Tuesday, July 26, 2005



Labour's tertiary policy

Labour has released its tertiary policy. The headline component is scrapping student loan interest for borrowers who stay in New Zealand, but there's also a significant widening of allowance eligibility rules and a commitment to keeping fees low. It's a progressive step, and far more generous than National's policy (which promised only to make interest payments tax-deductible, while doing nothing about allowances and allowing fees to skyrocket). On the other hand, while it will be very good indeed for future borrowers, it does nothing to assist past graduates. An entire generation of tertiary students have been fucked over by no allowances, high fees, and crippling interest payments, and they will be carrying the can for those policies for the rest of their lives. It would be nice if the government started paying attention to this problem and began to address the significant intergenerational equity concerns, rather than simply ignoring it.

I'd also take issue with Labour's costing. The interest-free policy is costed at $100 million intially, rising to $300 million, but this is an opportunity cost, not a real cost. The money won't be spent, rather it will not be made. Obviously existing projections which assume that the government will be receiving interest from students will need to be corrected, but it should not generally be thought of as a "cost" unless the government is actually borrowing the money itself and simply passing it on to students. And if they're doing that, they're simply being stupid...

Update: If you want to know how much you save in interest, Labour has a quick calculator here.

53 comments:

as a former student lucky enough to be able to get an allowance, i still carry a loan nearing $30k, at least one third of which is accrued interest. in other words, i copped some of the sting in the 90s policies.

but this one's a a winner to me. i'll personally save in excess of $15k on the repayments, and that's without voluntary money going into the debt.

that money will go a long, long way towards my retirement savings...

Posted by che tibby : 7/26/2005 02:20:00 PM

I'm staring at this with a 'too good to be true' vibe jangling in my head. But if they go through with this, man, that's us in a position to buy a house a good couple of years sooner.

Unlike National's policy, this also works for women with loans who take time out to have children.

Posted by Ghet : 7/26/2005 02:29:00 PM

ghet,

exactly, the elephant in the room in regard to National is it's handling of "wimmin's issues".

helen would appear petty by labelling don sexist, but i'm sure there are others who would be happy to do so...

Posted by che tibby : 7/26/2005 02:38:00 PM

Hey I/S,

This policy does apply to former graduates who still have loans. I'm a graudate, and the policy is going to save me $17,000 and allow me to pay off my loan 5 years faster. There are many graduates in NZ who will benefit from this policy if Labour is re-elected.

Posted by Tony : 7/26/2005 02:42:00 PM

Tony, I think all I/S was saying is that it benefits new grads more, because of course us old guys already accrued a fairly crippling interest debt over the last fifteen years.

For some reason the word 'wimmin' makes me reflexively want to set fire to things. Nevertheless, yeah, I am kind of tired of being punished for choosing (yes, quite freely) to stay home and raise my own kids instead of paying someone else to do it.

Posted by Ghet : 7/26/2005 02:50:00 PM

ghet!

you're a blogger! and female!

that's what i get for ignoring the labels and only reading the arguments...

you're officially bookmarked.

Posted by che tibby : 7/26/2005 03:02:00 PM

Tony: As Ghet said, it's about the inequity of graduates from a fifteen-year period being burdened with the consequences of a failed experiment in government policy. While this does wonders for my repayment time, I'm still going to be burdened by a large amount of accumulated interest, which will be with me for much of the future. Still, now my loan is at least repayable before retirement age...

As an aside, its not just student loans where that generational inequity is beginning to rankle. The costs of the 90's seem to have been imposed on quite a narrow cohort, who are now missing out on the various attempts to undo the damage. Free doctor's visits? We miss out. Home saving schemes? Too late. It's great that the government is trying to patch things back together again and restore the social contract, but it seems that there's one age group - who were victims of the process, while having little say over it - who are going to be left carrying the can for the whole thing.

Posted by Idiot/Savant : 7/26/2005 03:08:00 PM

to be fair I/S, there's people in their 40s and 50s who are suffering far more from the economic restructuring far more than you or i are.

the ones who were in low-skill employment who were forced out of their jobs with no support for retraining.

unemployment in that sector has only started to recover since 2000.

so while we're saddled with debt, many of them never even had a chance and have fallen way behind.

