The NZ Initiative's Khyaati Acharya asks whether tertiary students fully grasp the degree to which taxpayers help fund their education and says there is insufficient debate on how tertiary education costs are shared

The NZ Initiative's Khyaati Acharya asks whether tertiary students fully grasp the degree to which taxpayers help fund their education and says there is insufficient debate on how tertiary education costs are shared

By Khyaati Acharya*

There is no such thing as a free lunch.

The very same logic applies to tertiary education. Someone, somewhere along the line has to pay for it. And yet many New Zealanders believe that free tertiary education should be provided as a basic right.  

But do tertiary students fully grasp the degree to which taxpayers help fund their education?

New Zealand extended the interest-free student loan policy in 2005 in a bid to improve access to tertiary education (and buy student votes). The New Zealand Initiative is currently looking into the zero percent policy a decade on as part of our wider research in the education sector. This signals the Initiative’s first foray into the complex maze of higher education.

Tertiary education, it is often proposed, generates positive externalities that benefit the whole of society. This is the basic rationale used to justify public funding in higher education. It is also argued that a greater number of educated people will help improve everyone’s productivity. Advocates of free tertiary education claim free tertiary education is not only desirable, but somehow affordable too.

Arguments then, in favour of free tertiary education ignore two considerations. The first is that governments face resource constraints which limit how much funding can be allocated to the tertiary sector. The second is that while an educated population may provide wider economic and social benefits, the greatest benefits accrue to the individual who undertook the education in the form of increased earnings, a higher quality of life and reduced unemployment.

Under the current scheme, for every dollar the government lends through its student loan scheme (as at 2014) a mere 58.17 cents is treated as an asset. This means that 41.83 cents in every dollar lent to a student is written off as an expense – largely the cost of the zero-percent interest policy.

In short, the Government expects that less than 60% of each dollar lent will be recouped. The difference then must be funded from taxes.

How and to what degree the public should finance higher education is an issue that countries worldwide grapple with. And public pleas for free tertiary education are not limited to New Zealand.

But reducing the book value of the student loan asset by almost half is significant. The total write-down for the 2014 financial year was $630 million. Tertiary education as is, already requires a major public financial commitment. The cost of free tertiary education would be considerably more onerous on taxpayers.

Excluding the public subsidy inherent in the interest-free student loan scheme, the average university student’s share of the direct cost of higher education fell from 32% in 2000 to 27% in 2010. The reduced cost proportion for students was largely the result of fee regulation policies, like tuition caps, which dictate to what maximum percentage tertiary education providers may increase their fees. But take into account the implicit subsidy provided through the interest-free student loan scheme, and on average, students paid 16% and government 84% towards the direct cost of tertiary education in 2010.

These were some of the findings of a study conducted by Victoria University of Wellington in 2012. The study sought to analyse university student’s knowledge of government subsidies towards their education.

The study found that an overwhelming proportion of students underestimated what percentage of a dollar lent is written off due to the interest-free loan scheme, doubtful debts, and the opportunity cost of capital.

More than half of those students surveyed also underestimated the proportion of government education expenditure allocated to the tertiary sector. The majority of students misjudged the direct tuition subsidy that universities receive for each full time student enrolled. And almost 70% of university students surveyed underestimated how much of the tertiary education budget is spent on direct financial aid to students.

The study thus illustrates that the majority of New Zealand tertiary students have a poor understanding of just to what degree the taxpayer foots the bill for their education. Responses differed little among international and domestic students, as well as across demographic, education and financial aid profile.

Clearly, there is insufficient public debate on how tertiary education costs are currently shared. Much of this stems from a lack of transparency about tertiary education funding. Public information on subsidy rates, and governmental spending in the tertiary sector is not easily accessible. And tertiary education providers have little incentive to provide comprehensive information in this area.

As a consequence, there are often major discrepancies between what the public and what the government thinks is affordable. The Victoria University study concludes that the lack of information feeds into the complexity around the debate on interest free student loans and questions around current cost-sharing arrangements.

