Brad Olsen call for student loan repayments to start only after study is completed, and then at a higher rate. These changes would make it easier for students to survive without affecting the loan repayment flow

Brad Olsen call for student loan repayments to start only after study is completed, and then at a higher rate. These changes would make it easier for students to survive without affecting the loan repayment flow

By Brad Olsen*

Tertiary study is an important part of many young people’s lives, mine included.

It’s also an expensive part, requiring substantial funding from both the student and from the Government.

But has the right balance been struck when it comes to the funding of tertiary students in New Zealand?

Financial support for tertiary students seems to be a hot topic recently, with Ngatokotoru Puna arrested at the border in January due to a large outstanding loan debt, as well as various student leaders and politicians recognising that the estimated total value of outstanding student loan debt rising above $15 billion in early March.

Even though everyone seems to place their focus on talking about this massive stock of outstanding student loan debt, everybody seems to overlook the plight of current students and ask whether students are able to access enough financial aid to adequately support themselves during their studies.

In 2014, there were over 186,000 students reported to be accessing a student loan.  The amount loaned to each student varies, but students can normally access all of their course fees, ranging from $5,000 to $15,000 per year depending on their course of study, $1,000 for course related costs, and up to $176.86 per week for living costs under the student loan system.

It’s this last part of the loan system, the living costs, that I’m focusing on in this article.  Simply put, is this amount enough to live on?

The premise of the student loan system is that the Government provides some assistance to enable more New Zealanders to gain qualifications, with students and their families contributing towards the shortfall in government assistance, in recognition of the high personal benefit gained from a qualification.

However, bridging this shortfall isn’t easy for many students and their families, with most topping up their borrowed student loan living costs where possible with income from working a part time job, and often also from private bank loans and overdrafts.

Median rents in cities with major tertiary institutions range from $100 per week (Palmerston North) to $260 (Auckland).  Add to that $50 for food, $30 for power and $10 for internet, students are looking at paying between $190 and $350 per week, with only $176.86 coming in from Studylink.  At the same time as students are struggling to pay their bills by working extra jobs to cover the shortfall, loan repayments are automatically deducted from their earnings once over a certain threshold.  Although it’s true that these deductions will see students exiting their studies with less debt than they would otherwise have had hanging over them, it also reduces the amount available to use to pay the bills during study, especially as rents continue to rise.  It is clear that Studylink living costs barely cover actual living expenses, with rising rent prices exacerbating the issue.

There appears to be a smart way to introduce (small) changes to the student loan system to better enable students to complete meaningful study – if we reduce or remove the tax paid by students when studying, we’re giving them more income during their study to live on, albeit at the expense of increasing the amount of debt graduates will accumulate.  However, another core tenant of tertiary study is that it will lead to higher paying jobs in the recognition of higher levels of education.  If we also then changed the rate of repayments post study from the current rate of 12% of a person’s income to a tiered repayment structure based on how much you earn (with the 12% being the base rate), then the Government, having forgone repayments during study, would recoup these funds more quickly as gradates earn more.

In short, these two small changes could work towards reducing the burden on students trying to get by financially during their course of study, while also ensuring the Government is able to recoup its investment at a later stage when graduates are in a position to repay their loans.

To be clear, the student loan system is expensive. Having $15 billion dollars of debt on the books creates calls for greater repayments sooner.  But if students are to make the most of the opportunity that further education at a tertiary institution presents, they need to be able to pay for it without resorting to credit cards, bank overdrafts and expensive private loans that will burden them with further debt and a bad credit rating if they cannot make their payments because they’re forced to choose between an interest payment and food for that week. 

Further, taking a loan out, even from the Government, is not a decision that should be taken lightly. It’s crucial that students understand that this is money that must be paid back over time – the student loan contract makes this requirement to repay very clear.  Recent legislation that allows for the arrest of those with outstanding loan debt has been used twice by IRD, with one arrest made.  This should not be characterized by student leaders as having a ‘chilling message’ – it should serve as a reminder that if every other student is making inroads into repaying their loan, so should those leaving New Zealand and neglecting their obligations, and, in essence, stealing from the taxpayer.

