War of words heats up on student loans

The Labour Party has come out swinging against Westpac for its criticism of its pledge to axe interest on student loans, calling the bank's analysis "dodgy" and driven by "dubious motivation".

On Friday Westpac chief economist Brendan O'Donovan said the policy carried large fiscal risks and a potential long-term impact on the economy.

He implored Labour to dump the pledge, which the party estimated would cost $300 million a year.

In the worst-case scenario - working on the premise all students had been been handed an incentive to borrow as much as they were entitled to, and that every student would do that - Mr O'Donovan reckoned the cost could reach $1.1 billion a year.

"I felt beholden as an economist ... to try and get sanity into the debate. In our view, this election lolly would result in a chronic case of tooth decay."

Education Minister Trevor Mallard reacted on Friday by saying the analysis was "extremist and scaremongering". Yesterday he launched a stinging attack, calling the analysis an "outrageous exaggeration", "inflammatory" and "self-motivated garbage".

He said Labour's calculations, factoring in current uptakes of fees and allowances, and the correct figures for the full-time/part-time split of borrowers, showed Westpac's maximum estimate was out by $500 million.

And Mr Mallard accused Westpac - the Government's banker - of not declaring a conflict of interest as it had a graduates package that included buying out up to $10,000 of a graduate's student loan at a discounted interest rate to capture mortgage business.

"As a result of Labour's new interest-free policy, Westpac will lose millions of dollars of loans business and the follow-on business that they are really chasing.

"It is disappointing that this international company did not declare its conflict of interest."

Prime Minister Helen Clark backed Mr Mallard, telling yesterday's post Cabinet press conference the bank's costings were "lurid" and based on "quite wrong assumptions".

Westpac should have made a disclosure of interest about its graduate package, she said, adding that what devalued the bank's analysis were false assumptions made about eligibility for loans and the extent to which people could borrow.

Mr O'Donovan declined to comment. Westpac issued a statement saying it was disappointed with Mr Mallard's comments and it maintained a policy of editorial independence for its economists to preserve the integrity of their analysis. "We can assure you the commentary is independent of any other bank interest."

The bank said its economists provided analysis for customers in the financial markets covering issues that were likely to have an economic or financial impact, including proposed fiscal policy.

"In the case of the proposed student loans policy, the cost analysis was positioned to calculate the extreme worst-case fiscal costs."

National finance spokesman John Key said Mr Mallard was trying to intimidate other independent institutions and commentators into not commenting on the policy.

He said Labour's reaction showed "the truth hurts".

Asked if the Government was considering dumping Westpac as its banker because of the analysis, Mr Mallard replied through a spokeswoman: "No, we are not going to be vindictive because of one economist's lack of judgment."

Economists at others banks have agreed with Mr O'Donovan that if there was no cost for borrowing, the takeup of loans was likely to rise.

A check of the websites of the other banks showed all offered similar graduate packages as Westpac. No Government department, including the Treasury, has done any work on Labour's plan as it is party policy.

Westpac's analysis

* If students borrowed to their maximum capability, student debt would blow out by an extra $10.9 billion over 10 years.

* The annual cost could be as high as $1.1 billion (Labour costed its policy at $300 million a year).

* Splitting the difference between the extremes gives an annual cost of more than $700 million.