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Scrapping Loan Interest: When Good Policies Go Bad

Scrapping student loan interest: When good policies go bad

The Labour Party's proposed scrapping of the student loan interest rate will do nothing to lift quality in tertiary education, nor will it pay good staff more, help build New Zealand's research base or encourage more on-the-job training, says the Education Forum.

Education Forum policy advisor Norman LaRocque said the estimated $300 million annual cost (at maturity) of scrapping interest on student loans would mean less money for other priority areas, including schools, hospitals, police and tax cuts.

"The change will also do little to widen opportunities for students from disadvantaged backgrounds. How will the scrapping of interest for some graduates help the 30 percent or so of Maori students who leave school without a qualification?"

The government has argued that the change to student loans will 'massively' reduce repayment times. But, while it will reduce the interest build up for students, some of this will be offset as more students are likely to borrow (and borrow more) given that student loans will represent 'free' money to them.

Graduates will also have little incentive to make voluntary repayments under the scheme - a significant issue given that some 46 percent of repayments since the loan scheme began have come directly from borrowers, rather than through compulsory deductions by employers, Mr LaRocque said.

"The New Zealand student loan scheme has been acclaimed as a world leader by international experts. Successive changes to the scheme since 1999, including the scrapping of interest while studying, have impaired its policy design, added significantly to its cost and have achieved nothing in policy terms. These changes will only make the situation worse."

The proposed changes appear to be aimed solely at appeasing vested interests within tertiary education and will do nothing to advance the national interest, Mr LaRocque said.

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