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Colin, I missed you

Written By: - Date published: 11:17 am, January 28th, 2010 - 44 comments
Categories: business, education, Media, tax - Tags:

Colin Espiner’s back with his first blog of the year. It’s so much fun having him back. In his first outing, he comes up with four suggestions for government action in the year ahead. Since the government doesn’t seem to have any other ideas, let’s look at two of them:

End interest-free student loans
Yeah, let’s put tertiary education out of the reach of tens of thousands of young people every year. That’s the way to build a high skill, high wage economy. If my loan had borne interest I would have been forced to take any job I could find, placing salary ahead of career development, and wouldn’t have been able to travel. In fact, I probably would have just skipped the country rather than start my working life trying desperately to pay off the interest. That’s what my older sister did because the crippling debt left her with no choices in New Zealand.

With interest on loans it takes so long, even on a good salary, to clear the loan that you’re well into your thirties before you can even look at saving up to buy a house. Meanwhile, the baby-boomers, who got their education free, are buying up all the houses and you end up with a less educated, property-less generation. Nah, good idea, Colin. Well thought out.

Stop those earning over $100,000 claiming Working for Families payments.
Bill English famously said of WFF: “Don didn’t understand it, neither did John, actually”. Seems Colin still doesn’t.

So I’ll go through the simple mathematical conundrum again. If we want WFF to provide a decent tax credit to families and have a shallow abatement rate so that taxpayers don’t face too high marginal tax rates (remember, the Right really hate them because they disincentivise working more) then small payments are going to continue until relatively high incomes. The only solutions are: reduce the payments for everyone (the baby & bathwater solution), increase the abatement rate across the board (which will really get the righties’ knickers in a twist and any economist will tell you is a bad idea), or have an abrupt cut-off which is seriously dumb. For example, if you cut off WFF at $100,000, a family with three kids would lose $988 a year in tax credits when their income goes from $100,000 to $100,001. They really would be better off working less. Got to remember those perverse incentives, Colin.

Nothing is perfect. The negative side-effect of having a few well-off families getting WFF (if I remember right it was 1,000 families getting $1 million in total) is outweighed by the negative effects of preventing it – this was considered when the policy was designed, after all.

Now, to be fair to Colin his silly suggestions did arise from a serious observation:

No, I’m starting to think it’s our prime minister who has his work cut out this year. When even the Right-leaning business publication the National Business Reviewstarts telling National to get on with the job, you know that the tolerance of National’s natural constituency for its steady-as-she-goes approach is coming to an end….there’s a difference between planning things and actually implementing them, and that’s going to be the litmus test of this administration this year. In 2009 Key proved himself to be a political manager almost of Helen Clark’s calibre. In 2010, we’ll get to see whether he can match her in getting things done as well

The Right and the Left disagree completely on most issues in terms of what we think the government should be doing. What no-one wants is a do-nothing government that spends half its time on holiday and the other half in photo ops. But that’s the government we’ve got.

44 comments on “Colin, I missed you ”

  1. fizzleplug 1

    I think that re-introducing interest on student loans at a rate less than the market rate would be a good idea. Obviously retain the higher rate for those who head offshore (as it is currently) to offer an incentive to work here for a bit.

    • Bright Red 1.1

      why is making tertiary education more expensive a good idea fizzleplug?

      It’s easy to say ‘x is a good idea’ but it’s meaningless if you can’t say why.

      • fizzleplug 1.1.1

        Re-introducing interest is an incentive to pay it off faster, which reduces the cost on the government. Which is the point I was making.

        I agree that the old interest rates were far too high.This isn’t about making education more expensive, but rather having people take some responsibility for what they have borrowed without crippling them like the old rates did.

        • Bright Red 1.1.1.1

          But it will make education more expensive. That’s what putting interest on things does.

          • fizzleplug 1.1.1.1.1

            Yes, and why is this a bad thing? It is no less accessible as the loans still exist and any can apply for them. A (very) small portion of the cost being pushed on to the consumer is not a bad thing at all.

