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Student debt, it’s the interest that matters

Written By: - Date published: 4:36 pm, April 10th, 2008 - 48 comments
Categories: education, labour, national - Tags: , ,

Today, outstanding student loan debt reaches $10 billion. That’s a fair old swag of money but what has been ignored in the coverage so far is that this debt is interest-free. Now, an economist will tell you that the price of money is the interest rate, so student loans are free money. It’s not quite as simple as that because, as a loan holder, you have to pay 10 cents in every dollar you earn over $18184 towards the debt but, still, student debts are nowhere near as expensive as they were when there was interest on them.

Say you borrowed $10,000 each year for three years ending this year and the loan would be repaid by compulsory repayments alone. Here’s how it would look with Labour’s interest-free policy, just interest after studying, and interest all the time, like when National was last in power (normal assumptions: inflation 2.5%, real wage growth 2.5% starting at $40,000, interest rate 7%).

studyloan.JPG
Total repayments in 2008 dollars-
Interest-free: $26338, 10 years
No interest while studying: $41409, 15 years
Interest all the time: $45842, 17 years

Because inflation means an interest-free loan is actually worth less in real terms over time; the interest-free $30,000 will cost only $26,000 in today’s dollars to pay back over 10 years. If there was still interest once study had finished repayments would be 57% more. Under National’s interest all the time policy, you would pay 74% more than you do under Labour’s policy and it would take seven years longer.

Labour could do better for tertiary students, there ought to be a universial allowance for starters, but they’re much better off than when National was piling interest on their shoulders.

48 comments on “Student debt, it’s the interest that matters”

  1. Lampie 1

    I think the increase is because it is more affordable plus interesting to see if there is an increase in part-time students and if so how this affects the overall statistics. I pay while still finishing off papers and by the way, my wife’s one is dropping like a stone under Labour

  2. Billy 2

    “there ought to be a universial allowance for starters”

    What a dingbat of an idea. The poor struggling taxpayer already pays 74% of the true cost of tertiary education. How spoilt, ungrateful and self-important do you have to be to say that that’s not enough.

    All those middle class kids getting subsidies from truck drivers so that they can become lawyers and enrich themselves by charging the truck driver legal fees post-graduation.

  3. Lampie 3

    What I would find interesting Steve is the make up of those debts, i.e. full time versus part time AND what percentage of that $10 billion is studies now finished so loans are now been repaid. Also as mentioned I have a loan but also current paying it while in study, wouldn’t that skew the stats?

    $10 billion may sound a lot but is it really a concern? That is what I would like to know, cheers

  4. Lampie 4

    Also another thing, IRD lumps all your loan as one where StudyLink has them seperate (as most would apply every year). Which stat is used and man I get confused 🙁

  5. r0b 5

    Education is a public good Billy. Your education enriches not only you, but (unlikely as it sounds!) it enriches the whole country. Where are we going to get innovation and growth and a growing economy from, if not from education?

    The tragedy of the student loan system is that it creates exactly the wrong incentives for young people graduating. There they are with with an expensive and valuable education. Their (often huge) student debt is a powerful motivation to just walk out of this country, taking their education with them, and never come back. It’s insane!

    Now, what is worse for the tax payer? (1)Pay 74% of the cost of an education that walks overseas (and ends up building a competing economy), or, (2) pay 100% of the cost of an education that is more likely to stay in NZ, and build our economy, and pay taxes here.

    I vote for Option 2. I think student debt is a scandal. Free education!

  6. Billy 6

    I understand the average loan is $16k. Hardly much of a contribution to a quality education.

  7. Lampie 7

    I vote for Option 2. I think student debt is a scandal. Free education!

    You can’t win r0b, all these Nappy supporters saying we need free education like Ireland and when you agree they will say “no way, pay the full cost”.

  8. Matthew Pilott 8

    All those truck drivers not having to work and save so hard, so they can send their kids to university because they aspire to get them degrees. Gosh it’s awful billy – and it would only get worse with an allowance.

    And, given a degree increases your average earnings, well, the average tax contribution per citizen would increase if they further encouraged people to study. Even worse!

    Steve – I think there need to be greatly increased subsidies for the trades and institutes and so on, actually. I think that would be a better use of money than for allowances – university has become a default for many people, as you can carry on like you did at Mum & Dad’s, even if you end up with a 40k loan. Make the alternatives equally as advertised and attractive.

    Hell they might be, I’m basing this more upon perception than anything else, but that’s where the shortages are developing.

  9. Billy 9

    R0b, you mammering common-kissing horn-beast, it’s not free, you’re just asking someone else to pay for it. And since it’s mainly rich kids who go to university, it’s a subsidy of the wealthy by the poor. What is the public good in educating people to become wealthy accountants? And to whine that you have to pay 26% of something that improves you is just unchin-snouted.

