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The NZ Initiative's Khyaati Acharya & Eric Crampton argue better tertiary preparation at secondary school & means-tested assistance for students would be better policies than interest free student loans

The NZ Initiative's Khyaati Acharya & Eric Crampton argue better tertiary preparation at secondary school & means-tested assistance for students would be better policies than interest free student loans

By Khyaati Acharya with Eric Crampton*

2016 is closer to 1240 than you might think.

In 1240, Robert Grosseteste, Bishop of Lincoln, established the first ever documented student loan system. Scholars would take an oath to prove they were of modest means, and deposit some valuable object into an embellished chest - formally called St Fideswide’s Chest - held on the Oxford university campus. Scholars held the chest as collateral for the loan. 

On some fronts, we have progressed considerably since the rudimentary student loans of 800 years ago. But in other ways, not so much. Loans back then would not typically carry interest, as the Church at the time thought interest was sinful. Politics today around student loans have a similar tinge of the dark ages. 

New Zealand’s modern student loan system was established in 1992, tasked with providing bulk payments to students for tertiary tuition, course-related costs and living costs, disbursed at slightly below-market interest rates. No collateral was required and students could defer repayment of the loan until the benefits of tertiary education were realised in future income. The scheme remained largely unchanged for almost a decade. Tertiary participation rates soared. There were around 140,000 full-time students in 1994. By 2004, EFTS numbers had increased by more than 100,000.  

Upon winning the 2005 general election, the NZ Labour Party eliminated interest charges on student loans for all New Zealand-based borrowers. 

It was a controversial move, criticised by the Opposition for being little more than an election bribe - but ultimately supported by National when they came to power in 2008. A decade on from the zero-percent loans policy is a good time for a look back at how things have panned out. This week, The New Zealand Initiative released its report, Decade of Debt. The zero-percent loans scheme was sold as a way of improving access to tertiary study and reducing students’ debt burden. 

It has not done well on either measure.  

Tertiary participation rates peaked at 14% in 2005, just prior to the zero-percent loans policy. Since then, participation rates have dropped to just over 10%. The number of full-time student equivalents plateaued in 2005 and have fluctuated around 230,000-255,000 over the past decade. Work by Nigel Healey and Philip Gunby at Canterbury University found no improvement in Maori or Pasifika enrolment rates with the policy change. 

And, despite the interest-free loan policy, more than twice as many students from decile 9 and 10 schools progress to tertiary study than do students from decile 1 and 2 schools. Where zero percent loans were supposed to improve tertiary accessibility, instead we find constraints in the system that work substantially against lower income students. 

To put it simply, the government cannot, at zero percent, lend out enough money to meet the needs of the most financially stretched student without simultaneously encouraging everyone else to borrow far too much. And so it must cap how much students can borrow. Consequently, as the Child Poverty Action Group reported earlier this month, some students have had to turn to credit card debt, or to part-time work that hinders their study, to fill the gap. Neither of these improves tertiary accessibility.

Neither has there been any improvement in the student debt burden. Instead, the median student loan now takes a few months longer to pay off than it did prior to the zero percent loan policy. It might seem a paradox, as borrowing at zero percent should reduce the amount of time it would take to pay off any given loan. But remember that people will borrow more when interest does not apply, and will not be in a hurry to pay it off when they’re also saving for a house deposit. 

And overseas-based borrowers remain a substantial problem. In 2009, those overseas borrowers owed $1.9 billion, and today they owe $3.4 billion. Their overdue debt has snowballed from $110 million in 2005 to more than $800 million in 2015. 

The expressed intentions of the policy, assuming it was not, as National then deemed it, simply a cynical election bribe, could have been admirable. Improving access to tertiary study is a good thing to do. But the $600 million in subsidies provided this past year alone - and forecast to rise well into the $700 million range soon - simply has not done that job. And it is simple to see why it couldn’t do that job. 

New Zealand has an excellent income-based student loan repayment system. Everyone with student loan debt pays a 12% tax on every dollar earned over $19,084 until the debt is paid off. Whether the interest rate is 0%, 2%, inflation plus 3%, or any other percent, the minimum fortnightly payments would not change. What changes instead is the duration of payments. If the interest rate is higher, every dollar borrowed takes a little while longer to pay off. But the fortnightly repayment burden is no different. 

