Why interest free loans must go

If ever there was a need for an explanation of why interest free student loans need to axed it is the entitlement essay written by Richard Meadow on Stuff.

Monday was a day of new beginnings. We celebrated the good lord’s rise from the grave with a three-day chocolate and hot-cross-bun binge.

In less joyous news, a new tax year began, and with it came a series of changes to the student loan scheme.

Monday marked the closure of a 10 per cent bonus for voluntary repayments made to your loan balance.
The minimum repayment was also raised from 10 cents to 12c in every dollar earned above the $19,000 threshold.

With these changes now in place, it’s time to reassess the smartest method for casting off your student debt millstone.

So what should you do?

Nothing at all. 

That’s it. You can breathe easy. If you’re a borrower living in New Zealand, the best course of action now is to kick back and let the taxman drag your loan back from your paycheque, cent by measly cent.

The last incentive for making an early repayment has officially gone down the gurgler.

From here on in, it makes sense to repay your loan as slowly as possible.

I’ll give then an incentive….20% interest. This sort of entitlement mentality really makes me sick. The scuzz-bag even tells people how to game the system.

The early repayment bonus was scrapped because people were exploiting it.

“We weren’t getting the benefits of advanced payments because of the way it was working,” says Revenue Minister and United Future leader Peter Dunne.

“What, in fact, we saw happening was that people were reclaiming the repayment bonus in the last years of their repayment.”

There are plenty of boffins-in-training in the finance department at University of Auckland who had it all figured out.

One mathematics major – who asked to remain anonymous- has been borrowing as much as possible throughout his study.

“I’m in my fifth year, so that’s five years of compound interest, which is not to be laughed at,” he says.

Last week he managed to scrape together almost $20,000 to take advantage of the voluntary repayment bonus before it closed.

“I worked a lot over summer. I borrowed as much money as I could – from family, from wherever – because you can’t beat a 10 per cent interest rate.”

Now he’s back to borrowing more and building up the interest again. From here on in, he’ll repay the loan as slowly as he can while inflation eats away the balance and he earns money on his investments.

These fuckwits…and that is the only word to explain them aren;t gaming the system, they are gaming the taxpayer…and this taxpayer has had enough.

Bizarrely, after telling the student loan bludgers how to game the system he then decides to talk about ethics!

FFS is this guy a potential Labour MP with a moral compass as wonky as his?

You know what is wrong with the welfare system, including student loans…we give the bludgers nice names…like ‘clients’ or ‘beneficiaries’ instead of calling them what they are….bludgers…or some other suitable name. There’s another incentive right there…perhaps we should change all that, issue id cards that are red so people know they are tax takers not tax payers. Issue gold cards to net tax payers not bludger pensioners.

 


THANK YOU for being a subscriber. Because of you Whaleoil is going from strength to strength. It is a little known fact that Whaleoil subscribers are better in bed, good looking and highly intelligent. Sometimes all at once! Please Click Here Now to subscribe to an ad-free Whaleoil.

  • Honcho

    Why national has kept student loans interest free i will never know, they should be charged interest linked to either inflation at the least, or better yet the OCR.

    • Auto_Immune

      John Key has actually said previously that “It may not be great economics, but it’s great politics.” – take that for what you will.

    • mike

      Interest free while studying is good, trust me I know… I started earning interest on my loan from day 1, which when you only have a part time job isn’t nice. Even worse when you finish studying and start working to find you loan has ballooned and your repayments are less than your interest charged.

      Better option is to restrict what the loan money can be used for, money should only be used for course fees and associated costs (books/photocopying etc)… not a new computer or flash new stereo.

      Another option is limit how many tertiary students we have in this country, the number of workers at McD’s who have a BA must be staggering :-)

      • James

        Link the interest rate to the government borrowing rate. That way the “cost” is nothing to the taxpayer but it is still less than a commercial, unsecured, bank rate. Then when you have idiots who decide to get into huge amounts of debt doing valueless degrees it doesn’t actually cost us anything.

        • BJ

          There is still cost to the taxpayer because the capital being distributed as loans means it isn’t available for use elswhere which means more government borrowing or user pays in other areas

          • James

            Yes; but if that greater borrowing causes rates to go up then this increased rate is charged on to the student. Especially if you set it at the marginal cost of borrowing rather than an average cost.

    • unsol

      I am a big fan of tertiary education. I think that it is a great way to learn skills in terms of completing set tasks by a set time, trades & critical thinking. It also gives the breathing space for kids to move out of home, find their feet & grow up.

