Budget 2006: Bad student debts tipped to hit $2b

Forecast bad debts on student loans over the next four years have ballooned to around $2 billion because of the Labour Party's election promise to scrap interest on the loans for former students who stay in New Zealand.

The Ministry of Social Development is budgeting for bad debts on the loans to rise by $284 million in the year ending on June 30, and by between $400 million and $500 million a year in each of the next four years, because of the policy change.

Its total allowance for bad debts over the five years from 2005-05 to 2009-10 is up by $2148.5 million.

The increase, flagged in principle in the Treasury's six-monthly spending update last December, reflects a decision to write down the value of all student loans from 87.2 per cent of their original cash value (reflecting bad debts of 12.8 per cent) to only 66.8 per cent of their original value.

The new effective bad debt ratio of 33.2 per cent includes the cost of the forgone interest as well as actual non-repayments.

Total outstanding student loans are forecast to rise from $8.2 billion at present to $10.4 billion by June 2010.

However, the Treasury now believes that students will not borrow quite as much under the new interest-free policy as it initially expected. In December, it forecast that total student loan lending in the next three years would jump by 20 per cent above what it had projected before the policy change.

It now expects lending to be only 8.4 per cent higher than its projection. A spokesman said students were borrowing less than was expected in December, tertiary education enrolments had dropped, and yesterday's Budget allowed parents to earn up to $39,270 a year (up from $35,700) before their children lost entitlements to full student allowances.