            The whole point of tertiary education is so that you can have better job opportunities, and earn a higher income than those without it. Which allows you to meet the cost of your loans (with interest) much easier than those who don’t have the better paying job.

            • Richard 1.1.1.1.1.1

              The whole point of tertiary education is so that you can have better job opportunities, and earn a higher income than those without it.

              So a tertiary education is a sort of “earning potential” power-up?

              I think this is a naive, childish, and problematic view of what tertiary education is.

              • fizzleplug

                How do you view tertiary education if not a method of bettering yourself through learning? I would hope that a flow-on effect from the educational betterment was an “earning potential powerup” as you so gracefully put it, but you never know, some people might see tertiary education as an escape from reality (ah, the lifetime students. How fondly I remember them).

              • BLiP

                Perhaps its not just about the individual. A society where a greater proportion of its members is well educated is better able to work towards solving its problems in a cooperative and sustainable manner. A society where most of its members remain uneducated is more vulnerable to exploitation by a ruling class and/or outside influences.

              • Richard

                How do you view tertiary education if not a method of bettering yourself through learning? I would hope that a flow-on effect from the educational betterment was an “earning potential powerup’ …

                “Bettering yourself” sounds much more reasonable, than your earlier definition.

                I don’t think it follows that being “better” means you necessarily have the capacity to earn more. Although admittedly there is a correlation of sorts between education and income. Even if becoming “better” does result in a higher income potential, I don’t think that is the most interesting or important way that people “become better” by receiving a tertiary education.

                Earning more money is not the “whole” point of tertiary education, at the very best it is merely a minor part of it.

            • Bright Red 1.1.1.1.1.2

              “Yes, and why is this a bad thing?”

              Because we want a more educated workforce and society, fizzleplug.

              If you think back to Form 4 economics you’ll remember that as prices rise demand falls.

              • fizzleplug

                Assuming, of course, that tertiary education follows the same models as a standard consumer product.

                Tertiary education is at some of the most expensive levels it has been, yet demand is sky high.

              • PT

                if you did form 5 economics instead of form 4 red youd learn abotu market elasticity

  2. the sprout 2

    Re. ending interest free student loans

    can anyone with a technical understanding of contract law tell me if a government can start charging interest on a loan that was taken out on the understanding that it’s interest free?

    i would have thought you couldn’t retrospectively alter the conditions like that?

    • fizzleplug 2.1

      Existing loans went to interest free, so I would assume they can go the other way as well. Not 100% sure though.

      • the sprout 2.1.1

        no i doubt they can go either way without expressed consent.

        changes that advantage the party without consent (ie. removing interest) yes, but not changes that add interest without consent.

    • Pascal's bookie 2.2

      For example, if you cut off WFF at $100,000, a family with three kids would lose $988 a year in tax credits when their income goes from $100,000 to $100,001. They really would be better off working less. Got to remember those perverse incentives, Colin

      I don’t really buy this argument. Folks tend to take tax and suchlike into account when negotiating those sort of salaries, surely?

      And even though a 1% salary raise will leave you not much better off, it’s also not usually enough to change jobs for, all else being equal.

    • Bright Red 2.3

      I wouldn’t have thought it was a contract law issue.

      Retrospective legislation that disadvantages someone who acted in good faith is meant to be a constitutional no-no though (not that thre’s any legal check on doing it anyway).

      More importantly, it’s political suicide when there’s several hundred thousand (500,000?) young people with loans, many of whom, being too young to remember the 1990s, fell for Key’s aspirational smile and voted National..

    • felix 2.4

      Did somebody say retrospective?!?

    • Rob Carr 2.5

      They can legislate anything they want to. It would need to be legislation though. I am fairly certain they cannot change the loan from interested free to interest. Banks aren’t allowed to increase your rate on loans if you agree to fixed rate so why should a government department. They can of course start charging people halfway through their university so they pay interest on half their loans but not the first half.

    • Richard 2.6

      I think that parliament *could* pass legislation that retrospectively charged interest on formerly free loans.

