Labour's $300m loan bait

Labour's policy would save Auckland student politician Xavier Goldie $80,000. He is in the third year of a science degree. Picture / Richard Robinson

Labour fired a big election policy shot yesterday with a $300 million-a-year promise to abolish interest on student loans.

Prime Minister Helen Clark and Education Minister Trevor Mallard outlined a promise which would see the Government open its wallet to lure the more than 461,000 New Zealanders who have student loans.

The policy effectively gazumps National's scheme, announced last week, which would make interest payments on student loans tax-deductible.

Under Labour's policy - described as "desperate and irresponsible" by National's Bill English - people living in New Zealand will no longer be charged interest on their loans from April next year.

Labour intends to spend $100 million next year on the policy - $30 million more than National's scheme. The cost of Labour's policy is projected to grow to $300 million in subsequent years.

Both schemes are aimed at stopping the "brain drain" by being available only to people living in New Zealand, thus enticing young people to stay or return home.

Labour has provided a further incentive to come home in the form of an amnesty on penalty interest for people who return to New Zealand next year. A penalty of 2 per cent per month is now charged on overdue payments. People living overseas will continue to be charged interest at the current rate of 7 per cent until they return to New Zealand.

Both parties are aware of the strength of ill-feeling towards the ballooning student loan debt, which has reached $7 billion, and know an attractive loan policy is likely to appeal to more than just students.

Helen Clark said yesterday that the student loans issues was regularly raised at Grey Power meetings.

Labour says its policy is easy to understand.

It has designed an online student loan calculator to show people how much more quickly they will pay off their loan under the new policy.

For example, a person with a $20,000 loan who earns $45,000 will pay off his loan two years sooner and save $7700.

National's student loan policy involves Inland Revenue making deductions and crediting the money back to a person's student loan.

National's policy was criticised for favouring people on higher incomes and applying only to those in paid employment, thereby punishing stay-home parents.

Labour says its scheme is fairer because it applies regardless of whether the person is in paid work.

Mr English, National's education spokesman, called it an election bribe "on an unprecedented scale".

"Labour's package is nothing more than an extravagant, irresponsible attempt to out-bid National. It also makes an absolute nonsense of Labour's claim that it couldn't afford tax cuts for mainstream New Zealanders."

Mr English said interest-free loans would be too much for students and parents to resist and student debt would skyrocket.

But Labour says it will have safeguards to make sure that does not happen, such as loans being available only for approved courses and making sure students are aware of their financial commitment.

David Tripe, senior lecturer in banking studies at Massey University, said removing the interest would mean there was no incentive for people to make additional payments on their student loans, and most people would be content to pay them off at the minimum rate.

Labour's policy was welcomed by groups including the Medical Association, the University Students' Association, the Council of Trade Unions, the NZEI and the PPTA.

The University Students' Association, which was critical of National's plan, said Labour's was the most significant blow to the "debt monster" since the loan scheme was introduced in 1992.

Labour also said yesterday that it would continue to cap tuition fees, progressively increase parental income thresholds so at least half of all fulltime students got an allowance, and increase the number of bonded scholarships to help students pay fees.

CASE STUDY 1: 16 years up sleeve

Xavier Goldie anticipates knocking 16 years and almost $80,000 off what he would have paid for his student loan.

The Auckland University science student said National's rebates plan would have seen him winning back about $9 a week on his loan debt.

He is in the third year of a four-year BSc. He has so far borrowed $35,000 and estimates that will grow to about $45,000. Under the current rules, he estimates, with a starting wage of about $38,000, he would repay about $124,000, which would take 34 years.

Labour's debt relief plan would see the amount slashed to just the $45,000 borrowed and the time taken to repay almost halved.

CASE STUDY 2: Debt-free by 28

Under National, 20-year-old systems administrator Malcolm Burgess was looking forward to a tax deduction of about $1050.

But he is now considering the impact of his $15,000 loan being paid off in eight years, rather than 12. His repayments would have totalled $23,858 and taken him until past his 32nd birthday, but Labour's policy means he will save almost $9000 and be debt-free by the time he is 28.

"It's a big step in the right direction and it's not a hard decision which is the most attractive."

CASE STUDY 3: Policy fails to impress

Trainee nurse Sandra Strickett could find two years knocked off her loan repayment time and about $6000.

But the 24-year-old remains unimpressed by Labour's policy. With an estimated final loan of $16,000 and a salary of about $40,000, Ms Strickett intends to travel and work overseas when she completes her studies next year.

She would rather receive National's tax deduction, which would be worth about $369 a year, "in my pocket".

She said it was likely that the money and experience she gained overseas would outweigh the few thousands in interest saved on her loan.

COMPARING THE POLICIES

When does it start?
Labour: April 1 next year.
National: April 1 next year.

What it promises:
Labour: People living in New Zealand will not be charged interest on their student loans.
National: People working in New Zealand will get tax deductions on interest paid on student loans.

How much will it cost?
Labour: $100 million in the first year, rising to $300 million thereafter.
National: $70 million.

Does it apply to New Zealanders with student loans living overseas?
Labour: No.
National: No.

Do you have to be working for it to apply?
Labour: No, stay-home parents and people on benefits qualify.
National: Yes.