payment of $20,000 will cost the government $2,000. If the payment was not made, the government would have a $20,000 opportunity cost on the $20,000 value of the loan for the entire period during which the balance of the loan isoutstanding.
February 1, 2008 at 10:06 am
“Payment incentives only encourage the rich to make money off the system”.
No, no, no.
Your last paragraph is bang on, but you are failing to apply the same logic in the other direction.
First off, the interest free loans already gave the rich all the incentive they could possibly need to borrow to the hilt (along with everyone else).
Secondly, this payment incentive only reduces the disincentive to early repayment, early repayment is still nett negative. You’re failing to considering the opportunity cost to the borrower of repaying the loan. If they repay the $20k, sure, they get $22k of their loan reduced… but so what, it wasn’t accrueing interest anyway. And now they can’t, say, invest that $20k in a term deposit.
People don’t seem to be getting this, and I’ve got something else out of the way at last so I’ll try and spell it out.
Let’s assume that someone owes $45k, and is earning around $60k (hence repaying the loan at around $4,500/annum). If we deal with what could be considered to be the bottom $20k of the loan just so we don’t have to worry about the interaction with compulsory repayments, and assume the student has $20k in cash to do with as they will, then they have two options.
1) Repay the $20k, get the bonus, but suffer the opportunity cost
2) Keep the $20k, no bonus, but can invest the money elsewhere.
This is the decision the student must make every year.
If we work out the students end of year position in each case then…
Option 1 - Voluntary repayment
End of year 1 loan balance =
$45,000 - 4,500 (compulsory repayments) - 20,000 (voluntary repayment) - 2000(voluntary repayment bonus = $18,500
End of year 1 Personal account balance = 0
Year 1 end:Net wealth = -$18,500
End of year 2 loan balance = $18,500 - 4,500 (compulsory repayments) = $14,000
End of year 2 Personal account balance = 0
Year 2 end:Net wealth = -$14,000
Option 2 - Compulsory repayment only + investment
End of year 1 loan balance =
$45,000 - 4,500 (compulsory repayments) = $40,500
End year 1 Personal account balance = $20,000 + $1760 (term deposit return)
Net wealth = -$18,740
End of year 2 loan balance = $40,500 - 4,500 (compulsory repayments) = $36,000
End year 1 Personal account balance = $21,760 + $1914 (term deposit return) = $23,674
Net wealth = -$12,326
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After only two years, the person who didn’t make the repayment is well ahead. This margin will only continue to grow.
Once again - the only people this policy will attract are those who are bad at maths, and those who are going overseas. In the latter case it is bad policy because it leads to a loss for NZ, and in the former case it is only good policy if you like punishing people who are bad at maths.
February 1, 2008 at 12:07 pm
Ltd Faith
So what you are saying is that this policy is badly thought out ?
If you are right in your assumptions and they look good to me
Why would we let Key/English loose on the economy.. when you have just illustrated they have not got a clue in matters mathematical ?
February 1, 2008 at 5:51 pm
No! The student loan is interest free credit. No one with half a brain says no to interest free credit. Rich people don’t generally get rich by being morons (with a few exceptions).
Been too busy all day to answer sooner. I think you are loosing sight of the obvious here. Yes it is free credit, but it is the same free credit to all students, regardless of how wealthy they are. Sure if they are wealthy they have access to cash to invest, but that is pretty much the case regardless of whether they use it to avoid borrowing from the SL scheme, or if they invest it elsewhere. I see a level playing field here… what is it that you are seeing?
The fact is that MOST students are either going to need the SL and they will appreciate the zero interest rate, or their families are so wealthy that the few thousands they might gain by fiddling around with this “free credit” scheme amount to just peanuts.
If that’s your argument then shouldn’t education be completely free? And if your education is completely free, why should you be paid anymore for the work it allows you to do? You might as well argue that houses should be free.
I am old enough to have gone through University in the days when it was free. Yes free. So maybe I just have a different outlook on this. More faith if you like.
February 1, 2008 at 5:59 pm
The other backflip was of course on climate change. In 2005, John Key said climate change was a complete and utter hoax!