Tuesday 13 March 2012

Politically unsustainable?

Prime Minister John Key is giving up too quickly on student loan interest rates.
Charging interest would bring in considerable extra revenue for the Government, but Key said he would be voted out if National did so.
"Bluntly, if you want me to be really crude about it there are 565,000 student loans out there. If we add interest back on the student loans, it doubles repayment time of the loan.
"If your loan is $50,000, and it's estimated it will take you eight years to pay it off, we effectively turn it into a loan that is about $90,000 with interest that takes you about 15 years to repay," Key said.
"That is about the only thing that will get [young people] out of bed before 7 o'clock at night to vote, but it's not politically sustainable to put interest back on student loans. It may not be great economics, but it's great politics. It is a bit of a tragedy because it sends the wrong message to young people, it tells them to go out and borrow debt." [emphasis added]
What would be so hard about instead saying something like:
"Starting next year, new student loan borrowing will be subject to interest. Existing loans will stay at zero percent. We do not wish to impose an unexpected burden on existing loan holders. But current policy encourages ridiculous borrowing behaviour."
Would students really get out to vote en masse if new borrowing were subject to interest charges? Would Labour really look at the current deficit projections and reckon promising a return to zero-percent loans a great idea?


  1. Would students really get out to vote en masse if new borrowing were subject to interest charges?

    Maybe. Voting and politics are often more about group affiliation than direct personal effect of a policy. If it's seen as an "attack on students", then those who identify with students will be angry.

    1. I'd worry more about parents, who have higher likelihood of voting, turning out to oppose the increased burden.

  2. Yeah that would be the end for them - for a long time. As a student (at UC) I can assure you that the idea of a 'right' to education is alive and kicking among my peers. The only argument that ever gains any traction is pointing out the regressive nature of transfers from the lower income group who work straight out of school. The counter claim I hear most often is that the gains from taxing the higher incomes earned by the subsidized group must outweigh the costs. I have no data but I suspect this is false once you include Working for Families (Director's law?).


    1. Question then is whether the increase in aggregate tax revenue from subsidizing middle and upper class kids' education is sufficient to outweigh the opportunity cost of the money. I suspect rather a lot of the effect of zero percent loans is inframarginal - I recall seeing evidence of strong uptake of the loans once the rates fell, but not of huge increases in student numbers. But I'd have to double check that.

  3. The New Zealand student loan scheme is in bad need of reform. The following reforms should be introduced in the following order.

    1. The amount borrowed should never be paid directly to the student, but to the tertiary provider or to the uni
    hostel system. It should not be possible to borrow, put the money in a
    term deposit, and pay the loan back years later, and pocket the
    interest. This arbitrage strategy amounts to a rort. Those who wish to
    flat in town should not be allowed borrow their living costs. Those wishing to do full time study while having dependents should be considered for the dole plus the Accommodation Supplement.

    2. The loan balance should increase every year by the amount of
    inflation. The zero interest rate for those who remain within the
    country amounts to a negative real rate equal to minus the rate of
    inflation. This could be phased in on new borrowing after a certain date, grandfather the zero rate on existing loan balances, as Eric suggests.

    3. New Zealand should negotiate bilateral agreements
    with the other English speaking countries (where the vast majority of
    Kiwis do their OEs and the like) requiring that foreign tax authorities
    comply when the IRD asks them if Kiwi borrower X has declared any
    taxable income to the foreign authority. The IRD would agree to do the
    same when asked by foreign authorities.

    4. When a New Zealander
    with an unpaid student loan balance dies in New Zealand or another
    English speaking country, the IRD shall have a senior claim on his