Middle- and low-income earners should be up in arms about the implicit subsidy that accrues mostly to above median incomes via the interest-free student loan scheme for tertiary students and graduates.

The majority of student loan borrowers earn a bachelors degree, or higher, and can expect their income to be 1.4 times the median wage five years after leaving university.

While borrowers get a sweet deal via zero interest and earn above the median wage, the funder is on the median wage and pays higher tax or receives less spending support than would otherwise be the case. That's a subsidy directed up, not down.


Why should someone paying tax on the minimum wage be subsidising someone who is earning twice the median wage (in the case of someone with a doctorate)?

This is a policy that should be cancelled and the proceeds redirected to either a tax cut for low incomes or boosting early childhood and primary school funding. I'd favour the latter.

Students and ex-students will cry foul. There are more than 700,000 borrowers so it's a political voice.

But it's a poorly directed policy, a subsidy aimed at the wrong group, and tough decisions need to be made given spending pressures.

The best we can probably hope for is that student debt at least gets inflation indexed so the average taxpayer is not getting completely stitched.

Every dollar lent via a student loan cost the Government 45 cents in 2016/17. That's right. Almost half of every dollar is written off. Most of this is because the Government carries the funding costs and takes an upfront hit as soon as a loan is drawn down.

The writedown in loans has totalled more than $7 billion since 2005/06. This will not equate to the funding costs, but still gives a sense of the costs.

The carry cost (government bond rate plus a modest interest margin and default risk) of student debt amounted to $563 million in 2016/17.


The Government and taxpayer should be a strong supporter of tertiary education. That is because the benefits accrue to the wider economy as well as the individual.

More education tends to be associated with higher incomes and hence more tax. If individuals had to wear the full cost of their own education, they wouldn't invest as much.

That is not in dispute. We should be targeting getting more people into education.

But there are some appropriate questions. How much support should be provided?

The Government covered more than 70 per cent of the cost of a tertiary student's education in 2016.

By the time the interest-free student loan scheme is taken into account, this pops up to more than 80 per cent. This figure will be higher now given first year students pay no fees. The taxpayer is not just footing most of the bill, it is almost the entire bill.


Is that support appropriately targeted? The student loan write-off/carry cost exceeds what is paid in student allowances, with the latter aimed to help those from lower income families. Why should a student receive an interest-free deal whereas a small business start-up or entrepreneur can't?

Are interest-free loans the best use of taxpayer funding?

In the current instance, would that money be better spent in primary and early childhood education? Or what about cutting low income tax rates or the income thresholds at which a higher tax rate kicks in. Or how about a tax cut to small businesses?

Are the right incentives in place to drive the right behaviours?

Ninety per cent of arrears on student loans are overseas-based borrowers. Forty per cent of that is more than five years in arrears. Many have skipped the country with no intention of returning. More than 50 per cent are inactive and not paying.

Offshore students do face a borrowing cost, but it's less than the assessed carry cost of the loan to the Government (and taxpayer). The system has been tightened over the past few years though more is required.


With the current focus on poverty and closing income equality, why is $563m per year being put in the pockets of people that either are, or set to (on average), earn above the median wage?

The opportunity cost to the taxpayer of providing free loans divided by the number of borrowers (just over 700,000) is just under $800 per individual per year. A lot of low-income people below the median wage would like that.

In the coming month, the Ministry of Education will release the 2018 Student Loan Scheme Annual Report.

It will contain a raft of information that should be perused.

Of course, we want to encourage more people into education. But someone wears the cost, and the cost is not cheap.

- Cameron Bagrie is managing director and chief economist at Bagrie Economics.