Providing a viable solution to the fiscal conundrum of the current scheme is the challenge for New Zealand. Student loan debt is growing by approximately $1 billion per year. It is also a challenge for The New Zealand Initiative. Our research in this area will, we hope, help inform the public on the intricacies of the current scheme, the unintended costs and suggest alternatives that could be better targeted.

Of course, higher education makes a real difference to the lives of New Zealanders. Those with tertiary qualifications are more likely to be happier, better paid and live longer. But improving the affordability and accessibility of higher education must be balanced with what is publicly financially tenable.

Because there is no such thing as a free lunch.


*Khyaati Acharya is a research assistant at the New Zealand Initiative, which provides a weekly column for

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I see the discount rate applied to the loans is 6.62%, and accounts for most of the "cost" of the programme. This is approximately 4% above the government's actual cost of funds through issuing bonds. If you applied the 4% difference to the ~$13 billion nominally outstanding, then you get $500 million per annum in actual saving, which is more or less the assumed cost of the programme. Somewhere in Treasury I assume they are treating this $500 million as a profit, or the books wouldn't balance.
You can question some of the loans to some of the people for some of the courses, but on balance I'm not sure I would change much about the programme.

"The first is that governments face resource constraints which limit how much funding can be allocated to the tertiary sector. The second is that while an educated population may provide wider economic and social benefits, the greatest benefits accrue to the individual who undertook the education in the form of increased earnings, a higher quality of life and reduced unemployment."


A government that spends 20 million on a flag campaign or 50 million on inviting 750 Syrian "refugees" (for their first two years) is clearly overfunded and has money to burn. Investment in education produces a lot more value than investment in the PM's vanity or a lingering social and security issue.

Re the second claim, did I miss anything, was any evidence for it presented? I did not see any and I doubt that it would be easy to do so. Maybe let students of French poetry or feminst studies pay for their ivory tower degrees, but certainly sciences, engineering etc. should be for free as they are of obvious utility to wider society.

In any way, I wish the NZ Initiative would take its calculator to the governments silly policies on developing aid or invitations to refugees than ONCE AGAIN beat the user pays drum in education.

This is a topic that gets discussed a lot on a financial forum I'm a member of. The student gets the benefit of the degree. However the averages show higher income and so on, but if you separate the arts degrees you will find the majority or all will not get higher pay. There are a lot of degrees and courses that don't really add anything for the future career of the student and there are likely to be limited social benefits as well.

Science, engineering and commerce students are more likely to be useful to our economy. At the same time they are in a better position to pay back their student loans. I went through my science and engineering degrees with student loan (I didn't take out the maximum amount and instead lived poor) at a time when there was still interest charged. They don't need to go through for free as the 0% rate is sufficient and those students will be able to repay faster as they aren't fighting the interest.

It's the degrees and courses that add little or nothing where we need to question why students are being encouraged to borrow money with no potential benefit at the end. I have seen a number of fb posts where people discuss how much their BA, BA (honours) in religious studies, etc cost them, and how useless the degree is. Degree inflation means that just having a degree gets you nothing in today's environment.

There are a number of issues that are social where parents and educators are encouraging people to get a degree that won't help them. The students have little or no idea how the debt will impact them. Some lack the basic budgeting skills to not blow all the money and have to quit due to not being able to buy food and pay rent.

I think we do need to look at more than these issues. Student loans, even at 0% interest, are increasing inequality. People can't save enough for retirement, take 7-10 years to save for a house deposit, and can't take the financial risk of having children on top of this. We are going to face some major social problems over the next 15-25 because we aren't addressing any of this.

Very well written.

When it comes to science and engineering degrees, there is still the question of 'over education'.

Dr Evan Bydder, a physic professor at Waikato university, once told me that he thought what we really should have is just a 1 year course for the basics for technical courses, and from there move into the apprenticeship format (basically). And even for the more intensive professions that require real skill.

I agree with him. The apprenticeship format is the best way to avoid irrelevance and waste.