      However, I think that even the most rapid user-pays sorts of politicians are likely to think that is a bad idea, if only because of the resulting bad press / diminished re-election chances. But you never know, I guess.

      • Bright Red 2.6.1

        *rabid*

        • Richard 2.6.1.1

          Thanks, yes, I meant “rabid”.

          Although “rapid” ones, as in “as soon as we seize control of parliament we should implement all the policies that no one likes, because they will have forgotten that they hate us by the next election” would probably go for it too.

    • Lanthanide 2.7

      Hopefully this will end up high enough that it will cut off this ill-informed line of reasoning.

      Student loans are interest bearing. What they give you is an *interest write-off if you live in NZ for 181 days out of the year*. You are still being charged interest, but it is automatically written off for you. There is nothing in the contract that says “you pay 0% interest”, so there is no contract law problem here. The government can just decide to stop writing the interest off.

      Frankly I think it is very likely that the government is going to be heading in some direction to putting interest rates onto student loans, probably not until after the 2011 election if they win it. They have recently introduced the 10% early repayment bonus, so clearly they’re giving people an incentive to pay off their loan through early/additional repayments. I can’t help but think that with the carrot, there must come a stick.

      I would guess that National are going to bring back interest on student loans after a 5 year interest-free period, and use the 10% early repayment bonus as their fig-leaf for why this is an acceptable change to make. It would certainly shore up the government accounts by bringing in extra revenue.

      • the sprout 2.7.1

        i think just in terms of the fair trading act that there would be a case to be made to say there is a reasonable expectation of behalf of the borrower that the loan carries no interest, regardless of accounting terminology, considering at the time of introduction the lending government talked about no interest on student loans and borrowers have never paid interest on those loans.

  3. Armchair Critic 3

    “i would have thought you couldn’t retrospectively alter the conditions like that?”
    I don’t think so either. Burt knows all about this retrospective stuff, can’t wait for his thoughts.

  4. Spyro 4

    I graduated in 1999 having borrowed $46k over 8 years of graduate and postgraduate study. By the time I graduated it was $60k with the interest charged while studying. It grew annually every year after that, as the amount I could afford to pay never covered the ever-growing interest

    I have been paying it off for 10 years, started at $100 a week and now $250 a week and I still owe $11k. I have only made inroads to paying back the principal since the interest was taken off. I never had any spare money to pay back those wonderful ‘lump sum payments”

    This is not the way to encourage bright professional NZers to stay in a country with low wages. If i could have gone I would have gone years ago, and I probably wouldnt have come back.

    Interest free loans when working in NZ is the only incentive to stay for many. Reintroducing interest would be a very backward step.

    I’m looking forward to paying off my stend loan sometimes in the second decade of payment

  5. Spyro 5

    Reintroducing interest is no incentive to pay it back faster when you have a limited fixed income and responsibilities. People have all these great ideas about ‘incentives’ and how happy people will be to pay off their loans faster. Yay!

    Real world? Lots of people have limited choices.

    There’s no incentive there, just disadvantage for working here on half the money you could get in Aus

    • logie97 5.1

      @ fizzleplug – John Key has already admitted that higher earners have work-arounds when it comes to paying their dues.

      Putting interest back on to student loans will again be a big hit to many families.

      John Key’s mates who have learned to work around the taxes have also managed to work it so that their children get student allowance as well (because they pay themselves a nominal salary – low enough to qualify for student allowance).

      So middle income PAYE families will get a double whammy.

      • fizzleplug 5.1.1

        Those on salary and wages have no workaround when it come to repaying student loans. They are deducted from gross pay.

        The fascination with assuming everyone who has a trust is John Key’s mate baffles me – I have a trust, but I don’t earn enough to pay the top personal tax rate, and definitely aren’t his mate. Also, I think that you will find it is now much easier to get a student allowance than it used to be 10 years ago. I know this because I didn’t qualify for an allowance due to my parent’s income (even though they paid themselves a nominal salary and kept most profits in the business – business income was taken into account) yet people now qualify when their parents earn a shitload (to keep it statistical). The threshold has been raised nicely, and blaming it all on John Key and National is a bit rich.

