Thursday, July 28, 2005



Calculations

The release of Labour's interest-free student loan policy has clearly left the right gazumped, and they have been desperately flailing trying to find a way to counter it. So far this has manifested as an attack on the accuracy of Labour's calculator in an effort to argue that it overstates the benefits to borrowers. Nigel Kearney's efforts in this area are nothing but a strapped chicken - as is obvious from the blatantly stacked assumptions. 6% salary growth (the average is a mere 2.4% - less than inflation)? Twice the repayment rate under the present scheme (there will be some effect, but we should be comparing like with like)? Entirely arbitrary tax reductions? It's a perfect case of stacking the asusmptions to produce the desired result - do they teach this in right-wing school or something?

Meanwhile, DPF parrots Bill English's comparisons with other loan calculators - but as Just Left points out, this seems to be due to differing assumptions about salary growth, inflation rates, and whether the output is presented in real or nominal dollars. The latter is particularly important; with a long enough repayment time, the NPV of accumulated interest can shrink dramatically, even at a discount rate of only 2.8%.

But there's also two more general points I'd like to make. The first is that the right is being inconsistent in trying to claim that the loan writeoff will deliver less than graduates expect, while at the same time trying to wildly inflate the cost. They can't have it both ways, and they should make their mind up which claim they want to push. But more importantly, DPF's nitpicking over numbers is fairly irrelevant, because regardless of which calculator you use, a full interest writeoff is still worth more than a 33% rebate, particularly to those on incomes which do not meet their interest payments (of which there are far too many). No matter which way the right tries to spin it, student loan borrowers are still better off with Labour.

7 comments:

I know lefties don't understand money and finance so I will try to explain this is very small words:

Consider two people today:

A has just graduated from university and got a job. B graduated 18 years ago with the same qualification and has been working, gaining experience, and earning promotions over those 18 years.

Except in very unusual circumstances, B will earn more. I stated my assumptions, which I think are very conservative, that A earns $40k and B earns $70k.

So far this is all happening right now, in todays dollars. Now we need to consider the effect of discounting.

If A, in 18 years, is to have a real salary of $70k in today's dollars (the same as B) then his actual salary, assuming 2.8% inflation, will have to be:

1.028^18 * 70 = 115.07

In order to achieve an increase from $40k to $115.70k over 18 years, we need a rate that is the solution to the following equation:

x^18 * 40 = 115.07

Solving this for x we get x=1.0604

Hence my 6% assumption.

Posted by Nigel Kearney : 7/29/2005 08:48:00 AM

Again, I suggest that actually looking at reality. The average wage rise is only 2.2% this year, and the 2.8% received on average by those under collective contracts is "the biggest annual increase since the early 1990s". Your 6% is an utter fantasy.

Posted by Idiot/Savant : 7/29/2005 12:25:00 PM

First of all Idiot when we are talking about graduates I am sure the figure for wage growth would be much higher than the national average. So your attempts to say 6% is utter fantasy aren't based on any reality at all.

Secondly I agree with you rebates suck. Tax cuts (at least ACT's tax cuts) would deliver more than the interest costs to graduates while they are studying and leave them considerably better off once the loan is repaid. Hopefully ahead of time. After all we don't want the amount of student debt ballooning out now do we?

Posted by Mike Collins : 7/29/2005 02:13:00 PM

i was actually at a seminar this morning which examined the average wage increase across collective agreements, and I/S is correct, this year's average of 2.8% is the highest since the study began (1991 I think), and the average since the beginning of the study is only 2.2% a year. The Labour Cost Index has consistently been lower than that, although the gap has got smaller in the last two or three years. This is from Victoria's Industrial Relations Study.

Posted by span : 7/29/2005 03:10:00 PM

If the calculations are done at 5.4% instead of 6% then the difference is nowhere near enough to invalidate any of my conclusions.

If you are suggesting the 6% rate be replaced with 2.2% then you have completely failed to grasp the issue. 40 year olds tend to earn more than 22 year olds irrespective of what the average wage is doing.

I'm sorry but I cannot explain it any more simply that I have already done.

Posted by Nigel Kearney : 7/29/2005 03:19:00 PM

You're all also missing the fact that few people (especially those with a degree) will stay in the same job position for 20 years. Factor in promotions and moving to jobs with better salaries, and I might think that even 6% is conservative.

Posted by Greg : 7/29/2005 04:12:00 PM

I/S,
This is what I would call "having your ass handed to you on a plate". Good work by nigel I have to say or possibly just shoddy work by his critics.
GNZ

Posted by Anonymous : 7/29/2005 09:48:00 PM