How the system works; what are the costs and who benefits
New Zealand’s student loan scheme currently allows students who are New Zealand citizens or permanent residents, to borrow money for their course fees, living expenses, and course related costs up to $1000 per year. The scheme is currently interest free for all current and past students who remain within New Zealand. In the 2007/2008 financial year 1,201 million was spent by the government on student loans.[1]
In 2008, 179,000 students, of the 216,000 eligible, used the student loan scheme, borrowing an average of $6,953.[2] The majority of these students are noted as borrowing to pay for their compulsory university fees, a total of 93% of all borrowers,[3] and 26% of all borrowers only borrowed to cover fees.[4] As well as this, 50% of all borrowers borrowed to cover their living costs, and 53% borrowed some or all of the available $1000 for course related costs.[5]
Meanwhile in 2009 97,200 students borrowed from the student loan scheme to meet living costs, and of these, 66,900 students borrowed only from the loan scheme to meet these costs (ie. did not meet the criteria for any level of student allowance). As such, student loans to meet the cost of living aid the students who do not meet the criteria of a student allowance, or meet the criteria for a student allowance but receive a payment which is allowed to be ‘topped up’ by the loan scheme.
Efficiency considerations
The student loan scheme can be considered to be somewhat efficient, in that it achieves its purpose of increasing access to tertiary education, as students are not expected to pay the full amount of their education costs up front, through government bearing the initial cost. However, certain efficiency considerations must be taken into account.
As noted above, currently there is no interest on student loans, either while the individual is studying, or after study is completed so long as the individual stays in the country (there are allowances as to how long you may leave the country for at any one time without paying interest on the loan). The result is that the student in question will not be paying back the amount they borrowed, due to inflation and the time it takes to pay off the loan. As such, the policy does not achieve allocative efficiency; the value the student places on their education (ie. how much they are willing to spend on it, which equals their course fees plus any living costs they incurred) does not equal what it costs the government to provide (price does not equal marginal cost of production).[6] This is because the full amount will not have to be paid back; the loan is only paid back in today’s dollars, despite the fact that the loan term may last up to a decade, or even more. As such, more resources will be used than will be paid back, and therefore allocative efficiency is not satisfied, as it would be if interest was put back on the loan, but restricted to the rate of inflation. The result of this would be that the student would pay back the full price which they were prepared to spend on their education.
Equity considerations
Every New Zealand citizen or permanent resident who is studying full time in New Zealand has equal access to the student loan system, it is therefore equitable as everyone benefits equally, however with regard to the living costs component of the loan, the loan scheme does not take into consideration the amount of money an individual is capable of earning every week to supplement their loan, or the cost of living in various places; only a flat rate of living costs is available. As such vertical equity may not be considered to be satisfied while study is taking place.
More importantly, however, the scheme is vertically equitable in that the manner in which the loan is paid back is tied to the individual’s income; as it is a percentage of the individual’s income once they earn over a specified threshold per year, meaning that no one is unduly burdened with loan repayments. New Zealand also currently has an interest free policy for student loans, which means loans don’t accrue interest, so long as the individual remains in New Zealand; again, benefiting all those willing to contribute to the New Zealand economy, equally.
Conclusions from overseas research of student loan schemes
Canada, on the whole, appears to favour loans as a means of student support, rather than grants and allowances; “provincial grants for post secondary students were largely eliminated and replaced with expanded loan programs in the early to mid 1990s…these changes were, however, followed by cries of concern over the increased debt loads that resulted.”[7]
With regard to loans as the primary means of student aid, Finnie notes that they are probably the most effective means of ensuring access to all school leavers to tertiary study, as “a given amount of government spending on student financial assistance goes much further when put into a loan system… the money is paid back and is thus effectively recycled …a loan system can therefore provide more money to more individuals for a given level of spending.”[8] Coupled with this, this article notes that so long as the loan scheme is well designed, it sends its intended message; the required assistance is available to enable tertiary study.
In terms of the negative impacts which a loan has upon an individual who is studying, Australian research considered that students with a student loan may be required to work while undertaking study, in an attempt to minimise their debt; resulting in a decline in the quality of their learning experience.[9] However, it should be noted, that under the allowance system, students may be required to work also, in order to earn enough money per week, however, the incentives to earn money may not be the same.
Australian Research with regard to Australians Higher Education Contributions Scheme or HECS (a form of student loan) scheme, has determined that while it promotes access to tertiary education, through a scheme which does not require repayments until the individual is working, it has been noted that students from lower socio economic backgrounds may be more debt-adverse, and as such “the HECS debt might be more of a deterrent.”[10] Finnie, who analysed the Canadian system of student loans, noted that although loans have more advantages than allowances, loans may in fact act as a deterrent, and if so, grants (allowances) may remain an “important element of an overall student aid package.”[11]
Despite this, the Australian study considers that loans are only “a very minor influence, if a factor at all, for the low participation by low [socioeconomic] groups. The main reasons…appear to be the attitudes and values of low [socioeconomic] groups towards higher education.”[12]
Finnie summarises the use of a loan scheme by stating; “in short, a loan system can provide more assistance to more students in a more effective and equitable manner than can grants, debt remission, or lower tuition fees.”[13]
[1] Ministry of Education, “Student Loan Scheme Annual Report,” Ministry of Education, http://www.educationcounts.govt.nz/publications/series/student_loan_scheme_annual_reports (accessed 30/08/2010):10.
[2] Ministry of Education, “Student Loan Scheme Annual Report to 30 June 2009,” Ministry of Education, http://www.educationcounts.govt.nz/publications/series/2555/58406/6 (accessed 30/08/2010):1.
[3] Ibid., 1.
[4] Ibid., 1.
[5] Ibid., 1.
[6] Tutor2u, “Economic Efficiency,” Tutor2u, http://tutor2u.net/economics/content/topics/competition/efficiency.htm (accessed 27/09/2010):1.
[7] Finnie, 165.
[8] Ibid., 166.
[9] M Long, 135.
[10] Ibid., 135.
[11] Finnie, 166.
[12] Andrews, 1999 cited in M, Long, 136.
[13] Finnie, 166.