Posted by Che Tibby : 7/26/2005 03:21:00 PM

*peers down shirt* Good grief, Che, you're right! I am!

To be fair, I/S, while I see the general point, I do kind of benefit, cause I got free dr's visits for my kids while they were under six, and my mum got one of those great 3% mortgages, enabling her to buy a house that I'll get a quarter of when she eventually snuffs it, so benefits DO flow between generations.

Posted by Ghet : 7/26/2005 03:51:00 PM

Oh my word...that is an election bribe I'm happy to take.I haven't worked out the actual savings yet but as me and my significant other combined have student loans of over $70,000 I have to say this is really feeling too good to be true

And incidentally don't forget also that we, who bore the brunt of the social experiments of the 90s, student loans etc then had to enter the workforce at a time of 10-12% unemployment when lots of employers were carried away with the excitement of the "freedom" conferred by the Employment Contracts Act. "Lets make everyone an independent contractor! then we don't have to bother about boring things like sick leave etc" Not to mention all the charming beneficiary bashing that period was characterised by.

Posted by Make Tea Not War : 7/26/2005 03:56:00 PM

Though Che Tibby makes a good point too...

Posted by Make Tea Not War : 7/26/2005 03:57:00 PM

Good lord. Not that this isn't a great Backatcha-Booyakka-headline-trump card policy or nuthin' that is making loads of my friends jump up and down in teary-eyed glee and relief... but when you see them write things like 'this is feeling too good to be true'... you really know the goalposts have shifted, and that we really did get broken along the way.

Posted by tze ming : 7/26/2005 04:05:00 PM

By the way, an election-year tertiary-ed trump-card was in the works from the middle of last year, when I was working in [unnamed government department] on little-kiddie policy - and the word came down that the government knew that students were getting really sick of little-kiddie policy.

Posted by Anonymous : 7/26/2005 04:07:00 PM

My loan is $36K, a good 8k of which is interest. I worked for 3 years as an academic in NZ before coming to the US, and managed to knock off a wopping 3k of the capital besides keeping interest down. I've been resigned to having it for most of my life until now... I'm absolutely over the moon, given that I'm planning to be back in NZ for good in 2-3 years.

Although I would never vote for National after their betrayal of students in the 1990s, and horrendous arrogance in burying people under enormous debt, it's lovely to see Labour taking another step towards a more just NZ. May Helen be returned on Sept 17.

I'm almost emotional about this. It feels like a lifted weight...

Posted by Adrienne : 7/26/2005 04:21:00 PM

In addition,, I must agree with posters about the 'generation' issue. I'm 31, was first year Varsity in 1992 when the loans scheme was introduced. We were the front line for that experiment through those years, and now are struggling to find houses in surging markets, to save for retirement, to afford children. It helps that NZ has had such a strong economy through the labour years, but it remains tough. I've teken 5 years out of my education to try and save/pay back money; most of my educated friends are overseas of necessity. I hope one thing that this step will do is contribute to a return of our generation from around the world...

Posted by adrienne : 7/26/2005 04:31:00 PM

Tze Ming: or things are so crap now that even just interest-free loans (rather than no fees or universal allowances) looks fantastic.

Posted by Idiot/Savant : 7/26/2005 04:36:00 PM

Cool! more amunition for the trademe message boards

Posted by Anonymous : 7/26/2005 05:13:00 PM

The policy massively benefit the 90s generation who still have their loans, but I think it's a bit unrealistic to talk about addressing those who were hit in the 90s who have now paid them off.

Where would you stop? Re-embursing beneficiaries who were hit by the 1991 cuts? State housing tenants who National forced to pay market rentals?

There's only so far you can realistically go back.

Posted by michael wood : 7/26/2005 06:30:00 PM

I think Labour should reinstate core benfits back to their real pre-1991 levels, because the Nats deliberately reduced the income of the poorest citizens to boost the income of the richest, via tax cuts.
Unfortunately, the poor no longer vote, unlike middle class students (and their Mummies and Daddies).