How much longer would repayment take? Suppose you left tertiary study with the median student loan balance, inflation adjusted upwards from the most recent stats available: $16,700. And suppose that you followed the typical earnings path for someone with a Bachelors degree, as published in the most recent StudyLink data. Finally, suppose that you paid only the minimum 12% on every dollar earned above the threshold. If the interest rate were 2%, it would take an extra three months to pay off your loan. If the interest rate were 4%, it would take an extra 6 months. At 6%, it would take an extra 10 months. At 8%, 14 extra months. None of these are especially terrifying figures. 

Of course, not all investments pay off. The dairy farmer who borrowed at 8% to buy paddocks just before the crash in milk prices might have debt that outstrips the farm’s assets and wind up going bankrupt. And someone taking on tens of thousands of dollars in student debt in pursuit of degrees with little to no chance of employment will take a very long time to pay off their debt, regardless of the interest rate. 

Let’s consider a plausible bad case. Suppose you took out $60,000 in student loans for a degree that had no real payoff. Your starting salary winds up being $20,000, then you follow the normal path of annual salary increases after that. Even under zero percent, it would take over 23 years to pay off that debt. Even a 2% interest rate would add four years of repayment. But the problem really isn’t interest, is it? The problem is taking out tens of thousands of dollars of debt for a degree that doesn’t lead anywhere. 

And that’s why we recommend a strong refocusing of how government spends its money. If the point of the zero percent policy was to improve tertiary accessibility, and to reduce the student debt burden, the zero percent policy has failed. We suggest better uses for the money currently going toward interest rate subsidies. 

First, and most importantly, put the money into better tertiary preparation at secondary school. Labour was dead right two weeks ago when it said that too many students get very poor career guidance. Kids stuck in schools with little tradition of sending graduates on to tertiary education will not know which NCEA courses they need to take to have a shot at success after school. They need guidance in making those choices. They also need better guidance and help in choosing degree pathways that lead to jobs and success rather than to decades of misery. 

Second, some of the savings from reinstating interest on new student loans could be put towards means-tested assistance for students.  

The shift would be strongly progressive in effect. Instead of giving substantial interest rate subsidies to the kids who currently wind up going to tertiary study, who are typically from richer backgrounds and who are typically more likely to wind up on higher earnings, we would be investing in secondary schools so that kids from less privileged backgrounds would have a better shot at tertiary success. 

Labour’s Chris Hipkins dismissed this progressive shift as right-wing claptrap. It is time that Labour, and National, stopped throwing good money after bad, ceased their partisan claptrap defence of their joint failure, and gave their collective heads a shake. We could be doing so much more good with the hundreds of millions of dollars a year we’re funnelling into interest rate subsidies. 

If only we could move our thinking out of the dark ages.


*Dr Eric Crampton is Head of Research with The New Zealand Initiative.

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It should be clear to anybody looking back over the past decade or two that tertiary education is a farce.

You are indoctrinated from childhood with the myth that you need to study hard to get a good job to achieve success and the good things in life.

This is not the way really it works. Going to university and studying for years, missing out on all those of earnings and getting into student debt is a huge setback. Your hard won career is laughably worthless no matter how much it pays in the face of rampant asset price inflation.

To get ahead you should simply go straight to work, buy as many houses as possible and sit on them. Speculate with other people's money. This is what society rewards. The government has got your back, prices will never be allowed to fall.

This is the strategy I have seen beat almost everybody I studied with. What a waste it all was. Unless you are doing it for the love. Don't bother.

@ xelnaga: Well that might work if you can compete with all the overseas money that's pouring in to here and else where in the world supporting shadow economies and hoovering up existing assets and land: 'Gangster grannies' and China's shadow banking world

You aren't going to compete by working for a living even as a lawyer, engineer or doctor that much is crystal clear.

Keep a close eye on what happens in Vancouver though. It's an interesting case study in what could happen here if we install a better government.

