The great student loan blow-out

Labour promised that income tax rises would help relieve student debt. In the second of our five-part series on tax, DITA DE BONI marks the Government's report card.

Labour's 1999 Pledge 3:
Cut the cost to students of tertiary education, starting with a fairer loans scheme.

Daniel Hay, 25, is entitled to full student allowances, pays reasonable rent and gets financial help from his parents. But he will still rack up more than $14,000 in student loan debt in three years of a Business of Computer Sciences Diploma at Auckland University of Technology.

But the soft-spoken student, in his second year of studies, is not too worried.

He thinks his loan is reasonable compared with those of friends, especially in the arts. One owes more than $65,000, which "makes mine look small," Daniel says.

"I think the student loan scheme itself is a good scheme, but a lot of people I know use the money in ways that aren't really related to their studies. And then again, I know people who really need every cent."

Daniel is one of 314,280 New Zealand students owing money on student loans at the beginning of this year.

His $14,000 is a just a sliver of the $4.1 billion owed to the Government by students here and overseas.

Each loan, averaging about $12,500 a student, will take female graduates 11.5 years to pay off and male students 7.2 years.

As a result, an entire generation of educated people is steeped in debt. They are eager to leave the country to make back their lost money and are purposely delaying childbearing and marriage for a decade to regain their financial health.

In its pre-election pledge card, the Labour Party promised to "cut the cost to students of tertiary education, starting with a fairer loans scheme". Wiping several billion dollars in debt from the books was unrealistic, but instead a Labour Government. would cancel interest on loans while students were still studying, and freeze fees in 2000 and last year.

Labour was elected, and the effects were instant for some. In 2000 and last year, more than 76,400 student debtors received a $68.5 million interest write-off as they continued to study.

Interest for graduates repaying their loans has been frozen at 7 per cent for three years in a row, and a reduction in the compulsory repayment rate has meant anyone earning under $25,000 is repaying the principal directly, instead of just keeping interest at bay.

And tuition fees remain frozen. By December, this will have cost $100.3 million, the Government says, including the cost of compensating tertiary institutions for rising costs. An extra $35 million wangled out of the Government by institutions will take effect in July.

Last year the Government said it had earmarked $800 million over four years to bolster these initiatives further.

Financial help has also been given to medical students, dental students - whose fees have almost halved - and veterinary students. And $32 million over four years has gone into the training incentive allowance for beneficiaries.

But the extra spending has not reduced the cost of being tertiary-educated - indeed, for most people it has gone up.

The cost of living has continued to rise in line with inflation, and only one-third of the entire student population gets any help with living costs in the form of a means-tested student allowance.

Students whose parents pay tax on wages and together make more than $50,000 are entitled to nothing in the way of allowances. Generally, students whose parents can show a loss on their business or farm can receive up to $150 a week.

The rest borrow $242 million each year just to pay for food, rent and other incidentals. Those incidentals include books and course costs excluding fees, which have risen 90 per cent since 1998.

As a result, total student debt has leaped to almost $5 billion, and a report prepared for the University Students Association late last year from Government figures suggests that students are increasingly turning to other forms of financing, including personal loans, bank overdrafts and credit cards.

Various ways to reduce students' costs were suggested by a Government-appointed advisory body set up in 2000 which spent 12 months examining the sector. That body, the Tertiary Education Advisory Commission, recommended that the Government let institutions set their own fee levels and continue providing more money.

It suggested that the means-tested student allowance scheme was flawed, and that writing off interest on student loans was "not an effective use of the Government's resources" which had led to more students taking loans, in some cases misusing the money, and increasing their debt.

The Government did not act on these suggestions and eventually ditched the commission. But an ex-member, Andrew Campbell, who is co-president of the University Students Association, says more needs to be done to ensure the tertiary system provides quality education at a reasonable cost.

A favourite association hobby-horse is securing a universal allowance of about $150 a week for all tertiary students, and it will continue trying to sell that to political parties in the lead-up to this year's election.

But in the meantime, Campbell says the Government could go part way to easing costs. He points out that the $50,000 cap on parents' earnings which stops their offspring qualifying for an allowance has not altered to reflect inflation since the loan system began in 1992, and that the age at which students are still considered dependants should come down from 25.

A universal allowance system would cost $300 million to $400 million a year, but "why should students be penalised for undertaking study and contributing to the knowledge economy?" asks Campbell.

"The whole allowance system is inadequate and the Government needs to come up with a much better and more robust funding system that more accurately reflects costs."