      There’s been a few good suggestions on here & I think that the best way forward, rather than slapping on big interest rates, is to try doing some of all of them:

      Set repayments on all loans based on realistic income & set a due date – say 10 years working life.

      Interest free on all loans pertaining to degrees or qualifications that lead to real jobs – that is, employers signal/guarantee they have spots

      Interest free on all ‘good skill’ degrees such as those that teach kids how to formulate & articulate good arguments, proof reading, cost benefit & analysis etc but demand that as there is no guarantee of a specific job that the kids study part time & work part-time

      Charge interest rate around the same rate as inflation for those who choose to work in NZ & also provide all incentives possible for voluntary lump sum repayments

      Charge normal lending interest for students who go overseas & further extend the data match with customs.

      Make sure all borrowing is vetted in that it is used only to fund study & basic living costs – perhaps put it on a payment card that bans all luxuries including travel, excess clothing purchases, piercings, smoking & alcohol.

      Make student loans subject to the Relationship Property Act where just like all income & debt the student loans become a joint responsibility when you enter a de factor or married relationship (3 years for the former).

      Don’t debate me, just add to this or add your own version – solutions are far more productive than arguing.

    • Justsayn

      It is McDonald’s politics. Get them to like you when they are young and you hook some for life. It also works in reverse.

      I’m not saying all will later stick with you, but if the Nats change the status quo that may drive some to become “Labour through and through always have been always will be”.

  • chopsuey

    Why not give interest free student loans for things that are needed like math and physics teachers, and for professions that are needed.

    Stop hairdressers and bartenders from studying for free, or funding anything which has an average pay rate of less than 60k a year.

    Give the loan on the requirement that you stay in New Zealand, if you leave you have 2 months to pay it off in full or you get debt collectors.

  • Michael

    University student: greedy rich kids who think the government owes them, while their peers who work for a living have a government who demands that they are owed.

  • some earners are tax takers as they get more state assistance than pay tax. do they get ID cards too?

  • expression07

    I was gutted to find that they’d scrapped the 10% repayment bonus. Meant I couldn’t claim $6500 in living costs each year, stick it in a high interest savings account then pay the living costs + the interest back to get the 10% bonus.

  • Random66

    Like I said yesterday, no repayment due date, no penalty if you don’t pay and no incentive to repay your debt. All this and countless ways to avoid any re-payments at all. I think I might apply for Dunne’s job because it would seem all I would need is some commonsense and I’d be ahead of the game.

  • DavidW

    Shows that at least some students are learning useful “life-skills” and that the cost of their education is not totally wasted. Those who have figured out the way to rort the system have obviously got some smarts and should succeed later.
    Where they fall down is that having gone down the track of creating successful ways of extracting a benefit from the system, they have given it all away for nothing. This indicates that while they should succeed, all they will really do is suck. For if they were truly bright and entrepeneurial they would have started an enterprise that utilised their planning skills and shared the benefits over thousands of students thus creating a win-win.
    For that lack of effort, I score them a 2 out of ten and suspect that they will become perennial students and the highest qualified corpses in the cemetary.

  • unsol

    Firstly, “bludgers” must include WFF recipients.

    But 20%??? I think you need to wind back the clock & have a look at what history showed us….remembering of course that it was a National Government that introduced the SL scheme in 1992! By 1999 this scheme had racked up more than 3 billion dollars and that was despite applying high interest rates. You also need to look at university fees – these increased 961% between1990 – 1995. Obviously the interest free thing has meant SL debt has increased by 50%, but instead of going back to the 90s, how about some constructive policy on lessons learned & the way forward?

    You have to decide whether you think tertiary education is useful & if yes how best to make it affordable without long-term bludging. I am educated as are most of my friends & we were all top tier taxpayers before we had children. Most of us are also married to educated high income earners. And most of us had student loans – some have yet to pay it back in full (kids came first) but taxes paid during their working life & those paid by their spouse compensate for this.

    And fees are a huge disincentive if you want to do further study – I am doing further study so I can change careers further down the track & it is about $800 per paper plus books ($200 per paper) & student fees (about $1200 p/a)

    • unsol

      You also need to address the living allowance component vs student allowances if ones parents are earning below a certain threshold or if you are a poor mature student.

      Sure you can work part time to keep your loan costs down, but it is pretty hard to work enough to pay for your living costs & pay for your fees.

      Unless we make all tertiary part-time only – so 2 or 1 papers per trimester? Get rid of the full time student thing?

