Mary Holm: Interest rate on student loans queried

It can be tough for young people going overseas to see their student loans growing. Photo / Thinkstock

Reader says it's cheaper to borrow for a home than for graduates overseas paying interest on their debts

Q: I have two sons with student loans. One is working and residing in the UK, the other in New Zealand.

Student loans are merely a mortgage and for those unfortunate enough to live in provinces the need for accommodation outside their home towns/cities to further their qualifications was a no choice situation. Accommodation and living expenses make up the majority of my sons' overall loans. And also, unfortunately we, like many parents, were limited as to the financial support we could provide them.

What I find disturbing is that the interest rate the Government is charging is higher than that of someone buying a house. The current student loan interest rate is 6.4 per cent, while I can borrow for a home as low as 5.5 per cent floating, 4.79 per cent one-year fixed, 4.99 per cent two-year fixed and even as low as 5.99 per cent for five years fixed.

It is cheaper to borrow for a home than take out a student loan.

A: Only if the student goes overseas before repaying the loan. Don't forget the loans are interest-free to those in New Zealand.

And it's probably fair enough that people who have been educated in New Zealand - with the bulk of their tertiary costs paid by the taxpayer - should pay reasonable interest on their loan if this country is not benefiting from their education.

True, many graduates who head overseas end up back here. But in the meantime a lot of them have earned high pay abroad on the back of their Kiwi education.

Furthermore, it's not clear to me why the interest rate shouldn't be higher than the mortgage rate. After all mortgages are secured by property. With student loans, there's precious little security.

Actually, as our graph shows, the student loan rate has tended to be lower than mortgage rates historically. But the two rates are clearly not closely correlated.

So how do they decide on the student loan interest rate? The rate, which is set by legislation, is "based on a five-year average of the 10-year bond rate, plus a margin of 0.74 per cent. A long-run average is used to smooth movements in market interest rates," says Inland Revenue.