I think everyone agrees we need a better Government and one that supports its people. Rather than just selling them out.

the whole problem goes back years and years.
back when I grew upLOL only the smartest went to University and you studied in what field you could qualify and with what bursary you also qualified for.
next layer went into trades or professions where it was on the job learning supplemented with tech training
and last lot went into manual , office or retail work.
I will concede there was a hole for people from poor back rounds to make it to university but that could have been addressed with scholarships.
instead we went down the path of everyone should get the opportunity to go to university and designed a blanket way to achieve it to the Determinant of trade training and other technical school trained professionals
even my profession was deregulated and a one point no study was required which was a huge negative to it.
fortunately the government has seen sense and reinstated study and exams which over the years they are making more intensive and harder.
so my point is we need layers of different skills in our economy not just give everyone a loan and ship them off to university whilst importing others to fill the gaps created

There's an endless stream of mistakes. There was a good path to trades and that was dismantled. University isn't suitable for everyone. I went through when student loans still had interest and repaid it all prior to 0% being introduced.

One major problem I'm seeing is people moving overseas to make a basic living but not enough to keep up with the interest charges. If interest is reintroduced student loans will go down the path that the US has taken where people end up with $120,000 loans with 3-6% interest. It's crippling people for life, especially if their degree doesn't lead to a career that pays enough.

We would be better restricting courses that produce too many graduates for the real job market. It's not just student loans but the tax payer still pays for the majority of the course cost and this is more important than charging interest.

I agree that what is needed is change that addresses the actual issues.

If the point of the zero percent policy was to improve tertiary accessibility, and to reduce the student debt burden, the zero percent policy has failed.

It is a poorly argued case. It just as plausible that other government initiatives have failed. Or in fact government action has had no effect at all.

The participation rate drop from 14% to 10% is most likely due, as the article points out, to the common sense decision of that 4% of potential students to avoid debt. I believe this is most likely because they don't see viable careers existing to pay it back. It might be that the drop would have been worse without the interest free carrot.

few facts need to be addressed, we need certain amount of the main professions in medical, engineering, IT, Accounts and law plus the various fields of science to get ahead, catch up with the world, and to replace our own aging population otherwise we will need to import them and that is very costly and happening now. Certainly our bright students should pursue high education - life is not only trade and commerce !!

In recent years there were tons of Art degrees offered ( along with the message that you should get a degree!) which were utterly useless and led to nowhere other than lining the Unis pockets ( or keep them afloat ) and lining the Crown's Student loan coffer ... It was a convenient way to get people out of the unemployment list and put them in the student loan lists ... that was irresponsible to a degree and now they have to deal with the dept.
Meanwhile English and Maths in schools have gone down the drain and the quality of teaching went well before that - I have gone through the appalling teaching methods and attitude in one of the good secondary schools in auckland with my two kids - we can certainly improve the education of our secondary pupils and get them ready for trade and tech training so they could still earn very good money and be useful to society with less than half the student mortgage they would end up with.
It needs responsible leadership and discipline , certainly NOT namby pamby Green crap and soft tree hugging that is currently going on in public schools ---- anyone who knows a decent secondary teacher would have heard horror stories including the ones which led them to quit the profession.
update: I remembered a story of a math teacher friend , just retired this year, he says the kids do not care about learning and there is no real system to make them attend or learn ... He said: one day I was so pissed and asked a 13 year old boy as to why he fails his homeworks and doesn't attend his classes regularly, the boy shrug his shoulders and asked the teacher rudely how much do they pay you a year 60k, 70K?? .. my friend said : it was a shocking reaction and before I thought of an answer the boy said: I can make that in a month, so why are you wasting my time? ... and he just left me puzzled and walked away on me .... he said there is no discipline and no one dares to punish students for any of the above .. no one wants to get his hands dirty or risk getting the agro from either the parents, the school board or the Human rights commision ...
So there you have it.

Today i had a university educated designer talking to me in centimetres! Un f-ing believable. The guy even teaches design ( I won't say where)

Under what context?

Industrial Design! He came to me with dimensions for a new piece of furniture

What's wrong with centimetres? Unless he was pouring a beer, or weighing something.

Ok if you're a dress maker mate

Still don't see the problem. What units of measurement did you want him to use, and why?

The units expected are mm as they are an SI unit unlike cm. In the majority of industrial or construction work places mm are standard. Best the speak the same language as everyone else or you end up with a design 10 times too small. Which would be very wasteful or in some workplaces would be a safety issue.

You're incorrect. There are seven base SI units, of which the metre is one. Both centi and milli are SI prefixes, this means that they can be used in conjunction with the SI base units.

Convention dictates that measurement in mm is expected in most cases, but the use of cm is perfectly acceptable.

