Deconstructing Student Loans
Keith Rankin, 29 October 1999
The student loan scheme has emerged as a key election issue. The debate however focuses almost entirely on the scheme's burdens and hardly at all on its very real benefits. If a future government makes radical changes to the scheme, there is a real danger that many students (eg older students) would be disadvantaged. We could end up "throwing out the baby with the bathwater".
The problem lies in the language rather than the substance of the scheme. Student loans are not loans in the usual sense of the word. Rather they are universal benefits that invoke additional income tax. The word "loan" has the useful (to the government) effect of discouraging students with private means - eg affluent parents - from partaking in the scheme.
Treating universal student benefits as "loans" enables the government to raise funds on behalf of students without having to account for such borrowings as a part of the government's debt. Student loans are an 'off-budget' part of the public sector borrowing requirement. From a macroeconomic point of view, they have the same impact on the general rate of interest as the same money would have if used to fund a budget deficit.
We can deconstruct the student loans scheme into its four components: fees subsidy, living allowance, repayment schedule and interest. A fault in either of these components does not necessarily indicate that the whole scheme is flawed.
The 'fees' component of a student loan is just an off-budget subsidy to the tertiary institution that a participating student attends.
The 'living allowance' component is an unconditional non-means-tested benefit of $150 per week payable to fulltime students. Unlike means-tested student allowances, student-loan living allowances do not contain a five-year limit; they are available to older students who have been students before.
The repayment schedule is a simple tax surcharge. Former students pay a 10% income tax surcharge on all gross income in excess of $15,000 per year. In other words, they have a different tax code from other taxpayers. If they are employed for just half of a year, they get their "loan repayments" refunded.
Student loan interest is not real interest. Rather, it's just a component in the formula used to calculate when a former student can stop paying the tax surcharge. The present "interest rate" on student loans is high enough to ensure that a large number of students will be paying taxes at the higher scale for the rest of their lives.
The real problem is the inequitable tax scale that former tertiary students face. All young New Zealanders on modest incomes face much higher tax rates than similarly placed persons in other countries. An Irish person on the equivalent of NZ$25,000 will pay $3,250 (13%) in tax and social insurance this year, compared to $5,000 (20%) for a New Zealander. Once the former-student tax surcharge of $1,000 is added, the New Zealander must pay the IRD $6,000, 24% of gross earnings.
We should address this student problem as an income tax issue and not as an education problem. Once we do that, we actually find that students who go on to earn high salaries are much better off under today's tax-benefit system than they were in the 1970s when living allowances were less generous and when tax rates for high earners were much higher. A former student on $100,000 in New Zealand today pays $37,570 in taxes (including a "loan repayment" of $8,500) whereas an ordinary Irish taxpayer grossing NZ$100,000 pays NZ$39,000 in tax and insurance. The Irish income tax scale is as progressive as ours was in the 1970s.
There are two distinctly different groups of tertiary students: 'school leavers' and 'mature students'. The student loan scheme is very helpful to mature students. We too easily forget older students when making tertiary education policy.
A few months ago, Massey University's David Thomson showed (eg Herald, 5 August) that for increasing numbers of us, "our [paid] working lives end at 45". That is the hidden reality of today's post-industrial labour market.
A Herald story 'Late bloomer a sign of the times' (18 January 1999) noted that "a national trend is for universities to become dominated by older people: from the workforce rather than young school leavers". We must not ignore the financial needs of older citizens, increasing numbers of whom are students.
In the twentyfirst century, it will be critically important to our society that older New Zealanders have full access to the resources of our university system. They are often the best students - the students who most want to learn for learning's sake. With both life experience and a liberal education, older students will become the foundation of a knowledge society.
While the important contributions of our many healthy and well-educated 50, 60, 70 and 80 year-olds will often be outside of the domain of paid employment, some will use the knowledge gained from a second stint of tertiary education to become knowledge economy employers.
The student loans scheme works well for older students whose ongoing contributions to New Zealand society are more a matter of sense than dollars. Let's protect the scheme's benefits while doing something about the income tax burden faced by our university and polytech leavers.
this article was published in the Herald on 3 November as
More Benefits than Burdens in Student Loans Scheme
response by University of Auckland sociologist David Bedggood
rejoinder by Keith Rankin
letters to editor by Lynne Dempsey and G. Bell
rejoinder by Keith Rankin
© 1999 Keith Rankin
Rankin File | 1999 titles