New Zealand’s interest-free student loan scheme has not achieved its policy objectives and fails to help students from poorer backgrounds access tertiary education, according to this report from The New Zealand Initiative. Eliminating interest-charges on all student loans was a superb decision in political expediency; politicians compete for votes and people will naturally vote for policies that most benefit themselves. Lowering or deferring the financial burden of tertiary education gains the vote of many tertiary students – and the votes of their parents. But it has not improved access to university. The policy is best described as a costly failure.
 
Key Facts:

• Despite tuition increases, subsidies provided by the interest-free loan system mean students bear less than 20% of the cost of their education.
• While government-backed student loan schemes are common around the world, loans elsewhere typically carry interest charges. It is entirely possible to run an equitable student loan system while charging interest.
• Students borrowed $1.5 billion in 2014/15 through the interest-free loan scheme. The government immediately wrote $602 million off the value of those loans due to the subsidies provided through the scheme. Since 2005, write-downs on new lending have totalled almost $6 billion dollars.
• Reinstating interest on student loans would neither make education unaffordable nor result in substantial increases in repayment times. A student leaving university with $16,000 in student loans would take about an extra year to pay off her student debt if interest rates were 7% rather than zero percent.

The interest-free student loan scheme is simply not fit for purpose. This report finds that there is no compelling public policy case for universal subsidised student loans. The scheme has, to date, resulted in almost $6 billion taxpayers’ dollars being written off. Interest-free student loans are costly and ill-targeted. It is a policy that has had no major impact on tertiary participation rates, nor has it led to any conceivable improvement in tertiary equity.
 
The report recommends restoring interest on student loans, providing better targeted financial aid for students, and redirecting funding towards programmes in secondary schools to remove the real barriers to tertiary participation.