Big savings in Labour's changes to loans plan

By THERESA GARNER

Students are in line to save thousands of dollars from a student loan interest holiday that could also benefit wealthy parents.

Helen Clark wants a immediate law change to scrap interest for fulltime students while they are studying.

On Labour figures, its policy could save a dentistry student who borrows the maximum amount over three years, $14,719 in interest, compared to National's policy.

Labour costed National's policy assuming the 1999 interest rate of 7 per cent was retained. National last month announced it would introduce a reduced rate of 5.7 per cent.

In another case study, a person borrowing $3500 for fees, the maximum of $6000 for living costs, and $1000 for course costs, would owe $31,500 after three years, saving $4619 in interest.

National has said the policy will encourage more borrowing, and the Ministry of Education has calculated there will be an $11 million increase.

In theory, the policy could also allow parents who had planned to fund their children's education, have their child take out a loan, while they invest their savings instead.

Labour's tertiary spokesman, Steve Maharey, said he did not want to see the loan scheme to become a source of cheap capital. "We don't think there is any sign at the moment that this will be a significant problem."

He said seventy per cent of full time students have a loan, because "overwhelmingly because they need the money", and student surveys had discounted a belief that students frittered the money away.

A review of the loan scheme would take place in after a year, and pick up any anomalies, Mr Maharey said.

"Given the kind of problem we are trying to overcome, which is mortgaging an entire generation, I'm confident that we can deal with the problems that emerge."

Labour would ensure "as much as humanly possible" that the money went towards education costs, or living costs, he said.

Currently fees are paid directly to institutions, students must provide receipts for course costs, and living costs are drip-fed to them in fortnightly payments of no more than $300.

Mr Maharey said this could go further, ie, having the loan directly paid to halls of residence for accommodation costs.

Financial planner Murray Weatherston from Auckland firm Financial Focus said any gains from investing student loans would be "pretty minimal", because of the rules.

"Somebody's going to have to put themselves to an enormous amount of effort to actually invest the money."

"It's not like the old days where you could draw out your student loan at the start of the year and buy a car or go on a holiday."

He agreed that parents could make gains by investing their own money in term deposits, but investing $10,000 at five percent for a year, would result in just $500 before tax. "Its not a big deal, is it."

Mr Weatherston said anyone putting their savings into equities, with a view to paying the student loan back at the end, was risking shortterm market adversity.

Labour also wants to waive interest for low income, part time students, and for former borrowers until their income reaches $25,000.

Interest will be phased in for those who earn between $25,000 and $30,000.

These moves could be delayed by software changes required at the Inland Revenue Department.