        Middle income PAYE families wouldn’t notice any change to their take home pay. The repayment level would remain the same, but interest would be applied against the loan at a below-market rate (and as pointed out earlier, not credited back at the end of the year). Your “big hit” wouldn’t be noticed in the day-to-day lives of anyone with a student loan.

        • logie97 5.1.1.1

          It is anticipated that people read the comments before submitting diatribe. What did my last line say?

          PAYE Families I said. We happen to consider our children our family and WE took the hit because we have had to dip further to help pay them out. (Glad some families can buy all the capital items against the business by the way… fuel for the cars, entertainment and the rest.)

          • fizzleplug 5.1.1.1.1

            What? I addressed your PAYE family comment. There is no change to take home pay. There is no increase to university fees. There is no increase in repayments at all. I can’t see the double whammy you mention. Maybe I’m blind, or maybe you aren’t explaining yourself very well.

            If you help your children pay off their student loan, then you definitely aren’t a standard family (if that’s what you mean). Your snide comment at the end shows your ignorance on a lot of things too. You must hate all small business owners struggling to make a living (see, I can make snide comments too).

            • logie97 5.1.1.1.1.1

              Some families’ combined incomes take them just over the threshold for student allowance. (Modest family circumstances and not getting WFF either but valuing their children’s education.)

              Therefore interest on students loans plus their non entitlement to student allowance is a double whammy.

              Bear no grudge towards small businesses. Get hacked off though when I know that some have manipulated their incomes so that they qualify for such allowances. Also when they claim against the business such things as car, fuel, clothing allowances etc. When they are economical with the truth and feel they have the moral high ground when it comes to commenting on blogs.

              • fizzleplug

                Businesses can only claim the portion of the car that is used for business purposes, which applies to fuel also. No clothing except uniforms can be deducted for tax purposes (in a lot of circumstances, even protective clothing isn’t covered, such as work boots and thick socks). A portion of home expenses can be claimed as a business expense, but only if there is a definable space that is used for work purposes (such as an office or area with a desk set up – the kitchen table and laptop don’t count). Are you aware of the rules around expense deductibility, or do you just think that everyone does what you have outlined?

                You have still failed to explain why interest on student loans is a hit for a family. The cost of the upfront fees won’t increase. The amount of repayments won’t increase (unless income also increases). The availability of tertiary education would not decrease as a result of a below-market rate interest charge. However it would ease the burden on the Government.

                I agree that student allowances should be more readily available, but living costs can be claimed by anyone (and added to your loan).

  6. prism 6

    What would be so wrong for those on $100,000 moving to $101,000 to lose nearly all the increase because of sharp cut offs in WFF marginal tax. Then they will get an idea of the everyday situation for those on benefits with families trying to raise their living income from just above their costs. Try to get ahead and some security and whammo from the government which takes most of it away – they regard any payment from the public purse as extreme charity. Who gives a hoot about beneficiaries and what positive advances they are trying to achieve.
    Don’t give a hoot, just give them the boot – that ‘s the catchphrase for the uppers.

  7. Matthew 7

    “Yeah, let’s put tertiary education out of the reach of tens of thousands of young people every year”

    That is a completely indefensible statement. You only have to make repayments after studying, and even then minimum repayments are based on your earnings not the loan principal. The government is not going to seize your assets if you cant repay. It is more like a progressive tax than a debt.

    It may discourage some people from studying as the costs begin to outweigh the perceived benefits. But is that so bad? Plenty of people do well without tertiary education. And as for the ‘public good’ argument, tertiary education is already massively subsidized in any case.

    “With interest on loans it takes so long, even on a good salary, to clear the loan that you’re well into your thirties before you can even look at saving up to buy a house.”