Campbell and members of the Vice-Chancellors Committee, made up of the heads of every university in the country, are concerned that the fees freeze imposed by the Government is forcing some institutions to skimp on wages and other costs, which in turn may affect the quality of education.

The Government has not yet discussed any scheme for stabilising fees next year with institutions. It has said it will keep the interest rates on loans frozen at 7 per cent for a third year, and has indicated that tertiary finance will be subject to more "central steering" in the the Tertiary Education Reform Bill now before Parliament.

The Government also wants a philosophical shift that will change the present "competitive culture" between universities to one of "co-operation and collaboration". Money will be distributed through one body, the Tertiary Education Commission.

But while the Coalition may see "collaboration" as a way to keep a rein on fees, others read, with horror, "central planning".

Like the universities, the National Party opposes what it calls the Government's "ham-fisted" approach to financing tertiary institutions, and especially opposes forcing them to freeze their fees, charging that the system does not allow a "quick response to innovation".

Education spokesman Nick Smith says the major dilemmas of tertiary finance remain unresolved after two and a half years of Labour Government tinkering.

"By freezing fees and not changing the funding for tertiary institutions, it has simply shifted debt from students on to the balance sheet of the institutions. An unsustainable amount of debt is then accumulated, which will eventually backfire on students."

"The interest write-off was a clever political move which sounded like a major initiative but really isn't, and does nothing to solve the problem of mounting student debt, which is projected to grow to $20 billion by 2020."

National has not revealed its election manifesto on tertiary education yet, but says it will review the loan scheme as well as student allowances and total tertiary financing.

But students spoken to by the Herald generally support keeping the interest write-off scheme and the fees freeze.

Other suggestions include lowering or abolishing interest payments for graduates (total student loan interest repayments last year were $641 million), reining in the loan scheme to stop waste, and a less stringent student allowance scheme. In short, more Government money for students and institutions, if the Government is serious about the knowledge economy.

Daniel Hay says the fees freeze helps him to budget his year, and the interest write-off has saved him up to $400 a year.

His criticisms include a student loan system which at times can be hard to navigate, and a cap on extra earnings for allowance holders. (A student receiving the full allowance cannot earn more than $130 a week.)

But he is optimistic he will be able to repay his loan, especially when he joins thousands of young New Zealanders leaving the country for higher pay once he graduates.

In his field, he is looking at a starting wage of about $30,000, and feels he will have few problems paying off his debt.

"I feel less concerned about my student loan than I would a bank loan, for example. But it still, I guess, hangs over your head."

HOW IT FEELS TO BE IN DEBT

Jane O'Neill, age 38

Doing: Year 2 of 3-year bachelor of midwifery course

Where: AUT

Debt: added to mortgage, $10,000+ a year

"I'm glad to be doing something that I want to do - going back to school after many years in a completely different job. I didn't get a student loan because my costs from things like childcare are too large, I just thought I'd add the costs to our mortgage. And while interest write-offs are available, I think interest racks up on a student loan if you earn money. I look back now at the time that I left school, when fees were low or minimal, and think, 'Why didn't I go then?' I think that the Government should think about putting some of the money they get from Lotto into some worthwhile things, like education and health, instead of the other things they seem to grant that money to."

Tim Hall, age 21

Doing: Final year of a 4-year joint BA/BSc

Where: Auckland University

Debt: Student loan, $22,000

"I think the interest write-off is really good, because there's no way you could pay it off while you're studying. The fee freeze is also good, but not really enough on most courses within universities. Universities need more help with bringing fees down. I think things like an allowance for all students would be, ideally, a good idea, but then you'd have to tax people like my dad, a merchant banker, and my mum, who works in marketing, a whole lot more to support students. There's got to be a happy medium. This year I'd like to see political parties being sympathetic towards students on the social welfare side [student allowances] and offering suggestions about keeping fees down.

Jennifer Radich, age 23

Doing: BSc graduate, year 1 of a 5-year BDS degree

Where: Auckland University

Debt: Student loan, $45,000+

"I do like what the Labour Government has done [fee freeze and interest write-off] - it's a vast improvement, although still not fabulous. For one thing, although the interest write-off is available, they make it difficult. You have to apply for it - and I wouldn't have a clue how that's done - I think it should be automatic. My two brothers go to university and they don't get [the write-off] either. I don't know anyone who has actually done it. I went into dentistry because the fees were basically halved by the Government, and I really wanted to do it. But my loan will still be well over $100,000 when I get out. If I thought about it too much, I'd never sleep!"

Feature: The $1 billion question