Posted by Anonymous : 7/26/2005 07:00:00 PM

For the first time in what feels like months, Labour has temporarily seized the momentum.

Now ... on the topic of interest, Ghet and others may be interested to know that "those great 3% mortgages" of the past are what are simply called "mortgages" in the US today. On a recent trip to Canada I walked into a bank, and assuming I was a local they pitched me a mortgage for 3.75% (1 year fixed). I'd like to tell the local ursurers where they can shove their 8% loans...

Posted by dc_red : 7/26/2005 09:41:00 PM

the problem with the loans scheme is that it is hideously unfair. it has become less unfair over time (for new users), but any solution is probably going to be inequitable too.

if you wanted to be totally and utterly "fair" you'd have to wipe all the debt and then repay all those who didn't have debts, or had small debts, for their fees, plus the living costs they could have borrowed but didn't, plus interest... you see how it quickly gets quite ridiculous. and then of course the people who get a payout are most likely to be the very people who don't need it, if they didn't need a loan in the first place, etc.

this no-interest thing is a good first step, i am really stoked. let's just hope they get back in to deliver!

Posted by span : 7/26/2005 09:43:00 PM

Stick that in your pipe and smoke it, Don Brash.

This is perhaps the biggest symbolic move in policy in years. In one swoop, Labour has signalled that it intends to use the economic growth that this nation has given us to improve the lot of its citizens by delivering a universal social inititive. For the first time since Kirk was PM, the government has come forth with a policy that benefits all, and not the few.

This, Dr Brash, is why Labour didnt cut taxes. It had more important things to do.

Posted by millsy : 7/26/2005 11:44:00 PM

Idiot,

I'd despaired of any real action to reduce the immense loans debt because no matter what you do, it will be seen by some as unfair.

Labour's approach would (long-term) eat away at the debt mountain. Take it with both hands!

Posted by Icehawk : 7/27/2005 09:17:00 AM

Idiot,

I'd despaired of any action on the loan debt mountain because no matter what was done it would be seen as unfair by _someone_.

Sieze this with both hands.

Posted by Icehawk : 7/27/2005 09:19:00 AM

apologies for the stutter: I'd thought my first message failed to go through.

Posted by Icehawk : 7/27/2005 09:20:00 AM

True enough Tze, on the one hand it's a fundamental relief to me that it could be now feasible for me to pay off this loan in my lifetime, it will probably kill the demand for free education that has struggled back to some shadowy half-life in recent years - at least at Victoria. - John Anderson

Posted by Anonymous : 7/27/2005 09:33:00 AM

dc_red:

It's not that American/Canadian usurers are less greedy than ours. Canada gets low rates because their finanical system is an outpost of the US's (hey, I've lived in Alberta, so I'm allowed to mention that little secret).

The low US rates are because of world currency-based interest rates. Partly it's because Asian central banks keep investing in US bonds. But also lots of other third world countries take money from their people and push that money into the US.

Also it's because people don't invest in NZ. Including NZers: we need to put more money into the bank.

This difference in interest rates is one reason why National's plans to take NZ further into debt are insane: our govt pays TWICE the interest rate on our bonds (ie on our debt) the US govt does for its bonds. We're getting screwed on our debt: doubling the rate of interest you pay makes a BIG difference long-term.

Posted by Icehawk : 7/27/2005 09:36:00 AM

I have a $45k student loan. But am I the only non-selfish student out there?

Contrary to what I/S said, it is a cost because the government *do* borrow the money from banks and pass it on to students. This was stupid from the outset, but that is how it is. The money would be better spent on funding universities directly. Also, there would be no reason for everyone who attends university *not* to borrow as much as possible, because anyone who is smart, and can be bothered, could invest it... for as long as they want too, since they are paying no interest. Thus the debt will sky rocket and the government will struggle to continue paying all the accumulated interest.

