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Saturday, 3 September 2016

Interest Free Student Loans

What is the problem with claiming an interest free student loan when you do not, in fact, need a student loan? The answer, apparently, is that if you're saving, say, $400 a week, the interest you get on that $400 saved is "a gift from the taxpayers of New Zealand, whose government offers you an interest-free loan". Why should we care about this?

At first glance this seems like a fairly simple issue. After all, if you don't need something, then you shouldn't use it... it's not honest, or something. (You don't, for reference, crowd out those people who actually do need student loans so this isn't a problem here). Essentially, if you bear the financial burden of your education by yourself, immediately, then the govt. can use the money that they're giving you for other purposes (or, conceivably, they could not borrow it in the first place). I think that's the idea here, in addition to the "gift" bit.

There are some questions that need to be addressed here.

Firstly, is the premise even true? Probably. You have to pay fees by a certain date. That's not "start payments," that's the whole payment is due by then. And it appears that the standard fee for a course is about $848* which means that you'd have to a bit more than work two weeks (2.12) for one course, and thus you'd have to work for about 9 weeks prior to the fee's due date assuming a course load of four courses. And we're also assuming you save $400, which is probably not particularly realistic for people who manage to save money whilst studying, so the 9 weeks thing could stretch out into the realm of the implausible. We'll give the argument the benefit of the doubt, because I think I can defeat it regardless.

Secondly, what's better socially: the money goes to the university or the money sits in the student's bank account? This is a tricky one. On one hand, if the university gets the money, it'll probably be saved anyway. On the other hand, the university is getting money regardless, so what the university does with the money is actually irrelevant. Okay. so what happens with the money sitting in the bank? Well, in some sense, it doesn't actually sit in the bank. The way banks work is that they take the savings they have and transform it into loans. In other words, the money is working (which problematises this notion of a gift). This wouldn't happen if the student has to use the money to pay their fees themselves. The question, then, resolves around the government's alternative uses of the money. And, specifically, whether or not the social reward from those alternative uses is better than the indirect investment created by saving with the bank. If there is an answer to this question, it is not going to be found on a blog. I think we could easily argue that the govt. will win as they will pool more non-spent student loan money than even the biggest of banks will pool with all their student loan savers. On the other hand, if the govt. is simply not borrowing this money then I think we'll go for the social outcome favouring the "unethical" students. We'll work with the benefit of the doubt again.

Thirdly, what is the cost of working to reduce the number of student loan savers out there earning gifts? I can't remember what course it was, quite likely Accounting 101, but we sort of talked about this: it can cost more to reduce this "wasted" expenditure than you save by getting rid of the "loopholes" which allow people who can save money to take out student loans. Think about this, say that we save $848*8 = $6748 a year by stopping the student in our example from taking out a loan. But to stop the student from taking out a loan, what do we need? Well, we're going to have to get the student to submit a bunch of documents (much like the current student allowance process) and then we're going to have to pay someone (or someones) to review this material. We won't incur any additional costs when it comes to informing them that we've turned down their loan because this surely can't take any longer to type than what we use to say it's been approved. Well, it can't take, assuming a $20/hr wage for Studylink's employees 337 hours (about six weeks of 8 hour working days) to do this. But, we've got to factor in that it's not just this student. We have to ask everyone for proof of income, and we have to process all of the resultant documentation. And we already know that Studylink gets inundated with stuff beyond capacity leading up to March... if they had excess capacity then it wouldn't be the case that they expect waiting times to increase. It is not clear to me at all that there would be any saving made here. After all, not all students save and, therefore, for some students we will increase the costs associated with approving their student loan without "gaining" back their equivalent of $400 to offset that, because there is no equivalent. If this sounds bad, it isn't fatal yet.

What happens when we increase the barriers associated with obtaining a student loan? As things currently stand, it takes a while to process a student allowance. We will have to consider the impact of requiring the staff who do this processing to additionally process the student loan documents. We will also have to remember that with more working parts the greater the likelihood that someone will fall through the cracks, with their documents that are meant to be being used for both their loan and allowance applications maybe counting for only one or something. There is a cost attached to not giving someone who should have an allowance their allowance (in a timely fashion), and this needs to be factored into any analysis that decides to do something about these unethical student loan savers. We could also end up discouraging prospective students altogether through the administrative demands created by the system to weed out the unethicals. Every time that happens we have to factor in those economic consequences (e.g. reduced productivity, loss of human capital in this generation and the next**) too. This doesn't look good. But, wait, I have more reasons.

Does the government get a better deal? If you're saving $400 a week (the student in the article is actually saving something like $100, it was a monthly saving), then you are earning a minimum of $20,800 if you work every week a year. That sounds a bit unreasonable so we'll assume 40 working weeks and $16,000. The point, here, is that you're probably earning more than this and so are likely over the re-payment threshold (but you pay off something anyway even if you're under the threshold, it's just how it is). In other words, you may have a loan, but you pay it back faster. This means that the real loss by the govt. is lower than for a non-saving student as there is less inflation getting in the way. Furthermore, that you have a loan in the first place does place burdens on you, so if you're motivated (like the student writing to the Herald) to pay it off even faster as a result this is even more true. In contrast, someone who takes 10 years to pay off their loan and didn't pay anything back whilst studying pays back less in terms of the real value of the loan (assuming there's no deflation). It looks to me like that the govt. has a fairly good reason to be ambivalent here.

On a related note, is this even a gift? Why do we have interest free student loans in the first place? Because it lets more people study. Why do we want people to study? Is it because we're really nice? No, actually, it's because we recognise that it is better for people to be more educated/trained (whether at a university or through an apprenticeship or whatever) than otherwise. Instead of gift, we might call this an incentive. However, if someone buggers off overseas after being educated here, do we actually get anything from them? Well, yes. We can take their successes overseas and use them to market what we're doing (e.g. international respect). We can look at their presence in universities or whatever here and argue that this increases the quality or attractiveness of the university. We can remember that a lot of people like to work overseas for a bit and then come back home to have a family or something. Maybe it's just time to acknowledge that NZers have Wanderlust and that's just how it's going to be. Of these little answers that marketing one seems the most convincing. It's is especially good if they go on to study overseas too.

Now, there could well be other arguments for my point of view... these are just the ones I thought of... but it is also true that possibly there are other solutions to the student loan savers problems. For instance, maybe we could be more demanding about repayment. This way we can still have the efficiencies gained from making it easy to get a loan, and the IRD can just follow up with people who are earning more than we'd expect. That sounds pretty reasonable (provided their is no-one caught by this that we don't intend to catch). But, from a philosophical point of view, I am not necessarily convinced that this is an issue we need worry about at all. We might be giving people gifts, these gifts probably contribute to inequality*** but our intention is not to earn the loans back: our intention is to educate as many people as well as possible, and things which encourage this are okay. In an ideal world, one where we can avoid the practical issues discussed above, the unethical nature is probably the big thing (if you don't believe in free education). But we live in a practical world. It seems to me that we don't have a sense of the true size of this problem and that there are massive risks associated with trying to address it... if it seems to work, don't break it.

*Take these values. Muck around with Excel to split apart those entries with upper and lower ranges, divide by 8. Calculate the average for the non-zero cells. Voila. Not perfect, but it'll do, right?

**It seems reasonable to me that the lost education of the parent should count as lost education of any children that they subsequently have as well.

***Perhaps an angle I need to cover?