If I were to borrow from the vernacular of today’s youth to describe the state of New Zealand’s student loan scheme, the words “epic fail” spring to mind.
Here we are, over two decades down the track and more than 14b in the red. The burden the scheme is placing on our fiscal interests is exacerbated by the lack of accountability placed on borrowers and the glaring absence of some tough incentives to pay up.
It’s not through lack of trying – a new repayment threshold, a fixed payment requirement and information sharing between the Department of Internal Affairs and Inland Revenue have been introduced in recent years, and these appear to have slowed the beast somewhat but they haven’t stalled the distending debt:
|Number of people with student loans with IRD for collection||% increase||*Nominal value of loan Balances||% increase|
Source: Student Loan Scheme Annual Report 2014/2015
* Includes loan principal outstanding, interest and late payment interest.
It’s time to set the wheels in motion to start creating a solid and continual decrease in the debt and Budget 2016 is the perfect platform.
Tackling the increasing number of loans resting with those living overseas and the lack of repayments occurring as a result is a good place to start. In 2015 overseas-based borrowers made up a staggering 74% of all borrowers with overdue payments. Of the $850m debt sitting overseas, 60% is in Australia.
In 2014 new repayment obligations for overseas based borrowers were introduced and last year a bill was passed to amend the Student Loan Scheme Act 2011 and the Tax Administration Act 1994, to foster information sharing between Inland Revenue and the Australian Tax Office.
Although information sharing is a step in the right direction, New Zealand’s authority is limited. The exchange only allows Inland Revenue to receive up-to-date contact details for New Zealand student loan borrowers residing in Australia; and they can only contact defaulters and encourage them to meet their obligations. This soft approach to enforcement will only work if borrowers choose to co-operate. Unless the Inland Revenue has authority to make deductions from borrowers’ income, this initiative isn’t going to be very effective.
And there’s real room for improvement for those who stay in New Zealand and enjoy the benefit of interest free money. It’s important to empower people to further their education, but not at the expense of the taxpayer. While you can quite rightly argue that Labour’s introduction of interest free loans was a blatant bribe to win the 2005 election, there are some salvageable concepts within this policy to reduce debt and possibly create a return on investment.
If the Government dares to act, they could introduce a more stringent repayment scheme. Yes, let’s give graduates a head start in life by providing interest free loans – but with a time constraint, let’s say, three years after graduating. That provides some real incentive to pay the balance – or a sizeable chunk - before the interest kicks in. And, let’s up the ante on repayment thresholds. The current repayment threshold is 12% of your annual income if it is $19,084 or more; this percentage should be adjusted to reflect borrowers’ incomes, so if you earn more, you pay more.
Whichever way you want to slice it, there’s a raft of initiatives that could be introduced to stop people racking up interest free debt for an infinite amount of time – it requires a brave government, but stunted progress demands it.