I can't believe everyone is so grateful for it. *I* should be grateful, but I'm not. It is a waste of money.

Of course National just wants to use the money for tax cuts which is equally annoying. Why can't they promise to use the money for education, health, research, economic development? I guess these don't pull the voters though - why does the public have to be selfish, short term thinking and stupid?

Posted by Joel : 7/27/2005 09:57:00 AM

The thing is Joel that big student loans are having negative effects for a lot of people. I don't know if they are for you. I'm lucky, I never had to get a loan but most of my friends have loans, often quite sizeable ones that have severely limited their options. There really are people out there who can't save for a house, can't have children yet, etc. And a lot of them are people who are giving back, and not in high income jobs, eg teachers. They are not reaping huge personal financial benefits from their qualifications. But they are suffering pretty hefty detriments because of an unfair system. I think it's great that they will get some relief if we get a Labour-led govt back again.

Also I would expect that this policy will have an indirect effect of increasing investment in tertiary education - more people will study, and probably more people will study for longer (which is great!) which will mean more fees for institutions (even though i hate them) and more EFTS funding too.

Posted by span : 7/27/2005 10:06:00 AM

If people can't be bothered to plan their lives then they shouldn't complain. If ppl get a student loan they should realise it'll take time to pay back and will interrupt things which for some reason people think life is all about (marriage, buying a house).

If getting a loan is a problem, then go and study part time while working. Many of my friends worked while studying fulltime and got through without borrowing - and in fact saved enough to go on an OE at the end! I haven't avoided getting a loan, because I choose not to and know I can get a higher end paying job eventually, I also don't have any plans to settle down and have a family/buy a house for at least another 5 years.

At any rate it is still a waste of money to payoff interest. I'd be more supportive of it if they just set everyone to zero.

Posted by Joel : 7/27/2005 10:24:00 AM

so at 17 or 18 you are supposed to be wise enough to realise that starting a course may result in a massive loan that you never intended, due to unforeseen circumstances like fee rises (although this is less of a problem now), losing your allowance due to your parents' income changing, etc?

Not everyone can get part time jobs that give them enough to avoid loans - who do you think is doing all those crappy service jobs? (not exclusively students of course, but a lot of them are filled by people who are studying).

I avoided a loan due to having a rich dead grandfather to cover fees and course costs, parental support (ie living at home at very low board), working two days a week (for $7.90 - $9.50 an hour). Without family money I would have definitely had a (sizeable) loan. Actually I would never have gone to university probably.

who the hell plans their life at 18?

Posted by span : 7/27/2005 10:43:00 AM

I never got a student allowance, but I do believe a universal student allowance is a good idea. I don't think people should whinge about student loans when the facts are there for them to find out what they are getting themselves into.

The friends I mentioned before worked in those "crappy service jobs" - they could do it, so can others. And if someone needs more than what they can reasonably earn, then they should take a year off before going straight to Uni to save up some cash.

Posted by Joel : 7/27/2005 11:57:00 AM

definitely with you on the universal student allowance Joel!

i would dearly love to know how your friends got by in crappy service jobs - i was pretty frugal (don't drink, don't smoke) but could never have come out debt free without dear departed Granddad.

Posted by span : 7/27/2005 12:17:00 PM

ah, just realised you are in akl. did you study there? I guess it is a different ball park when things like rent are so much more expensive. Bit cheaper in chch

Posted by Joel : 7/27/2005 12:25:00 PM

yep when i finally moved out of home (after 5 years of studying from my folks') rent was about $100 a week for an absolute hole just up the road from Helen Clark's house.

Posted by span : 7/27/2005 01:43:00 PM

not that that was the reason we lived there btw! ;-) to balance things up Richard Prebble's mother lived on the same road.

Posted by span : 7/27/2005 01:43:00 PM

To be honest, I was so excited yesterday and even though I have almost paid off my loan, I have a sister who will benefit and a brother studying engineering in Chch who will benefit. I had a small loan ($10,000) because of lucky circumstances - some limited parental support, studying in my home town and being able to live at home and doing a course that allowed me to fit in a part time job around study. I also have a husband and 'two incomes no kids' makes paying off loans a little easier.