Not in my business it's not! If someone tells me the box is 35 by 35 or writes that on the drawing they will get a box that's 35mm by 35mm. millimetres IS the standard thanks.

So if somebody came in and wanted a dining table 180 long you would build him something that would fit in a shoebox. Of course you would. You are always so right.

I'm not sure why people are still discussing this. There are real situations where a misunderstanding of units can cause a problem. Rather than try to debate that miscommunication is beneficial and productive consider this high profile case of getting units wrong.

When someone asks for a table 1.4m long, he obviously declines the business based on the position that the measurement wasn't supplied in millimetres.

Metres is a standard i work too also. Millimetres also. And i dont know one engineer who would accept a drawing in centimetres. Maybe in the US they think that qualifies as metric. I think you're full of it quite frankly.

No, KH. I would ask 180 what? Broccoli heads? Take your chip of your shoulder mate.

Then you have missed some very basic training in the use of measurement. Values without units are meaningless. That is why the rules stipulate that when supplying measurements that the units ARE ALWAYS specified.

No Simon. I learned centimetres in primary school, then i grew up

Ofcourse you don't! Do you work in design?

Engineering. Where measurement units are ALWAYS stipulated as they are REQUIRED to be. Only lazy practices have lead some people to leave off the units.

The building plans I have in front of me all stipulate the units - mm and metre - next to the values.

The convention (and in your context, it is debatable) might be to represent units in mm, however the use of cm in any situation is still technically acceptable and conforms to the SI rules.

Regardless, you can convert this to your desired measurement unit very easily.

When I was in construction it was more than convention, it was a government policy. Construction was in mm. Other industries (textiles ?) was centimeters. Don't know what say roading was.
Justice might not know this. But there are clear requirements depending on what industry you are in.

Convention, yes. Usually this is to eliminate any decimal points which could be overlooked. The standard does however call for the use of a unit of measurement to be noted next to the value, and that is taught in all trades.

Education is one of the most profitable businesses today. It's easy and simple. Once the students are registered, the government disburses the money directly to the institutions involved. On top of tuition payments are auxiliary services income streams to benefit from, like food catering, accommodation, book sales, beer sales, air travel, end the list goes on.
Education today is as useful as teats on a boar. A large percentage of graduates reading or writing abilities are not commensurate to the amount of energy and time devoted to undergraduate studies, to say the least. Mostly they learn how to use computer software and become good consumers. A masters degree is the minimum required today to be considered eligible for most professional careers. And the really sad part is primary educators' efforts are design to indoctrinate young people to the need of obtaining a college education to qualify for a "good' job. In other words, they are "talking up their book" at the expense of the tax payers.
Mind you, today's teacher were themselves indoctrinated by the system, for the system. It's a win-win situation!!

Note the source of this article. A right wing think tank funded from who knows where. The motivation is to lower tax on the top 0.1% and increase the already obscene wealth disparity even further.
If we look at the countries that are doing best in this area it is those where tertiary education is free as it used to be here.

Way to go. Look at who the author is; make assumptions about his motivation and what he really means; attack that, rather than addressing what the article actually says.

Which are these countries where tertiary education is free to everybody who wants it, regardless of how many there are who want it, or what they want to study, or what means they have to support themselves?

What does it cost them to provide it?

In what ways are they "doing best"?

Why don't you ask Invercargill? They provide free tertiary do they pay for it? It's not a new thing, either, so they must have a good enough reason to continue with it...

It's just a business proposition for the city really, isn't it? The student fees are theoretically offset by the boost to the economy that they make. I'm sure entirely sure it works out that way, but obviously Invercargill is happy with

So wonder why Auckland can't work it out the same way, then, or PN...?
Why does Invercargill manage to make it work, but not Auckland? Surely the influx of students is a boost, here, too?
or could it be that that student spend in Auckland is required for other council related stuff and therefore there's nothing left to provide AUT with?
You have to remember that the bulk of international students probably make their way to AUT or Victoria, and that, too, is a boost - not just for those cities, but (judging by the extortionate fees) the universities, too.

I'm surprised there was little mention of the cost of undergraduate degrees in 2005 compared to present.
Most degrees were in the $2500-3000 ballpark per year in 2005 compared to $6000 per year in the present and that includes certificates and other bridging courses offered by ALL tertiary providers. Effectively, a minimum debt of $18,000 for a degree excl. resources and other accom. costs.

