Student Loans are Loans (Duh.)

13:04 May 8, 2012 246

To state the obvious: Student loans are loans. When you pay off a loan, you stop paying. So if repayments go up from 10% to 12%, graduatues won't pay more - they just pay *earlier*.

This impacts on government finances:

The government collects future revenue earlier, allowing them to "get back to surplus" earlier. This part is purely political.
Collecting revenue earlier means they don't have to cover interest on it. This is a real saving, but this is only worth a fraction of the "revenue increase".
It will marginally worsen default rates, because:

Graduates who don't default will pay the same amount (i.e. 100% of their loan), only sooner. (No effect on default rate.)
Graduates who default because of bankruptcy or death will pay more before they go broke/die. (Very small positive effect.)
Graduates who default by skipping the country will pay a tiny bit more before they leave. (It's for a short time while they're on a graduate wage - Very small positive effect.)
The after-tax wage in NZ will decrease, making working overseas more attractive, causing more to leave and default on their loans. (Small negative effect.)

Increasing repayment rates DOES NOT improve default rates. It is a cynical policy, but not terribly significant either way.

Also: Stupid targeting is stupid

But this four-year limit thing. Seriously: RAGE.

This is not welfare. Welfare is welfare. We fund tertiary education because a well-educated workforce strengthens the economy and pays more taxes - it's an investment.

And it makes sense to target our investment for maximum return. Who are the people most worthy of funding? What kind of skills do we want in the economy? Where do we get the most bang for our buck?

On what planet is the answer "people who study for less than four years"?

We bemoan degree inflation, the fact that everyone is supposed to spend three years of their life at a degree factory getting a worthless undergrad that imparts neither wisdom or practical skills, and now, the government ONLY wants to give allowances to undergrads? Don't we need specialists anymore? Scientists? Doctors? Researchers? Cross-discipline study?

In terms of targeted allocation of allowances, this is arbitrary, perverse and just goddamn stupid.

Keith Ng is a self-loathing BA(Hons) graduate.

246 responses to this post

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David Cormack, 13:38 May 8, 2012

I have missed a trick here, but isn't the 4 year rule only for allowances - which wasn't part of the loan. That was for lower-income people or for those living away from home right? You can still get the loan living costs?

Suburbia, Wellington • Since Nov 2006 • 218 posts Report
Keith Ng, 14:04 May 8, 2012

Yes. So the question is a) whether stacking another few years of living costs onto student loans will cause more post-grads to skip the country and default on their loans, and b) whether potential post-grads will be turned away because of the lack of an allowance.
Argument for b comes from behavioural economics: Subsidising some, but not others makes the unsubsidised choice appear worse than if none were subsidised at all.

Auckland • Since Nov 2006 • 543 posts Report
Hebe, 14:06 May 8, 2012

Discriminatory too: over-55 year olds can't borrow for living expenses and course-related costs now. So I have only 3 years in which to do extramural study and be able to afford to go to the North Island for the three seminar weeks in a year.

Christchurch • Since May 2011 • 2899 posts Report
David Cormack, 14:18 May 8, 2012

Argument for b comes from behavioural economics: Subsidising some, but not others makes the unsubsidised choice appear worse than if none were subsidised at all.
So just to play devil's advocate, if you were to make the allowance only for undergrad, you would potentially disincentivise people from doing tertiary study, but once they were there they wouldn't be disincentivised from doing post-grad if EVERYONE had to get a loan. Or a scholarship?

Suburbia, Wellington • Since Nov 2006 • 218 posts Report
Marcus Turner, in reply to Hebe, 14:26 May 8, 2012

Makes a person feel old and in the way...

Since Nov 2006 • 212 posts Report
Matthew Poole, 14:31 May 8, 2012

One minor correction, 200 weeks, equating to roughly five years of study. Which gets you a conjoint LLB or Bachelor of Engineering with any three-year degree, a Masters on top of a three-year Bachelors, a Bachelor of Architecture, or a standard Dentistry, or Vet Science degree. It doesn’t get you close to being a doctor, especially since most med students have already done undergrad study before commencing med school (brother knows a doctor who had a PhD in Statistics before starting med school). It doesn’t get you post-graduate engineering unless you do nothing but a BEng. In short, it steers students towards post-graduate Commerce and Arts – nothing wrong with those, but we don’t need them in large numbers – and away from anything that’s vaguely demanding. It certainly doesn’t encourage students to stay in NZ post graduation because their loans will be much larger from the borrowing to cover living costs.
As an example of how much difference living costs makes, I had to borrow for living costs in my first BCom year. That year’s living costs were more than the combined course and course-related costs for my first and second year. For a medical student it’s roughly doubling their loan each year that they have to borrow full living costs, and I don’t know of many med students who have a whole lot of time and inclination to get a part-time job by the time they’re at the point in their studies where they will cease to be eligible for any student allowance.