This policy also now means that perhaps we can consider some full time postgrad study, which we are both keen to do.

As to - why would you pay it off sooner - once you have paid your loan off you actually get more money to spend on whatever you like (or put it into a super scheme???)

Posted by Fi : 7/27/2005 03:37:00 PM

span - at 18 you are not supposed to be responsible for your actions. As you say - you are just a kid at 18.

Who could possibly understand consequences of actions, like taking on a debt, at that age.

The government has obviously taken advantage of these naive youngsters by swindling them into a big loan for their education. The bastards. That's exactly why we need a nanny state. You've got it in one. Thank God for Labour. It has a heart.

And they should raise the voting age to 21, because these 18 year olds are pretty ignorant and impressionable. Or maybe you can vote once the debt is paid off. How's that for an incentive?

It's likely that Labour voters would fill that demographic, and the nasty right wingers will be unable to vote themselves in because they are hardly the type to work off the debt, or pay their way as they go.

Later in life, when the horrible (sorry, wonderful) government raises your tax rate, and you still have a student loan + a mortgage, I hope they realise they need to make the mortgage interest free too.

It's the right thing to do.

Posted by ZenTiger : 7/27/2005 10:52:00 PM

Note, spanner, I'm not disagreeing that the life of a student and managing the loan is not difficult, and that solutions are required.

I was struck by the divergence of opinions across the blog, from those that have managed to pay it off through extra hours, sacrifice, etc etc and somehow managed, and then those that are sitting on $65,000 of debt, and now want to make it some-one elses problem.

I wonder if the nanny state mentality is at the heart of some of this?

Posted by ZenTiger : 7/27/2005 11:06:00 PM

Personally, whatever party offered it, I'd be shouting in the streets if the government wrote off the huge IRD tax penalties and maxed them at whatever the student loan percentage was, with reasonable repayment terms.

Posted by ZenTiger : 7/27/2005 11:08:00 PM

Millsy, I find your comment a bit strange that this is a universal social initiative. Its not. If affects only a portion of society, just like say tax cuts for the rich. A universal social initiative would be something along the lines of cutting tax for all. That means the worker that chose not to go to university also gets a benefit through more money in pocket. I think universal tax cuts would be better as everyone benefits. Am I a bit pissed. Yeah, because I've already paid off my student loan. With interest.

Posted by Bernard Woolley : 7/28/2005 12:12:00 AM

ZT i wasn't trying to say that all 18yo are stupid, just that the level of life planning that Joel was talking about isn't in place for most 17 and 18 yos, which is the age that many first go to tertiary institutions and incur debt. Many people never have a plan at all, beyond the next few months. And noone but NZUSA has done any research on the effects of the student loan scheme - certainly when it first came out in 1992 there was no Govt investigation of possible impact or how much debt people could realistically expect from certain courses. Which would have made it damn hard to plan anyway.

Posted by span : 7/28/2005 07:22:00 AM

Yep, I get your point. But where does it lead? If we say that 18 year olds can't really plan properly, that they don't plan etc. Then we have two choices:

1. Don't let them enter into debt becuase they do not understand consequences.

2. Let them into debt and tell them they must accept the consequences.

3. Bail out the ones that accepted the consequences but can't cope, whilst the ones that coped, put that down to a rich grandparent or wealthy parent and they can afford it so who cares?


This policy, like the National Party rebates etc is just more of the same socail engineering and puts a greater tax burden on all other NZ'ers to pay for the "elite graduate" who should be treated as special, because they are going to keep NZ running blah blah blah.

If this goes like the US experience, fees will increase, student numbers will increase (but likely accompany higher drop out rates) and overall debt will soar.

And another thing - if Labour get in, what is the chance that the interest free thing will only apply to NEW debt after 1 April? What if they apply it only to NEW LOANS, rather than current loans. Is that a possibility anyone? Will Cullen annouce the fine print or is it a pledge?