The above comment regarding profitability by the education sector is on the money. Like most public sector environments, education has adopted a corporate strategy in running their organisation including many tax deductible expenses, lavish overseas trips, and bonuses for managers reaching targets of success in their faculty.

The other major factor seeing a decline in tertiary numbers is the funding from govt. All tertiary institutions are ranked on performance (successful graduates per bums on seats) which is a change from the "bums on seats" funding that was present up until two years ago. As students fail or cease to continue in their chosen degree/course, the funding is reduced for the following year resulting in fewer students and turnover of staff. In principal I agree with the govt's stance, one of the rare occasions I agree with this govt.

The final issue alluded to regarding secondary schooling (being a teacher) is that NCEA changed the UE requirements two years ago, which means students now require 3 UE approved subjects of 14 credits or more to apply for a tertiary course (not guaranteed). Prior to this, as long as a student gained 60 level 3 credits they were accepted into Uni, even if 25 of the credits were in one non-academic subject. Hence the reason there has many a significant drop in students achieving UE and thus not going onto Tertiary study.

Though this is never stated publicly, NCEA has an academic/traditional pathway. ie Calculus, Physics, History, Accounting (examination based) compared to vocational pathways including general Maths, Business, Gateway, Star etc (Internally assessed)

Many schools, including mine are creating alternative pathways for students through careers advice and guidance which is a positive sign looking to the future.

Great article.

I 100% agree with your comment about better career guidance for low decile schools. I went to a low decile school and had very poor quality guidance. This is probably common across high and low decile schools, however now that I am in professional employment, I notice that often times those that intern at my work who come from high-income families receive higher quality guidance simply from parents who have experience in a professional work place.

My family was medium-high income and provided a lot of support, but neither of my parents had worked in a professional environment (farmer and teacher). Many in low decile schools will be in a similar, or far worse, situation to I was in. My parents understanding of different degrees was very rudimentary - for example, their experience of a lawyer was their local small town lawyer, their experience of an accountant their local small-town accountant. They did not understand the world of financial accounting, management accounting, corporate council, etc.

I started off doing a bachelor of computer and mathematical science - simply because I was good at maths and computing at school (this was the sophistication of the career advice)! I had no knowledge of strength-based career development and how the soft skills I had at influence, communicating, negotiation etc, could help me in a career. I changed degrees when I didnt enjoy the maths based option and did a management degree. I have traversed finance, accounting, policy, international policy, and consulting now - each time moving slightly closer to where my true skills lie!

I recently attended some professional courses on career development / choices. On reflection, I have managed to do OK but 100% agree with your comment re low decile schools. Think about someone whose parents are unemployed taking the time at age 18 to choose a career - the professional world is likely to be such a mystery to them. It is no surprise that they may either choose the wrong degree or choose not to study at all.

The problem is and has been for 30 years or more is the current user pays system. Free education should be free. The costs should be borne by government & Industries who want particular skill sets and qualifications. Watch the price of education drop and ridiculous demands from certain industry's disappear overnight. The Private Sector Education industry should only be for International Paying Students. Not NZ citizens. That will cure the private parasitic under-performing Charter Schools and lift poor performing State Schools.

Another classic biased article from this lot, trying to pose as independent.
There is one good point about more support in secondary school focussing on career guidance. That is a no brainer for me, but it has nothing to do with whether or not interest should be charged in student loans. It is not an either-or. If this group were looking at ways of funding more support at secondary school, why not look to more effective tax solutions? Why target student loan interest?
There is next to no analysis as to what effect zero interest has had on participation rates in this article, so let's not pretend that we have any conclusion on this. Their second measure highlighted here is the students' debt burden. The author laughably goes onto define this burden in terms of how long it takes to pay the debt off. The burden is how much the student is actually paying back. Zero interest reduces this burden. If tertiary fees have risen then that is another variable you need to explore.
This article fails to conclude accurately on both measures.

Means testing = useless when lots of wealthy have their $ in trusts.

If you bring interest back on loans there will be no incentive for young nz graduates to stay here when they can earn more overseas to pay off the interest. Eg. Young drs with 90k - 100k loan with 5% interest. Why would they stay???

Seems this think tank spent no time questioning why we had a brain drain in 90s/00s