– Dorothy – 4/12/98
Some of the media have recently had a field day featuring the huge debts incurred by students with student loans – debts sometimes incurred because the students used their loans to travel overseas or purchase expensive motorbikes or cars. These are a minority of students, but the government has moved to reduce loan abuse, and in so doing has penalised the responsible students using their loans for legitimate expenses.
The present system Student loans were introduced in 1991 when fees at tertiary institutions were increased. Students may access loans for a maximum of five years. Failure two years consecutively can cause access to a loan to be cut, but it is restored if students pay their own costs for a year and pass their courses.
Currently students repay their loans through an additional tax of 10 cents per dollar once their income reaches $14,716 per annum. The interest rate charged on these loans is 8%, which has not been adjusted as market rates have fallen, and is now above market rates.
At the University of Canterbury in 1998 around 7000 of the 12000 students were drawing loans. The average student indebtedness at the end of the course has been around $10,000.
A survey commissioned by the New Zealand Universities Students’ Association and carried out by CM Research in 1996 surveyed 1204 students. The results showed that the average annual expenditure of student loan borrowers was 30% on accommodation, 16% on food, 3% on course costs (excluding fees), but only 2% (below the margin of error) on stereos or travel outside the city.
The Minister’s view of the changes Wyatt Creech, the Minister of Education, said that the recent changes were designed to make the scheme fairer, reduce the debt burden on students, reduce the time they spent repaying loans and reduce abuse of the scheme.
The main changes are: From next year 1999
- no more payment of lump sums, but direct crediting to students’ bank accounts of their living costs entitlement of $150 per week
- no student loans for students under eighteen without parental consent
- no student withdrawals through the 0800 freephone line
- fee entitlement paid only by direct credit to the education provider
- maximum loan amounts for course costs reduced from $1000 to $500
- Student Union fees no longer to be paid through a student loan withdrawal
- an increase to 15 cents per dollar repayment for those with an income of $50,000 per annum or more
From the 2001-2002 tax year
- 50% of all loan repayments to go to paying off principal.
Interview with Darel Hall, President of USCA Darel Hall, President of the University of Canterbury Students’ Association (UCSA), had a number of questions to raise with the Minister of Education about these changes.
Lack of consultation His first concern was over the lack of consultation before these changes were announced. Students, (at least Canterbury students), those who are most affected by the changes, were not consulted. However, even if the Government was not prepared to consult them, surely the universities themselves should have been consulted. The Universities of Canterbury and Otago, the second and third largest administrators of the loans schemes, were never consulted about the changes.
Validation system Darel sees the validation system for payment of education costs as acceptable as long as it does not involved too much bureaucracy. No details are yet available as to how it will work.
The staff who were administering the loans scheme were not consulted before the changes were announced. Since the announcement of the changes they have had to be flown to Wellington to help solve the administrative problems that were not solved when the system was announced.
Course costs – not fees Reducing the maximum amount for course costs from $1000 to $500 will mean that the loan will barely cover the cost of books for many courses. Computer access is essential and photocopying is a recurring expense for students. Some courses involve field work which means yet another expense.
Already many students have to manage without all the required textbooks. Library copies held on reserve assist such students, but when there is pressure on book use for assignments, tests or exams there are not enough library copies to fill the need. There is a real danger that students will flout the copyright laws and photocopy whole books to save expense.
It seems inconsistent that changes which are presented as aiming to check abuse of the loan system should include a reduction in the amount of loan for course costs – a legitimate educational expense. What was the real reason for this change?
Fortnightly payments Darel commented that this system presupposes that students’ expenses do not vary. There is no provision for them to draw a sum to pay for medical or dentistry expenses. The UCSA will be advising students to draw their entitlement each week but to save some money regularly to meet unexpected expenses.
Increased repayment for those on higher incomes The repayment rate of 10 cents per dollar for those earning between $14,000 and $50,000 will continue unchanged.
The repayment rate of 15 cents per dollar for those earning $50,000 means in effect a tax rate of 48 cents in the dollar, when the 15 cents repayment is added to the existing top income tax rate of 33 cents.
Government principles and practice at variance Darel pointed out that the Government has argued that high individual tax rates stifle wealth creation. The change to the repayment rate for those earning over $50,000 introduces a progressive tax rate, yet it is being implemented by a government which has consistently advocated flat tax rates to promote growth.
It has also stressed that any difference between company tax rates and individual tax rates creates opportunities to shift where wealth is recorded – which means that tax avoidance is promoted. Surely the new provision for increased loan repayments will do just that.
An increased impetus for the ‘brain drain’ High achievers faced with a high repayment rate for their student loans have a powerful incentive to leave New Zealand and seek work overseas where the salaries are higher. Instead of bewailing the number of people of high ability who are lost to this country through the ‘brain drain’ it is surely time to offer them an incentive to stay here rather than an increased burden to drive them away.
Change to rate of repayment of capital The change which allocates 50% of loan repayment to reducing the capital is of advantage to those carrying a load of debt. Why has it been delayed to the 2001-2002 tax year?
Anyone studying these changes to the Student Loan Scheme must surely feel impelled to ask, “What is the Government’s motivation behind many of these changes?”
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