      That could work as loan costs would be down, there would be no need for a student allowance (huge cost to the taxpayer) & students would graduate with work experience.

      • Dave

        Hold on Unsol, just because ones parents “Earn” above a threshold does not mean their offspring should not get a “Living allowance subsidy” or loan. We have paid taxes and are very much net tax payers, so we have actually contributed to the NZ economy. Our daughter is at uni and living away from us, but MISSES out on any subsidies as she has parents who earn above the threshold. Her flatmates BOTH get living allowances, yet one is from a very wealthy family with everything in trusts, the other flatmate does come from a disadvantaged family. So, perhaps remove parents income/wealth thresholds and provide students with a reducing living allowance (to assist the transition from school to uni) and LOANS on a commercial basis so they can fund their uni work and then pay it back. The Loans need to be on a commercial basis from major institutions, (Not the Government) with very very low interest. That should also make students VERY picky over their choices and career options, we might see take up of arty farty flower arranging degrees drop.

        • unsol

          That is exactly my point – the student allowance is not consistent & further is always missed in these discussions yet it is a huge burden on the taxpayer.

          And I like the idea of loans being via private lenders.

          Problem is though 18 year olds don’t always get their career choices right the first time.

          And the family trust thing is a huge issue – it has been mostly addressed under WFF so it is time it was addressed for things like student loans too.

          Of course the problem then becomes MPs & their rich influential friends – an issue that is across all parties.

    • Random66

      ‘…most of us had student loans – some have yet to pay it back in full (kids came first) but taxes paid during their working life & those paid by their spouse compensate for this.’

      So you believe taxes paid by the spouse or your previous taxes paid (during working life) somehow discharge the debt you incurred under the student loan scheme?

      • unsol

        In the big scheme of things of course – unless of course you are saying a full-time housewife & mother doesn’t contribute to their spouses ability to generate a good wage?

        In my case it was my high income – a direct result from my education funded by student loans (my parents were apparently too rich for me to get an allowance yet couldn’t afford to put me through) that not only paid back my student loan but also funded/propped up my husband’s current career which put us in the top 10%.

        • Random66

          Of course your at home support has more than likely assisted the ability of your husband to put in the big hours to ensure a good wage. But you receive the benefit of your support by exactly that, a good wage and presumably a good lifestyle. The tax paid on that wage is no more or no less than what any other individual who earn’t the same income would be expected to pay. The fact that one individual has a wife with a student loan debt does not expunge this personal responsibility of the wife to meet her debt. As tax payers we don’t get to decide what portion of our tax should pay for what benefit a member of our family should get.

          • Bunswalla

            Quite correct, and unless/until the government decides to pay people to stay at home and look after children, you don’t have the right to not repay your loan on the basis that you’re diverting government payments to offset your loan account.

          • unsol

            I see what you are saying. My point was more based on the overall taxes going into the big consolidated fund vs those that come back out. And it can depend on your world view really. In my marriage income & debt is 50/50 so if I still had a student loan or any personal debt my husband would have paid it back as we don’t like debt – prefer to save first then buy. But for most I would imagine if the government doesn’t require repayment then they consider it as fair given the taxes going out of their household to fund the lifestyle of others. A form of payback I suppose.

            It is interesting that the student loan still remains with the individual when everything else under the RPA is split 50/50 – including say where a someone provides financial support while their spouse studies. Here they can be entitled to a % of their future earnings if they split up.

            Either way the scheme is not consistent & the extraordinary fees are prohibitive in terms of finding a solution that does not involve government lending. Especially if the government was to remove all subsidies.

          • BJ

            As we all know divorce happens frequently and the obligations of a government funded student loan lies with the individual – thats fair but I wonder how many now divorced single parents that didn’t pay back their loan while they made having children their priority, and are now on the DPB to boot – completely different to a spouse funding you which is within your own personal financial arrangements.

            What stinks is if a household has an unpaid student loan in limbo while that individual doesn’t draw an income but then a child of that person gets a student allowance while a parent is sitting at home to avoid having to start paying back a student loan they had.

          • unsol

            I see what you mean re double dipping, but in terms of numbers it’s hard to know. The public perception is that ALL DPB mums are wastrels from South Auckland having 10 kids to 10 different fathers while addicted to p, crack & goodness knows what else.

            In my work I had to do some contractual work for MSD & then WINZ. Working for a few months out of a front line office was an eye opener. I saw first hand that many DPB mums were in that position because hubby ran off with the hot secretary leaving them with 3 kids & a mortgage. Few were on it for very long as most seemed determined to move onwards & upwards & provide for their kids. The ones who weren’t educated went onto the old TIA scheme to do nursing & teaching which I personally thought was great as at the time there was massive shortages. I have no idea if they stuck with it though.

