Student loans – does the Government dare to act?
In Budget 2013 the Government made some initial moves to curb the rapidly growing student loan debt balloon.
The focus was mainly on overseas based borrower repayment obligations. This included the introduction of fixed repayment requirements and two new repayment thresholds, information sharing between IRD and Department of Internal Affairs and the power to arrest at the border for persistent defaulters.
These are good initiatives, but the balloon is still getting bigger. Budget 2015 is the perfect time to burst it.
The Student Loan Scheme (SLS) was introduced to give people access to tertiary education to gain knowledge and skills that will enhance the economic and social wellbeing of New Zealand. It has been successful, but with that comes the growing burden on the IRD to ensure that repayments are made.
In the last seven years New Zealand’s student loan debt has rapidly expanded to $14.2 billion with over 720,000 debtors – roughly 16 per cent of the population:
|30-Jun||Number of people with student loans with IRD for collection||*Nominal value of loan Balances||**Fair value of loan balances|
*Includes loan principal outstanding, interest and late payment interest.
** Defined as the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.
And then there are the other peripheral costs associated with the student loan system which include:
- policing the system
- system administration
- the value of the debt that is lost over time – effectively a discount – because loans for New Zealand based borrowers are interest free
- repayment of a loan being conditional on income above a threshold which means some loans may never be repaid
- loans being written off if a borrower dies (year ended 30 June 2014 - $9m) or is declared bankrupt (year ended 30 June 2014 - $15m).
For students resident in New Zealand, there’s currently no incentive or urgency for graduates to repay their loans any faster than the minimum requirements – so this naturally becomes less of a priority for most. Repayments become an issue if borrowers are overseas for more than six months, but there are workarounds and one could argue that this isn’t actively policed in all parts of the world.
The Government needs to focus on three key areas - escalating loan balances, the increasing number of people with student loans and the cost of financing and administering these loans.
It’s high time to reinstitute interest on student loans. It will take a brave Government to instigate such a move but it’s an obvious solution to deflate the balloon and it could also encourage people to plan their tertiary education more efficiently to incur less debt.
According to the 2013/2014 SLS annual report published by the Ministry of Education, a staggering 262,000 New Zealand based borrowers aren’t repaying their loans either because they have no income, their income is below the obligatory repayment threshold, or because they’re still studying.
Approximately $686 million of student loan defaulted debt is held by borrowers living overseas and an estimated 65% of those people reside in Australia. However, the Government is increasing its efforts across the ditch by working with the Australian Tax Office to procure up to date contact information for New Zealand students with loans, which is promising.
Taxpayers should not be subsidising students who are in debt by allowing them free use of the money for an indefinite amount of time so long as they reside in New Zealand. The New Zealand economy simply cannot continue to carry the weight of an escalating mountain of student debt.