  10. r0b 10

    You can’t win r0b

    Of course I can’t win, but I can go down grumbling!

    Good point re Ireland.

  11. Matthew Pilott 11

    Billy, the loan might be 16k, but the cost given to a student (this is pure heresay) is only about 1/4 of the cost of tertiary study – so make it closer to $75k…

    Anyone got stats on that?

  12. BeShakey 12

    Billy – the mean loan will be skewed by people studying part time or just taking a paper. A better representation of the ‘average’ would be the median. Putting that aside, even if the median was very low there might still be a problem. Doctors and dentists for instance are often cited as having extraordinarily large loans. Surprise surprise they also either charge very large fees, need higher salaries to entice them to stay here, or just leave. Which means that you can wave bye bye to the 74% of their education that you paid for, simply because you were stingy about the last 16%. Of course, even with free education people will leave the country for a time, but needing high pay to pay off an enormous loan can’t help.

  13. Matthew Pilott 13

    And since it’s mainly rich kids who go to university, it’s a subsidy of the wealthy by the poor. What is the public good in educating people to become wealthy accountants?

    It’s alright billy, we tax the bejesus out of them (the rich ones) afterwards don’t we? Makes up for it, don’t you think? If it helps, just imagine that top tax rate is purely to fund university study.

  14. Billy 14

    Jesus BeShakey, with maths like that I hope the taxpayer didn’t front up for with a free education for you.

    Of course, what we should be aiming for is a situation where everyone subsidises everyone else so that we all end up with what we started with, less of course the costs of collection and paying it out.

  15. r0b 15

    Billy, beware my sting thou errant flap-mouthed wagtail!

    it’s not free, you’re just asking someone else to pay for it

    Your taxes pay for my education, I work in this country and my taxes pay for your retirement. It’s not a matter of petty accounting, it’s a social contract. A bigger world view.

    And since it’s mainly rich kids who go to university, it’s a subsidy of the wealthy by the poor

    I don’t have any stats, but that that claim is a lot less true than it was. Society is changing. And I’m not sure the maths works out on “the poor” (who pay less tax) subsidising the wealthy either. But rich and poor alike we need doctors and teachers and agricultural scientists and a growing economy…

    What is the public good in educating people to become wealthy accountants?

    … and yes even a few accountants.

    And to whine that you have to pay 26% of something that improves you is just unchin-snouted.

    And once again, addle-pate, education is a public good.

  16. higherstandard 16

    rob

    Nice to see you’re being amplivagant with you’re verbiage in support of the barbarocracy

  17. r0b 17

    I aim to please HS! But Billy and I aren’t just indulging in random logolepsy, believe it or not there is method in the madness:

    NZ Growing Faster Than Aussie, US, Japan, and UK

  18. randal 18

    with that gobful hs your loan must be about $500,000! tell us plebs what you really mean in plain english please. mine is 60 grand and everybody thinks I’m stupid…hahahahahaha

  19. r0b 19

    Randal, roughly translated HS said that he was glad I was using so many fancy words in support of the ruling barbarians.

    How many of your friends have loans of a similar size? How does such a loan effect your (or their) plans for the future?

  20. insider 20

    I’m more right than left but a definite believer in free education just because it is a great leveller and opportunity giver, not just for young people but older ones too, no matter what your background.

    The weakness of the loans scheme is IMO that it stifles creativity and options too early. When you are just leaving school, you are forced early on to choose your life direction because the cost issues can be to high to try things and see what you are good at. Remove that pressure and you may find people are more productive long term.

    I suspect people go for accounting because they want a good job that will pay their loans off, not because they ‘want’ to be accountants.

    Anyway, that’s my theory

  21. Dean 21

    Rob:

    “The tragedy of the student loan system is that it creates exactly the wrong incentives for young people graduating. There they are with with an expensive and valuable education. Their (often huge) student debt is a powerful motivation to just walk out of this country, taking their education with them, and never come back. It’s insane!”

    Actually I think the tragedy is more like why we see user pays education to be such a bad thing in this country, when plenty of other countries have it and don’t experience anywhere near the “brain drain” New Zealand does.

    Do you have any ideas why this is the case?

  22. randal 22

    Rob…I have a good degree but am nearly a senior and I cant get a job…I have stopped worryng about it, whats 60 g’s out of $5billion…so much for getting an education

  23. Dave 23

    I’ve got a monster loan ($60,000-ish) after studying for 5 years full time. Good news is that I have an MA. And work in finance. And I think most people would agree that being educated is a good thing.

    Because of the interest free repayments I’ve stayed in the country. Sense of obligation and all that. As soon as interest gets put back on I’ll make like John Key and bugger off overseas to make my millions in London (and pay them my taxes). For me the social contract starts and ends with the interest. Add the interest – remove the social contract.