            But this is only anecdotal & in terms of stats it is probably hard to measure. I can’t imagine any educated mother with a student loan deliberating wanting to stay on the DPB so they don’t have to pay it back. And then there is of course the new changes which apply to all carers whether on the DPB for the first time ever or not (youngest aged 6 you have to look for full-time work etc).

          • BJ

            Sorry my last paragraph was relating to a two parent household where one was working and they were happy to chug along without the other thinking perhaps they should get a job and pay off their loan

          • unsol

            So in the case of high income families you are saying that where the spouse who has chosen to stay at home & look after their child/ren has a student loan they should put their child/ren into childcare or after school care (until 14 – then what, home alone?) so that they can pay off their student loan so that their personal debt to the State is cleared….meanwhile their high income nett taxpaying spouse whom the debtor may or may not have put through uni or set up in business etc pays enough tax to not only settle this so-called debt, but also fund the entitled lifestyles of those who have done nothing but put their hand out?

            Tax is tax in my view so in this case I see it as payback. If I had a student loan there is no way I would put my child into child care so I could work & pay it back. No way hosea because, irrrespective of my loan, as far as I am concerned I paid far too much before I had a child & my husband pays far too much now.

            Lower the tax rates to a flat rate of 10% & make the entire system user pays then you would have my vote.

            Ironically the 2 friends I have who are in this position are hard core left wing so you will never get them on side!

          • BJ

            What I am saying is a student loan given on the understanding it was for personal opportunity and advancement should surely be a priority to pay back before embarking on a family. Having a family is a choice as was taking on the responsibility of a loan in the first place.

          • Callum

            Actually student loans can and have been included within marital settlements where there are claims made against future income. Can be factored in for how other assets and liabilities are split up.

  • Brendan Waugh

    People respond to incentives, the incentive is not to repay the loan. Thus don’t pay it back. People are following the rational action which is to delay paying the loan as long as possible.

  • Patrick

    Why are paayments from the taxpayer for sitting on your arse called “entitlements”?
    Why are they not called “advances on your future potential” & as such repaid when the recipient finds work?

  • BJ

    As far as I’m concerned – the government using taxpayer dollars to support anyone doing any course after their formal schooling has ended without firm contractual agreements to prioritise paying it back asap, is beyond me. Anyone that isn’t going to university for any of the professions that are identified as needing graduates should go out and work and save for university. Our individual fancies aren’t all equal in importance for the country’s betterment

    We assisted one of our kids ( didn’t want her taking out a loan that we felt would be the beginning of a indebtedness mentality so young) through a polytech, then to uni but when she wanted to change her course yet again we said enough – take out a small loan then. Last week we advanced $20,000 that had been left to her – to pay off in full an original student loan of $5000 from 17 yrs ago. She has lived overseas accruing interest and penalties without considering it should have been a priority yrs ago and she wouldn’t come back to NZ to stop having to pay interest – so we have now ended that ballooning situation at the expense of her legacy – all because of an irresponsible attitude – not the way she was brought up!

    • unsol

      “Anyone that isn’t going to university for any of the professions that are identified as needing graduates should go out and work and save for university. Our individual fancies aren’t all equal in importance for the country’s betterment”

      I quite like the idea of that. But I am not sure if I had my time again I would have worked first as it all panned out in terms of timing re my husband & career.

      “he has lived overseas accruing interest and penalties without considering it should have been a priority yrs ago and she wouldn’t come back to NZ to stop having to pay interest – so we have now ended that ballooning situation at the expense of her legacy – all because of an irresponsible attitude – not the way she was brought up”

      That is I suspect a massively common issue & if high interest rates are re-introduced it will happen more.

      The interest free period only exists while you are studying & if you remain in NZ.

      If you go overseas the same rules apply as they have always done.

      • BJ

        I’d like to see a requirement that a certain percentage has to be paid off before one can even leave the country. Why do we need to be supporting people that have no intention of hanging around as the country is not benefitting from our ‘investment’ In the business sense – it just proves to be a bad investment and should be learnt from

        • unsol

          I quite like that too – will add it to my list above!

        • Callum

          That is a requirement. If you leave the country you are required to arrange a payment plan based on your loan balance (NOT likely earnings). Many ignore that and then bitch when it bites them later. Idiots should be responsible for their own stupidity.