Student loans are an important aspect of ensuring that New Zealand produces a highly educated and skilled workforce that is innovative, critical, and productive. While it’s important for the Government to recoup their investment and for students to fulfil their repayment obligations, students also need financial support to complete further study without undue burden.  Reforming how and when repayments are scheduled would work towards striking a better balance between these.


Brad Olsen is a data analyst at Infometrics. He can be contacted hereThis article originally appeared in Infometrics’ newsletter and has been republished here with permission.

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$15 billion saved by business and transferred to future employee debt serfs? There must be a better way.

I would add -
Do away with student allowance and make them all loans.
Huge saving in admin costs and revenue loss...and you can still study if you want to. No one is prevented.

For the parents add an asset test to the income test.
At present those parents that can manipulate income obtain an allowance for their darlngs. So once again the asset wealthy are getting better treatment than those declaring actual income.

The income manipulation was a problem even when I was studying. I knew fellow students who their parents ran a farm and adjusted their income to below the threshold so their son could get full allowance. They weren't the only ones. Either give every student an allowance or none. Best way to close the loophole.

I would be opposed to make it all loan if student loans were interest bearing (which hurt when I was studying). Although I feel sorry for those who have a retrain several times during their working life as they will have the perpetual tax.

We do need to avoid the situation that's arisen in the US when students have a typical loan around $120k with 3-6% interest. Most are completely stuffed financially and are little more than debt surfs surviving and paying debts. They'll spend 10-20 years repaying loans before they can save for anything. We need to keep a close eye on loans.

Study is a waste of time. Better to spend the time and money investing in property.

In Auckland

You know the world is broken, i worked as an it consultant for company, who for $100 a day (per student) would pretended to train youth in productive skills like reading and writing (school dropouts,trouble makers etc) who (the student) where there to just collect their dole at the end of the week - so wasting everybodies time. Yet at the end of the spectrum we got students racking up massive debt trying to get a education and who value that education. its all topsy turvy. The current education system is just another hidden tax take on society - instead of the government paying the instutution to provide an education to its citizens - they putting it on the student/parents who will fund it. So you pay your tax and now you pay your kids schooling (indirect tax). -- its all a cruel joke.

The Education industry currently creates a product that is so expensive nobody can afford it without massive government loans. The very foundations of the industry are broken.

On the topic the living allowances aren't enough for living and reasonable transport costs in a larger city. The $1000 course related costs is unchanged from when I studied which is baffling. I had at least $500 worth of required texts at the time and it's more expensive now.

However I stated above that student loans are a huge risk in relation to creating a debt trap that decreases spending and overall economic growth. Course fees need to be capped or otherwise kept under control. Courses need to be a bit more functional or where they train for a specific job there are needs for student number limits. No point training people to find no job on the other side to repay their loan.

We also need to relook at interest charged for those overseas. The interest for those who move overseas and end up with a low end job is unsustainable.

"However, another core tenant of tertiary study..."

It's funny because most of today's students will, forever, be tenants.

There are still people that say "I started with nothing." The current generation starts with less than nothing and has to work their way to zero. I know some that will never be able to repay their student loan before they die, low earnings in an effective higher tax bracket due to student loan repayments.

Clearly they will be tenants forever due to having Sky's basic package.

Don't forget that one-a-day iPhone habit.

I hear the kids today just grind the things up and snort them straight.

@ dictator: Either that or they'll be forced to migrate and be part of the brain drain.

There is no 'brain drain' any more. Since September 2015, more NZ citizens returned here than left. (According to StatsNZ.) There is still a very small leakage of citizens to Australia (2,137 in the same 7 month period), but that is nearly the lowest level it has been since 1991.

My daughter completed her degree in less than 3 years (missed out on the last year of study link as it was deemed part-time. i.e. punished for being too good) but did not want to do postgrad (of which she is capable) as she did not want to further increase her debt level. She now has a part time minimum wage job (this is the economy we have created). She does not repay the student loan on this, as it is below the threshold.
I was a lucky baby boomer who was paid during (part of) my education. With jobs etc I managed to save during my time in education (some well disciplined ones still do, but it is hard work). So I feel sorry for those starting with negative (financial) wealth. At the same time, too many are in education (which has been dumbed down). We need more in apprenticeships etc.
BTW: The study link forms require that the parents declare their incomes but also the breakdown excludes losses and depreciation and other non-cash losses. It also considers trusts.