    We can argue for hours about whether this is a reasonable decision on the part of people like me. Yes the State paid for a large chunk of my education. Thanks truck drivers! And the State benefits from that investment. But the thing that has changed is that twenty-somethings like myself have learned that we don’t have to accept what we’re told. We learned from the 80s and 90s. And now we can make some of the terms. The playing field is more even. (Thanks near-full employment!)

    So – you can argue that it’s only fair that I should pay interest on my loan. But then you can’t complain when I leave. And I’m not the only one by any stretch. You think the brain drain is bad now? Ha. Vote National – and then see what a real brain drain is.

    NB: Few people I know have a $16,000 loan – unless they’re second year or work 20 hours a week on top of their study. Good on them for that – but I would love to see the more relevant stat of ‘what is the median loan for graduate in the last five years>’

  24. DS 24

    “What a dingbat of an idea. The poor struggling taxpayer already pays 74% of the true cost of tertiary education. How spoilt, ungrateful and self-important do you have to be to say that that’s not enough.”

    The baby-boomer generation who implemented the student loan system DID NOT HAVE TO PAY A CENT for their university education. Did they allow their children the same avenues of education that they had enjoyed, in an era where a Knowledge Economy is seemingly so important? No they didn’t. They screwed over their kids, just as they screwed over their own parents.

    As for a universal student allowance favouring the rich, the current system assumes that parents will provide for their children until they’re 25. Which is, frankly, bullshit. Moreover, the really rich can use trust loopholes to get around the income requirement if they so choose. And there are administrative costs relating to deciding whether or not someone qualifies for allowance. Make the allowance universal and you get rid of a load of bureaucratic costs at a stroke.

  25. mike 25

    “It’s alright billy, we tax the bejesus out of them (the rich ones)”
    No Matthew the envy tax kicks in at 60k. If you think that is rich then you are much sillier than I thought.
    Yr use of ‘we’ is interesting – its a real them and us fight for you lefty folk eh.

  26. DS 26

    “No Matthew the envy tax kicks in at 60k. If you think that is rich then you are much sillier than I thought.”

    Mike, if you think 39% is a tax level that reflects envy then you are much sillier than I thought. If implementing a 39% tax rate makes us a bunch of evil envious socialists, what on earth does that make the USA of the 1950s, which had top tax rates above 90%?

  27. big bruv 27

    You have to laugh at all the stupid socialists who want “free” education, just where do you think that money comes from in the first place?

    I agree with Billy, the real working man (the people YOU lot are supposed to represent) already subsidizes tertiary education to the tune of 74%, on top of that they the election bribe interest free loans.

    It is about time students thanked the tax payer for the subsidy they already receive and forget about demanding more money from the working man.

  28. Billy 28

    I am also interested in this idea that the state has to subsidise a “public good”. Many have observed that, when half or more cut, I am significantly more charming, witty and handsome. Surely the public interest is therefore best served by keeping me pissed. Will te state be subsidising my Stolli bill?

  29. AndrewE 29

    BeShakey said: “Which means that you can wave bye bye to the 74% of their education that you paid for, simply because you were stingy about the last 16%.”

    Oh dear, mathematical education sorely needed!

  30. Leftie 30

    I don’t see why education can’t be free from my point of view. The money in the first place would come from the taxes i’ve paid for years, continue to pay as I study, and will pay with my new career. I could sure get it done a lot quicker if it was free. If I want to upskill myself then this seems a fair deal.

    Broaden your mind big bruv.

  31. big bruv 31

    Lefite

    Its just another case of Labour shafting the working man

  32. DS 32

    “I agree with Billy, the real working man (the people YOU lot are supposed to represent) already subsidizes tertiary education to the tune of 74%, on top of that they the election bribe interest free loans.”

    To use the previous example of truck-drivers (the Tory propensity to shed crocodile tears over the plight of the great unwashed masses has always been a source of amusement), those trucks would have nothing to drive on without university-educated civil engineers.

    But hey, those civil engineers-in-training are just bludging off the taxpayer, aren’t they? Just like all those biologists, chemists, mathematicians, computer scientists, and doctors. Who needs ’em? Let’s make ’em pay 100% of their tertiary education – that’ll teach ’em! Ruddy little ignoramuses actually have the nerve to expect the same sort of educational opportunities their parents’ generation had (or as exist in virtually anywhere else in the Western World).

    In fact, why stop there? Why not make everyone pay their own primary and secondary school costs? That way we can return all that tax money to those poor long-suffering inhabitants of Remuera.

  33. randal 33

    dave you are a liar. you lie on tr*d*m*, you lie in the cesspit and you cant tell the truth about anything. you are an angry man with no friends and then you come and lie here even though you say you hate liars. well look in the mirror and deal with it and stop bothering decent people.

  34. Billy 34

    randal, I think I am starting to see why no-one wants to employ you.