Auckland • Since Mar 2007 • 4097 posts Report
Ben Curran, 14:48 May 8, 2012

As far as I can tell, the 4 year limit is a change. It is currently 200 weeks, which yes, pretty much gets you 5 and a bit years of study. I was under the impression that this was changing to 4 years of efts which is less than 200 weeks. I could be wrong. Currently, for certain degrees (PhD is one of them) you can get a 150 week extension - I've got the extension (though funnily enough, they'll extend the amount of time I'm allowed it, but not actually give it to me because I've got a scholarship)
Apart from that, I concur with the opinion that it drives people away from the areas in which we need post-graduates as well as almost begging more people to leave. It's the whole education is a private benefit as opposed to public good mindset that boggles me.
And the whole "private good thing is one dubious grounds. Graduating from post-grad science degrees will put you on a decent wage - not a spectacular one though. And the average wage for a scientist in NZ is not spectacular either (Not bad, but not spectacular). Then you get to take into account the lost earnings (no saving for a house, etc) over the extra years of study ....

Since May 2011 • 47 posts Report
Bart Janssen, in reply to Keith Ng, 14:56 May 8, 2012

and b) whether potential post-grads will be turned away because of the lack of an allowance.
There is a much more important and damaging effect.
The really bright kids and I'm talking here about that fraction of our population who really are exceptional ... think Jonah Lomu exceptional but instead of physical it's mental skills that they have ... those kids have choices.
The bright kids are generally interested in everything and they are good at many different subjects. So they can choose which career path they take. Law is just as easy and exciting to them as is theoretical physics or maths or engineering or NZ literature or ...
And these kids can do maths. They can work out that they will have a bigger debt the longer they stay at University. And they also can work out which professions pay the most and hence which professions will clear their debt fastest and easiest.
So what happens when you increase post graduate fees, which is effectively what is being done here, is the best and brightest kids choose the highest paying careers paths.
And that means they won't become ecologists or biologists or theoretical mathematicians or analytical chemists or god forbid any of the Arts. Instead they will all choose to be lawyers or economists and similar professions where salary ramps up fast and high. Note these are the brightest they won't be mere clerks.
Personally I want the best and brightest to feel free to choose more er useful professions (apologies to lawyers and economists but frankly we kinda have enough already).
In essence this is social engineering but without any intelligent reasoning behind the engineering.

Auckland • Since Nov 2006 • 4461 posts Report
Hebe, in reply to Marcus Turner, 14:57 May 8, 2012

Makes a person feel old and in the way...
Yes; what about my fourth career? It is a dumb move because as my baby boom-generation ages, we are active longer and capable of working longer. Our national super entitlement age will rise, and I think the super will be means tested to some degree. so we need to plan for self-employment in some way. I'm happy about that but I fail to see why I should not access study assistance up to a certain limit of study years just because of my age. Note I am talking student loan for direct course costs, not student allowance or loans for living costs.

Christchurch • Since May 2011 • 2899 posts Report
Matthew Poole, in reply to Ben Curran, 14:58 May 8, 2012

As far as I can tell, the 4 year limit is a change. It is currently 200 weeks, which yes, pretty much gets you 5 and a bit years of study. I was under the impression that this was changing to 4 years of efts which is less than 200 weeks.
Nope, staying at 200 weeks. From http://beehive.govt.nz/speech/speech-notes-investing-tertiary-education-budget-2012:
We are likely to freeze the parental income threshold for the next four years at its current rate, and ensure the current limit of 200 weeks access to student allowances is consistently applied, and towards the early years of study. In practice this means removing access for masters and PhD students and for long courses beyond the first 200 weeks of study. Those students will continue to have access to interest-free loans.

Auckland • Since Mar 2007 • 4097 posts Report
Hebe, in reply to Bart Janssen, 15:06 May 8, 2012

Did they really think it through or is the change just a way of locking in the best tertiary education for the wealthy?

Christchurch • Since May 2011 • 2899 posts Report
Stewart, in reply to Bart Janssen, 15:23 May 8, 2012

In essence this is social engineering but without any intelligent reasoning behind the engineering.
Anti-social engineering?

Te Ika A Maui - Whakatane… • Since Oct 2008 • 577 posts Report
Ben Curran, in reply to Matthew Poole, 15:33 May 8, 2012

Ah, that clarifies that then. Ta muchly.

Since May 2011 • 47 posts Report
Marcus Turner, in reply to Hebe, 15:40 May 8, 2012

I presume the decision is based on the likelihood of the loan being repaid (both literally and in terms of contribution to society by the student). But it's an uneasy feeling, being one of the excluded.

Since Nov 2006 • 212 posts Report
Keith Ng, in reply to David Cormack, 15:44 May 8, 2012

So just to play devil's advocate, if you were to make the allowance only for undergrad, you would potentially disincentivise people from doing tertiary study, but once they were there they wouldn't be disincentivised from doing post-grad if EVERYONE had to get a loan. Or a scholarship?
They would still be disincentivised, but they would be *less* disincentivised.
More formally, if a person was offered $1 when another person was offered $5, they would see that $1 as a worse deal than if both were offered $1.