    • WhyCharterSchoolsWork

      the government using taxpayer dollars to support anyone doing any course after their formal schooling

      Why the fuck do primary & secondary kids parents get to bludge?

      “Government using any taxpayer dollars to support anyone” should be unconstitutional . There that’s more like it.

  • chopsuey

    Anybody who says “I paid interest on my student loan!” forget that they had high inflation too.

    Same with the old farts who say “I paid 30% on my mortgage!”

    • WayneO

      Not entirely true, what was the inflation rate in 1999 before interest free loans were thrust upon us? I bet less than 3% while loan rates were above 8%.

  • jonno1

    Our deal was that we funded our kids’ tertiary educations and basic living expenses (not a dollar value, just whatever it cost, which varied over time) provided they made at least some contribution to their pocket-money through part-time jobs. All our friends and neighbours did or are doing pretty much the same.

    One son borrowed to buy a car – when he realised he was “in debt” it gave him such a fright he worked real hard to pay it off within about a year. All learned the time-value of money and the importance of saving before buying (with the exception of a house mortgage of course, but even then to save a substantial deposit and to pay it off as fast as humanly possible). Everything else cash only (includes credit card paid in full each month). All are now married with children and none of the wives work full-time outside the home. It can be done, it just requires a bit of self-discipline. I should add that they all studied marketable subjects – not a degree in ancient Chinese calligraphy among them (although I do find that a fascinating topic ).

    • Callum

      A better way is to force your children to rely on loans/allowances only. If you chose to repay for them later they are still effectively capped at the maximum amount they can borrow. Saw quite a few pople who borrowed without their parents knowing even though all their costs were alrady being paid directly and spent the rest on booze and loose women.

      • jonno1

        Yes that can happen – one friend’s daughter borrowed about $20k even though she lived at home, he paid her fees and she had a part-time job. Dunno what she spent it on, but I don’t think it was booze and loose women. He was horrified when he found out!

        Our view was that our kids’ education to tertiary level (ie not working full-time)was our responsibility, then they were on their own. On top of that we’ve paid for a some family holidays and made a few other contributions.

        In the case of the entrepreneur son we’ve lent him quite a bit at a discounted but realistic rate – don’t know whether we’ll see it again though; might require a codicil to our wills.

  • Sarrs

    My suggestion is to keep loans interest free but add an annual inflation adjustment.

    • James

      Is that not therefore an interest rate equal to the rate of inflation; as used in the UK for example.

      • Sarrs

        Yea it’s pretty much exactly that. I would make the inflation adjustment a compulsory payment each year, regardless of the level of earnings though. I’m not sure how the system operates in the UK.

        The rate of inflation that the loan is adjusted for should be equal to that which is added to national super and benefits each year.

    • BJ

      Brilliant! No interest but the amount owed will not get any smaller (because of annual adjustments for inflation) unless a concerted effort is made to pay back principal

      • Honcho

        Amounts not really getting bigger, Its more relative to the currency. If your going to pay todays debt which has been lent in todays dollars, and you intend to pay it tomorrow, then you should pay back that debt in the equivalent value of tomorrows dollars.

  • What about closing down 5 of the Universities, making the entry requirements very difficult (ie – on MERIT), eliminating all the nonsense courses, focusing on the important ones – and making it free for the 2000 or so students per year who are allowed in? (reserving University for the clever buggers at the top rather than letting every effete, moronic, Tom/Dick/Harry who applies)

  • Richard Meadows

    Hi Cam,
    Having written about this subject in depth, I too believe that student loans should have some sort of nominal interest rate reintroduced.

    Make sure you have a read of this earlier article I wrote for context:
    http://www.stuff.co.nz/business/money/8197323/Bitter-pill-should-be-swallowed

    My latest article simply illustrates why this is the case. In fact,you put it perfectly yourself in the first line:

    “If ever there was a need for an explanation of why interest free student loans need to axed…”

    Exactly!

    Cheers,
    Richard “scuzzbag” Meadows

  • WhyCharterSchoolsWork

    It’s even better than that: just go bankrupt.

    Your loan is wiped, and you’d be discharged within a year.

    Unlike everywhere else in the world – student loans in NZ a very easy to get away from.

  • johnbronkhorst

    At a tangent…Have just seen a story on CNN….Educators (teachers) being charged with “doctoring ” test results to gain bonuses for themselves!!! At a PUBLIC school in Atlanta Georgia………The quicker we open charter schools, the better.

    • StupidDisqus

      The quicker we close state schools, the better!

32%