  35. Dave 35

    Randal: dave you are a liar. you lie on tr*d*m*, you lie in the cesspit and you cant tell the truth about anything. you are an angry man with no friends and then you come and lie here even though you say you hate liars. well look in the mirror and deal with it and stop bothering decent people.

    Wow. I think that pretty much rebutted every point I made.

    Insightful. Witty. And coherent.

    Well done.

  36. Leftie 36

    big bruv
    “Its just another case of Labour shafting the working man”

    Nope, National started the student loan scheme but I don’t need to remind you of that. Another case of the working man being shafted by National.

  37. r0b 37

    Dean: Actually I think the tragedy is more like why we see user pays education to be such a bad thing in this country, when plenty of other countries have it and don’t experience anywhere near the “brain drain’ New Zealand does. Do you have any ideas why this is the case?

    I don’t know how other countries handle their education costs Dean, I’m not an expert. I suspect that user pays education is regarded as a bad thing in plenty of countries. In NZ I think it interacts with an already strong tradition of the Big OE (young Kiwis travel for many reasons, not all of them economic). The combination is disastrous. I personally know of several (extended) family members and children of friends who have left NZ to escape their student loans.

    randal: Rob I have a good degree but am nearly a senior and I cant get a job I have stopped worryng about it, whats 60 g’s out of $5billion so much for getting an education

    Very sorry to hear it Randal. Don’t give up.

  38. Matthew Pilott 38

    “It’s alright billy, we tax the bejesus out of them (the rich ones)’
    No Matthew the envy tax kicks in at 60k. If you think that is rich then you are much sillier than I thought.
    Yr use of ‘we’ is interesting – its a real them and us fight for you lefty folk eh.

    Envy tax, my favourite. I won’t start on that piece of bigotry again, but it’s a real us versus them thing for you isn’t it?

    Just think, in a comment where you tried to paint someone else as using the us versus them thing, you then used a “you lefty folk” type generalisation. That could have been a clever ironic remark, but I doubt it… Did you think about what you were writing?!?

    P.S you’re assuming I’m not being “envy taxed”? I might have been part of the “them” getting the bejesus taxed out of by “you”, but you assume otherwise… More crass stereotyping is it – I’m from the left, so I must be poor and envious of those on 60k ?

  39. mike 39

    “I’m from the left, so I must be poor and envious of those on 60k ?”
    No you sound more like a latte’ liberal, champagne socialist to me Matt..

  40. RedLogix 40

    No you sound more like a latte’ liberal, champagne socialist to me Matt..

    I’ve always wondered what was the driver behind this banal and commonplace epithet. After all what could be more praiseworthy than a wealthy person who has not allowed their wealth to become a barrier between them and caring for those less fortunate?

    Is the nastiness nothing more than the dark guilt of those lessor folk who know (but would never admit) that they do not measure up?

  41. DS 41

    “I’ve always wondered what was the driver behind this banal and commonplace epithet.”

    Basically, it goes back to the US Republican Party (the undisputed masters of framing political language). In the 1970s they sought to splinter the New Deal coalition that had sustained Democratic Party dominance in the US since the 1930s, and so tried to win over blue-collar workers by creating this image of “welfare queens, limousine liberals,” etc. And it worked: for thirty years, the term “liberal” has been a dirty word in swathes of the US, simply because Republican propaganda has created this image of leftists being elitists (an image that gets downright Orwellian if you consider what the Right represents).

    Right-wingers here are simply following the lead of their American counterparts. They’ve been rather less successful though, if only because New Zealanders tend to vote on their economic interest (you generally don’t see poor people voting National, for instance, whereas most of the poorest states in the US invariably vote Republican).

  42. higherstandard 42

    DS

    “You generally don’t see poor people voting for National ”

    Who do the “poor people” vote for ? And God forbid who do they vote for if they turn into “rich people”

  43. IrishBill 43

    MJ Savage had a line about that HS, it went something like “they came in their rags to vote us in then came in their motorcars to vote us out.”

  44. higherstandard 44

    Great line IB

    If only our current batch of politicians had a similar grasp of the English language.

  45. RedLogix 45

    DS,

    Ah yes. I like your explanation. I guess I forgot the principle contribution American has made to the world… marketing. Delivered via Hollywood and Madison Avenue.

  46. higherstandard 46

    Bit more than that maybe Red – I know it’s fashionable to blame the worlds ills on the USA but it’s be a very different world without their influence over the last 100 years and I very much doubt it would be a better one.

  47. Matthew Pilott 47

    HS – if nothing else, can we blame the US for the ills inflicted upon the english language? I’m sure they’re behind the decline of the semicolon, to say nothing of the abomination that is apostrophe usage.

    P.S Top contribution mike, keep it up; it’s a shame there’s no easy political stereotype for the inane…

  48. higherstandard 48

    MP

    In the aforementioned blame we are in complete agreement.

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