Auckland • Since Nov 2006 • 543 posts Report
Hebe, in reply to Marcus Turner, 15:51 May 8, 2012

My understanding is that if a student loan were not repaid by the time the student (or former student) died, it would come out of their estate like any other debt. Which is as it should be. Living costs are negotiable for loans, but allowing course fees but not course costs for loans is stealth age-discrimination. Would it hold up under human-rights legislation?

Christchurch • Since May 2011 • 2899 posts Report
Graeme Edgeler, in reply to Hebe, 16:23 May 8, 2012

My understanding is that if a student loan were not repaid by the time the student (or former student) died, it would come out of their estate like any other debt.
Your understanding is mistaken. This is a major reason why one might conclude a student loan isn't really a loan.

Wellington, New Zealand • Since Nov 2006 • 3215 posts Report
Lilith __, in reply to Hebe, 16:28 May 8, 2012

if a student loan were not repaid by the time the student (or former student) died, it would come out of their estate like any other debt.
Unless it's changed, no. If you die, any remaining student debt becomes a grant.

Dunedin • Since Jul 2010 • 3895 posts Report
Hebe, in reply to Graeme Edgeler, 17:05 May 8, 2012

Your understanding is mistaken. This is a major reason why one might conclude a student loan isn't really a loan.
I stand corrected. Stupid system, for everyone concerned then unless there are fishhooks I do not foresee.

Christchurch • Since May 2011 • 2899 posts Report
Lilith __, in reply to Hebe, 17:43 May 8, 2012

Stupid system, for everyone concerned
Well…you can imagine a situation where the spouse or children of a former student were otherwise saddled with that person’s student debt if they died. And with many student debts being 50 or even 100,000 (eg. medicine or dentistry), that’s a very big deal.
When student loans were introduced, the rationale was that tertiary degrees should give graduates the ability to earn more, and so a portion of those subsequent earnings are taken back by the government. But if a graduate did not earn much income, and/or died still owing money, then the debt would be forgiven.

Dunedin • Since Jul 2010 • 3895 posts Report
Brendon Steen, 17:49 May 8, 2012

Keith! I can't believe you of all people have used Joyce's four-year line without comment. It's clear from his speech notes, and confirmed on Q+A on Sunday, that the limit is 200 weeks (which is five academic years, assuming you don't do summer school).

Auckland • Since Sep 2011 • 9 posts Report
Alastair Jamieson, 18:26 May 8, 2012

We fund tertiary education because a well-educated workforce strengthens the economy and pays more taxes – it’s an investment.
And here's me thinking that we fund tertiary education because well-educated people can make the most of their talents for the betterment of themselves, their families and society as a whole.
I suggest that until we reframe the argument the minutiae of student loan arrangements are the least of our worries.

Auckland • Since Jan 2007 • 99 posts Report
Scott Chris, 19:26 May 8, 2012

The government collects future revenue earlier, allowing them to “get back to surplus” earlier. This part is purely political.
This I disagree with, the reason for which you answer yourself:
Collecting revenue earlier means they don’t have to cover interest on it.
Not everything is political - some things just make sense. If you aren't paying interest on a loan then the average person needs to be compelled by law to repay it - at a reasonable clip.

Auckland • Since Feb 2012 • 167 posts Report
DexterX, 21:02 May 8, 2012

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10804377
This policy makes my skin crawl - it disadvantages many - it is narrow in many ways including the perspective that people after completing their initial qual will need at sometime in their “adult” working life retrain and gain further quals in a likely different field.
It also overlooks that no learning is wasted even when it does not relate directly to the field one chooses to work.
The policy overlooks the changing nature of work and learning and an aging workforce that will need to re-educate itself on a “continuous” or fairly regular basis.
The real problem is that the economy is being badly handled/managed – there is so much that is rudderless – The tax take being down almost two billion – this policy is not a sensible response.
The fertility policy and the student allowance cuts although perhaps having appeal to the wider electorate are unnecessary and the announcements are perhaps well timed to be a distraction to the present range of fiascos the Nats have created for themselves.

Auckland • Since Nov 2006 • 1224 posts Report
Matthew Poole, in reply to Scott Chris, 21:14 May 8, 2012

If you aren’t paying interest on a loan then the average person needs to be compelled by law to repay it – at a reasonable clip.
I would say that 10% of all income over a level that's not even 2/3 of full-time minimum wage is a reasonable clip, personally. In nominal terms Australia doesn't compel commencement of repayment until the borrower's income is nearly 2.5 times higher than the NZ level, never mind in exchange-converted terms. They also increase the repayment rate as income increases, in recognition that those who have done particularly well from their education should be repaying society commensurate with the additional financial benefit they are getting; after all, a dollar today is worth more than a dollar tomorrow.

Auckland • Since Mar 2007 • 4097 posts Report