Also, education can easily become its 'own justification' insofar as it functions as a barrier-to-entry for given professions, which can lead to wage inflation all on its own.

My own thoughts, if there is interest:

Sounded like utter rubbish. So you build a straw man and knock it down, congrats, I guess.

--edit-- you talk about engineering and science and then use a shop assistant as an example?

As an ex-engineer frankly the number of NZ tradesmen who think they are engineers is mind boggling.

I talk about engineering and science, and then use a shop assistant as an example. Yes. But in a totally different article and context.

When I made the example about shop assistants, I was only using it to explain a principle (something I always do in the simplest way I can). I was explaining how *excessive* educational demands function as a barrier-to-entry for any given profession, which in turn supports wage inflation.

Utter rubbish? I hardly think so. Common sense actually.

"Common sense" frequently isnt, for me its a sign of lack of education and capability to justify the position to use such a term.

So maybe you can show a real life example where an "excess" really does create an unjustified barrier?

Otherwise shop assistants are un-skilled and need little depth of knowledge are abundant, so there is no need to demand such qualifications. mean while Doctors need a great deal of statistics, biology, chemistry etc and hence a 5 year degree.

"excessive" well from my experience a good degree gives a solid foundation to build capability on, its a starting point for a lifetime in learning, not a key to a few.

What happens to student loans taken out by students who, for what ever reason, either drop out part way through, or never complete their degree?

The students still owe the $s.

With a non-completion rate of up round 50% that's a lot of students with a lot of debt who never achieve the earnings power expected


Agree, well written and something that concerns me.

While a bit of a beat up on "media studies"....

a) On a bus trip last year (or so) there was a "media studies" last year student in front of me. She was complaining that all her degree was getting her checkout jobs and nothing more, she was p*ssed. Well frankly there is a surprise.

b) About the same time a "helpful friend" of my wife suggested wecome talk to her "as I know how to beat the system, its all about getting the NCEA points". So her 3 children had all done media studies in secondary school as it was easy points for them and her advice was for ours to do the same, we said no.

c) My ones are close to finishing secondary, my eldest is almost the only one doing 2 sciences out of his friends, in fact the rest bar one, one at most.

Now while I think an under-graduate degree should partially be an eye opener on life, ie fairly broad frankly I despair that we are indeed producing too many degrees at questionable cost in dubious subjects. As examples do we need as many fine arts, accountants, lawyers and architects as we produce? the answer if the already qualified / working in the professions is any honest indication is, no.

I think the changes a few years ago where the Govn would only fund so many under-graduate degrees and the uni had to fund extra itself was a step in the right direction. The result of this was Uni's having to look at courses/degrees and dropping them and the academics to save money, probably a good outcome. I am however worried that this will funnel/focus too much so I am watching this develop with interest.

German University education is free.
The country benefits with a highly educated population, and successful advanced industries.

Even their International students study free. So they don't create Diploma Mills.

Takes no account of the widespread effects of financialising this sector. The debt burden so created acts as a disincentive for students to progress through life, in particular have kids and create the next generation.

Agree. Finance however will effect them elsewhere as well....

Several points worth considering:
1. Would it be cheaper to directly fund institutions, rather than students? Several universities have hinted that the student loan scheme is an inefficient mechanism.
2. While it is true that learners gain the greatest benefit from their qualifications vis a vis the broader community, it is also true that specific employers gain substantial benefit from the provision of trained workers, for which they pay only a small amount of tax. In the absence of a public system those employers would be forced to train their own staff. Would an industry training levy be a more accurate depiction of the "true economy"?
3. Society is not the same as "economy." J R R Tolkien did degrees in languages, and yet has probably generated as much if not more utility than most scientists and engineers. If you want a purely vocational training scheme, don't call it a university.

1) Not really as the uni's then dictate what they then provide and not the students. This means the Uni's do not move to what is wanted/needed but sit in la la land offering degrees their academics want to provide.

2) Agree

3) Do not agree, you dont appear to understand what scientists and engineers actually do and have done.