Herald on Sunday Editorial: Loan debt is costing too much

Student loan debt now stands at $12 billion. Photo / APN

The mountain of student loan debt must surely be the bitterest legacy that Helen Clark's Government bequeathed to its political opponents after nine years in office.

Dropping interest charges in 2001 for those still studying and extending the privilege in 2005 to graduates staying in New Zealand may have seemed smart when the economy was ticking over nicely. But that was then; this is now.

The problem is that bringing an end to the scheme would be political suicide. Prime Minister John Key conceded as much when he observed in March that it was not politically sustainable to put interest back on student loans, even if he showed scant understanding of undergraduate life by adding that "it is about the only thing that will get [students] out of bed before 7 o'clock at night to vote".

But amid the wreckage of the global financial crisis and in charge of a sluggish economy, the Nats are now carrying the can for Clark's largesse. Student loan debt now stands at $12 billion - close to 10 per cent of real GDP; the opportunity costs of the scheme, by way of interest forgone in other use of the capital, rose from $385 million in the 2008 financial year to $620 million in 2010/11.

So the Budget increase that Tertiary Education Minister Steven Joyce foreshadowed this week does not seem unduly punitive: debtors will be required to pay 12 cents (up from 10) of every dollar of income over $19,084.

Opposition parties and student groups have levelled the obvious criticism that it amounts to a pay cut for graduates. They don't say that they are not being asked to pay more in total, but to repay the total faster and that the charge is being applied to people who have already enjoyed substantial public support while gaining a qualification from which they will derive much private benefit.

Joyce says the rise will yield $70 million a year. That's only five per cent of total direct Government funding of universities, which was $1.34 billion in 2010, but that's not an amount to be sneezed at, if he makes good on his promise to reinvest it into improving teaching and research in tertiary institutions.

But the discussion should focus the minds of students and the community at large on the question of what we expect from our universities and their graduates. A university education confers both a public good (a better-educated workforce with the potential to be more productive in the economy) and a private good (graduates have better lifetime prospects and income expectations than non-graduates).

The relative balance is a source of endless philosophical argument, but what is plain is that neither good is absolute or guaranteed. Hordes of so-called "McDonald's graduates", whose university educations gain them only menial jobs - attest to the plague of what is known as credential inflation: our expectation that a university education is a right.

In the best of all possible worlds it would be, but in our small corner of the world, we need to cut our coat according to our cloth. Wide student intakes inevitably dilute the talent pool going to university. Stellar students who will have much to contribute to a knowledge-led economy get less attention than they deserve and we get less bang for the education buck.

Those who are considering taking on a course of university study and shouldering a student loan should consider whether their talents might be better used in another educational institution. And those who fund and run our universities should contemplate the reality that, at the top of our educational tree, elitist is not a dirty word.