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National's Policy on Student Loans

11 July 2002

National's Policy on Student Loans: The Great Leap Backward

The National Party’s policy on student loans represents a great leap backward, according to Norman LaRocque, Policy Advisor with the New Zealand Business Roundtable.

The “you stay, we pay” policy, announced on Sunday by National Party leader Bill English, is not built upon sound public policy principles and would represent a waste of taxpayers’ money. It is no substitute for creating an economic environment that provides graduates with opportunities that encourage them to stay in New Zealand, according to Mr LaRocque.

Mr LaRocque said the policy is likely to have only a minor impact on its apparent goal of reversing the brain drain given that some students may defer the timing of their departure for overseas, rather than reduce the amount of time they spend overseas. "It would also lead to a further increase in student loan borrowing as students recognise they are being offered half-price dollars. The policy would also lead to inequities in the treatment of students and would be difficult to implement," Mr LaRocque said.

"Even if the policy was successful in reducing the brain drain, it will do so only at a very high per-student cost to taxpayers (who represent the “we” in “you stay, we pay”)," Mr LaRocque said. "This is because loan write-offs cannot be limited to those who would have left in the absence of such a write-off. The proposed policy is tantamount to using a garden sprinkler, rather than a watering can, to water a pot plant – while both get the job done, one wastes a lot more water in doing so," said Mr LaRocque.

The “you stay, we pay” policy would extend the current government’s policy of softening the student loans scheme, thus increasing taxpayer subsidies to tertiary education. Additional taxpayer subsidies are not warranted given that:

· tertiary education is already heavily subsidised (much more so than other levels of education) and subsidies are much higher than can be justified on mainstream public policy grounds; and

· spending on tertiary education tends to benefit people who, on average, come from better off backgrounds and also go on to earn higher incomes after graduation, rather than the poor.

Mr LaRocque said National's approach confuses two separate issues: the proportion of tuition costs that students should pay (currently around 25 percent on average) and the means of funding the tuition they must pay. The debate about taxpayer assistance should focus on fee subsidisation not on the loans scheme, the terms of which should be kept as close as possible to commercial terms - otherwise it will be exploited for purposes for which it is not intended. Recent experience with the interest rate holiday provides graphic evidence of this.

As Don Brash recently pointed out in 'The Listener' (13 July, 2002), tertiary education is an asset that enables students to earn higher incomes and the student loan scheme treats them favourably relative to people with debt in other sectors.

The opportunity cost of spending hundreds of millions of dollars on a low priority area such as this – for little gain – is significant, said Mr LaRocque. "The policy would do nothing to address legitimate policy challenges in the education sector generally or in the tertiary sector specifically. For example, a more highly subsidised student loan scheme would not widen tertiary education access for students from disadvantaged backgrounds, spur research and innovation or lift quality of delivery in the sector," he said.

The priority in student loan policy should be to reverse recent changes such as the interest rate holiday, as recommended by the government’s own Tertiary Education Advisory Commission, said Mr LaRocque.

"An ambitious country does not need half-baked taxpayer-funded bribes to encourage its graduates to stay and seek prosperity," Mr LaRocque said. "Political parties should focus on creating an economic environment that encourages graduates to stay in New Zealand – by lowering taxes, reducing regulatory burdens on businesses and modernising archaic, state-dominated sectors such as health and education," he said.

Norman LaRocque
Policy Advisor

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