Posted by ZenTiger : 7/28/2005 10:23:00 AM

just quickly - there's certainly been no indication that it will only be for new debt - all the stuff Labour has put out indicates it applies to all debt. have you seen the calculator on their website, that definitely works for old debt, and i don't think it would cost $100M going up to $300M for just new debt.

Posted by span : 7/28/2005 10:44:00 AM

"the level of life planning that Joel was talking about isn't in place for most 17 and 18 yos..."

Doesn't stop them from taking out loans to buy cars or tvs or playstations though does it?

Maybe we should pay the inteerst charges on those loans for the poor did dum kiddies as well.

Posted by Mervyn_Williams : 7/28/2005 02:12:00 PM

Which is all very well except for the things you can't plan for, because you have NO control over them, no matter how old you are. Illness. Accidents. Death of a partner. Any number of things entirely outside of an individual's power to control can affect their ability to pay back a loan.

Yes, there were a few munters back in our day who worked up huge loans buying cars and getting Sky and yes I have difficulty feeling sorry for them, but they're a small minority and I think it's unfair to be using them as a benchmark example.

Posted by Ghet : 7/28/2005 02:41:00 PM

The calculator on Labour's site is plain wrong. It assumes (although makes this clear) that interest is 7% p.a. The reality is that for a lot of people in the workforce currently who are paying off their loans that it is not 7%. The way the system works is a lot more complicated than that and ensures you are paying at least half of your minimum repayments towards the principle. If the other half is less than what the interest charge is the remainder is written off.

The point about all of this is that the Labour site is quite misleading. People are thinking they are taking a lot longer to pay off their debt than they actually are.

ACT on Campus has done some calculations showing that people will still be better off with tax cuts and still paying interest than having their loan written off. Of course this is using ACT's tax cuts. We don't know how miserly the Nats will be.

Posted by Mike Collins : 7/28/2005 02:46:00 PM

"Which is all very well except for the things you can't plan for, because you have NO control over them, no matter how old you are. Illness. Accidents. Death of a partner. Any number of things entirely outside of an individual's power to control can affect their ability to pay back a loan"

Actually there is Ghet - its called Payment Protection Insurance - although students will get death cover only as you can't get the sack from being on a benefit.

Posted by Anonymous : 7/28/2005 06:05:00 PM

and if everyone got it Anon the insurance companies would go broke. it's not cheap - my partner has it.

Posted by span : 7/28/2005 08:24:00 PM

"and if everyone got it Anon the insurance companies would go broke. it's not cheap - my partner has it."

Wrong - actually the Insurance companies would make a killing - they would only make a loss if everyone holding a policy makes a successful claim on it - which means that premimums would rise to cover the loss....but then given that even a rudimentary knowledge of financial mathematics seems beyond most people on this site then I doubt that you would be able to understand that.

Posted by Mervyn_Williams : 7/29/2005 10:19:00 AM

Guys, if we could have afforded Payment Protection Insurance, we'd have done better to use that money to pay off the loan! Ours being relatively small in the scheme of things. That sort of planning is the privilege of the disposable income.

Posted by Ghet : 7/29/2005 12:49:00 PM

Mervyn, I imagine that many of the people who are most vulnerable to fluctuating incomes, and would thus benefit the most from PPI (and cost the insurance companies the most), would be the very people who could not afford it and would thus never get it. I repeat my assertion that it is not cheap.

Posted by span : 7/29/2005 03:21:00 PM

Actually Payment Protection Insurance is usually capitalised onto the loan principal - so theres a negligible effect on short term cashflow to the borrower.

If utilised properly it is an invauable tool in hedging risk - those who you say can't afford it are often those who most need it. They often lack the ability to absorb any "bump" in their circumstances/income generating capability - hence the need for cover.

Whats better a cheap unhedged position or a hedged position when your risk profile is generally quite high (in terms of income variability/transient job status leading to default)

Pie in the sky really as no one is going to underwrite the billions of dollars of (additional) risk on unsecured positions that this policy will result in.

Posted by Mervyn_Williams : 7/29/2005 04:51:00 PM