Editorial: Govt right to tighten up on student loans

Photo / NZ Herald

More than 40 per cent of the money that the Government puts into tertiary education goes directly to students as allowances, loans and interest subsidies. The average for such spending in OECD countries is close to 18 per cent. That disparity provides a highly relevant context in which to assess changes to both the student loan scheme and student allowances that will be confirmed in the May 24 Budget. The income raised this way will, in the first instance, help to balance the books. But it will also assist in repairing an imbalance that has had serious consequences for the performance of this country's universities.

The Tertiary Education Minister, Steven Joyce, identified the problem quickly after taking over the portfolio. Since then, he has tried to claw back the cost by tinkering with the student loan scheme in several ways, not least by recovering more money from borrowers living overseas. But the real problem, and the reason that spending on the scheme has blown out, is, of course, the interest-free nature of the loans. That feature was introduced as an election bribe by the Clark Government in 2005. Last week, Business New Zealand called for it to be ditched. The Prime Minister said, in response, that this would have a dramatic impact on the time it took to repay loans.

That is unconvincing. The main impact, in fact, would be to make students less liable to take out loans in the first place, thereby saving the expenditure of millions of taxpayer dollars, some of which are never recovered. And the real reason for inaction stems from the part this extravagant policy played in securing Helen Clark a third term. Ever since, touching it has been deemed political poison.

Deprived of the most rational response, Mr Joyce must continue to fiddle. His latest move, confirmed well before the announcement of the Budget after an initial outline of his intention met broad public approval, increases the student loan repayment rate from the current 10 per cent to 12 per cent for those with income over $19,084. Half a million graduates will face steeper repayments.

In terms of student allowances, the Government plans to cut costs by tightening the eligibility rules, especially in relation to the definition of income. It also wants to focus allowances on the first years of tertiary study - there will be a four-year cap - and on students who can least afford to study. Such targeting is welcome. Too many allowances are being paid to youngsters whose parents could afford to offer support but, instead, are exploiting income loopholes.

The Prime Minister says the changes will be "modest". That is as it must be. A sluggish economy would be done no favours if the repayment of loans became so onerous that graduates could not afford to take out mortgages and suchlike. Or if students denied allowances responded by taking on a great deal more debt. Modest adjustments ensure students and graduates will not be subjected to serious hardship. It says much for the scale of the spending, however, that such relatively small steps will save the Government tens of millions of dollars.

John Key says this saving will be reinvested in the research and teaching capabilities of universities to help raise their world rankings. That represents a change of tack. Previously, the Government had talked of transferring this money to universities to fund tuition for more students.

Not before time, it has recognised that something must be done about the sliding international ratings of the country's universities, and that the throwing open of entry to them has been an important factor in this.

Adding more students would simply prompt a further slipping of standards.