    What rubbish. I had an above average sized student loan when I left uni, and got a job in a mid level (as far as pay goes) profession. Loan was paid off by the time I was 23 (before interest free student loans post-uni), and I and my partner had saved enough to buy a house by the time we were 25. Now at 28 we are already a third of the way through paying the mortgage off.

    • Bright Red 7.1

      Matthew. If you are 28 now that means you studied when loans were interest-free while studying. That’s why your loan was so small. /facepalm

      And it sounds like you had a pretty tiny loan if you were able to pay it off in a couple of years. So I suspect you had some assistance and didn’t need to borrow the max like most students, especially those from low income backgrounds.

      If you get a medical or engineering or law degree or a double degree rather than a BCom (i’m guessing) you have to study four years at least. If you have to borrow your total fees and take the living costs loan too you’re looking at over $10,000 a year of study.

      So, you’re walking out with $40,000 at least, a big amount to pay off. Now, imagine if that loan had been taking on interest (they taught you about interest in Bcom didn’t they?) for those four years plus you were studying. Prety quickly you’ve got $50,000 and more to pay off, and interst is going on it all the time.

      Of course the prospect of facing that kind of debt turns people off uni.

  8. Spyro 8

    10 years and counting….

    Not all students are 23 and free of responsibility.

  9. Matthew 9

    Bright Red.

    Yes it was interest free while studying. It was more like 20k and it was a 4 year degree (engineering). I didn’t just sit around and do nothing other than study. If I had accrued interest while studying it would have been <5k and so not material when it comes to my future prospects of home ownership.

    But even if it was 50k and interest bearing, there is no reason why someone couldn't pay that off in 4-5 years by repaying say $15k a year. So by your mid twenties you are debt free with a degree largely subsidized by the taxpayer.

    • Bright Red 9.1

      None of us sat around on our arses after studying. When are you righties going to get it into your head that not being rich doesn’t mean you’re lazy?

      “there is no reason why someone couldn’t pay that off in 4-5 years by repaying say $15k a year.”

      The average full-time wage in New Zealand is $44,000 gross. Most graduates don’t start out on the average wage. Let’s say you’re lucky enough to start out on $40,000. Post tax that’s about $34,000. You’re saying that a person should live on $19,000 a year to pay off their student loan in 5 years, and they’ll have to because otherwise the interest will keep on building.

      And what if you can’t get a job? What if you are unlucky enough to graduate in the middle of a recession? The interest just keeps on building whether you can pay or not.

      Maybe you can see now that putting interest on loans is going to discourage a lot of people from studying. A lot of people are going to look at the choice of studying on a poverty income for 4 years then spending another 5 years living on $19K if they’re lucky enough to get a job or working a lower-skill job not much over minimum wage and decide they’ll be better off going straight into the workforce.

      And that is the problem with it if we want a more educated workforce and for people not to skip the country.

  10. Paul Williams 10

    Cost is undoubtedly a barrier to participation in higher education, particular for low socioeconomic and otherwise disadvantaged students (NZ, Australian and international studies broadly agree on this). However, income-contingent loans do ameliorate this barrier to an extent. Economists will argue, narrowly, that so long as there is an internal rate of return (IRR) which is comparable with other investments, then fees/loans etc are not necessarily iniquitous. They’ll also argue that an overly generous scheme will unduly distort behaviour and, potentially, have high dead-weight costs ie. not realise additional enrolments.

    I think it’s wrong to entirely dismiss these arguments without fully considering them. If the goal is to extend access, a social equity/mobility objective, then there might be alternative uses for this funding and/or amendments that could increase its effectiveness with unduly burdening students.

    Unfortunately, the policies adopted by the last National government led to unjustifiably high fees and unsustainable debt. The changes implemented by Labour, particularly regulation of fees and capping and targeting funding, improved the balance between public and private costs and benefits.

    Another way to frame this issue is to consider financing in light of a plan to increase participation/attainment generally.

    • BLiP 10.1

      unduly burdening students

      . . . aren’t they all unduly burdening in their own little ways 🙂

      But, yeah, like your thinking. How about bonding graduates in return for a portion of their loans?

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