Treasury costs student loan plan at $924m

Michael Cullen said the policy was more affordable than National's tax cuts. Picture / Alan Gibson

Labour was last night trying to limit damage after the Ombudsman forced it to release Treasury costings of its student loans policy which show it ballooning to nearly $1 billion a year in one scenario.

Labour said when releasing the policy to axe interest on student loans in late July that it would cost a maximum of about $300 million a year, and denied that the Treasury had done any work on it.

But the Treasury had done work for a tertiary spending review, part of which Finance Minister Michael Cullen released last month while withholding the rest.

The papers released yesterday show:

* Original Treasury calculations estimated the policy would cost $390 million a year in 2008-9, reaching $924 million by 2019.

* Revised costings using Labour's more conservative estimate of loan takeup rates estimated it would rise from $302 million to $527 million.

Chief Ombudsman John Belgrave ordered the papers released by 5pm yesterday, citing urgency because of the election on Saturday and "strong public interest".

He said there was no good reason to withhold the full papers, as Dr Cullen had done, after they were sought under the Official Information Act by both the National Party and the Herald.

National jumped on the papers yesterday as proof Labour had been deceptive over the true cost of the policy, but Prime Minister Helen Clark said the Treasury's assumptions of takeup rates of loans by students were unrealistic.

The papers give the full picture of the possible cost under the two scenarios out to 2019-20.

The first, dated June 22, assumed student loan takeup rates for fees rising from 79 per cent in 2005-06 to 95 per cent in 2008-09 and future years. Dr Cullen's office asked for a second set of costings using a lower assumed takeup rate for fees of a flat 70 per cent in this and future fiscal years.

National finance spokesman John Key said a feature of the papers was that the Treasury had said it could be understating the true total cost.

Under the lower scenario, total student debt is forecast in the papers to rise to $12 billion in 2019-20 compared with $19.781 billion under the higher scenario.

Mr Key said it was a "complete scandal" that the costings were withheld from the public.

"No wonder Michael Cullen refused to release these damaging documents. The alternate costings that the minister requested, using his own political assumptions, are simply preposterous and defy belief."

But Dr Cullen said the costings showed Labour's policy was easily affordable and would have a negligible impact on Government debt - in sharp contrast to the $11 billion-plus in debt-servicing costs which would accumulate over 15 years to support National's plan to borrow for tax cuts.

"The documents make it clear that many of the assumptions on which the first round of Treasury costings were done was unrealistic."

For example, they assumed course fees would rise 3.6 per cent a year on average, which was well above inflation, and ignored the impact of the Government's fee maxima policy.

Helen Clark said Labour had not assumed 100 per cent of people who could take out a loan would do so, as it did not think that was a sensible assumption.

Labour's move in its first term to remove interest from loans while students were studying did not lead to 100 per cent of students or "anything like it" taking out loans.

"People don't borrow unless they have to."

A letter released with the documents from Treasury head John Whitehead to Mr Belgrave emphasised the costings were rudimentary.

Dr Cullen said he had "serious concerns" at the precedent set by the forced release of the papers, and would take it up after the election.