$2b lost to interest write-off

The plan to axe interest on student loans will cut $2 billion off the value of the debt students owe the Government.

Finance Minister Michael Cullen revealed the write-down yesterday as legislation introducing the policy - a key election plank for Labour - was introduced to Parliament.

The legislation also implements the other key Labour election pledge - to expand Working for Families at an eventual cost of more than $400 million a year.

Labour put the cost of axing interest on student loans at $100 million a year initially, rising to $300 million from 2008-09.

Just before the election the Chief Ombudsman ordered the release of an alternative Treasury costing which put the estimated annual cost at $390 million in 2008-09.

Dr Cullen said yesterday it was necessary to pass the legislation before Christmas so it could come into force on April 1 next year.

Asked if the two measures came at a difficult time given he was trying to dampen the economy, Dr Cullen said it would have a fiscal impact next year.

"It's a stimulus compared with not doing it," he said.

"But in fact, in terms of Working for Families, it's a tighter fiscal position than was projected on Budget night and much cheaper than the tax cuts which everybody else was spraying around like nobody's business."

Dr Cullen said moving to an interest-free system for student loans significantly lowered the value of the asset on the Government's books, so there would be a "one-off hit" of just under $2 billion.

National finance spokesman John Key said Labour had finally confirmed the policy would cost a lot more than originally suggested.

The write-down would reduce the Government's net worth - its assets minus its liabilities - by $2 billion.

"The write-down is only part of the total cost of this reckless policy.

"On top of that, the taxpayer is threatened by a massive blow-out going forward as students feast on a diet of growing debt."

Mr Key said the Government did everything it could before the election to keep the Treasury costings of the policy from the public arena.

National education spokesman Bill English said the policy would see more student debt and lower-quality education.

The more than 100,000 students - 45 per cent of the total - who were eligible for a loan but hadn't taken one now had a strong incentive to do so and "put it in the bank to earn a nice little nest egg on the taxpayer", he said.

Election pledges

Axing interest on student loans

* What it means: Students will no longer be charged interest on students loans. They must be resident in NZ to benefit, but a number of exemptions to the residency rule apply.

* What it costs: $100m a year initially, rising to $300m a year.

* When it's introduced: April 1, 2006.

Working for Families expansion

* What it means: provides income help to 160,000 families with children, with the impact averaging around $50 a week depending on family circumstances.

* What it costs: more than $400m a year.

* When it's introduced: April 1, 2006.