A proposal to reintroduce interest on student loans has been shot down by the Government before it reached final report stage.

The proposal is one of a raft of recommendations put forward in a draft report by the Productivity Commission, released this morning, which is heavily critical of the current model of tertiary education and how it's funded.

The 400-page draft report, New Models of Tertiary Education, suggests a radical shake-up of the sector, with some controversial ideas, which have already been knocked back across the political spectrum.

It proposes a shift from a Government and institution focus to a student-centred approach, allowing for more flexibility and innovation in the sector in a bid to keep up with fast-paced changes in the modern world.


The report levels a number of criticisms at the current New Zealand model, labelling it inflexible and "not well placed" to respond to uncertain future trends. Tertiary education was "more responsive to Government than students", had "considerable inertia", and lacks innovation, it said.

Charging interest

The funding model also comes in for criticism. The commission says the Government should charge interest on future loans at a rate that covers the cost of the Student Loan Scheme.

The Government currently writes off about $600 million of student debt every year, it said - or around 39 cents for each dollar lent.

However, this was ruled out by Tertiary Education Minister Steven Joyce last night, who said the Government "won't be putting interest back on student loans".

Both Labour and the Greens were against the proposal, with Green Party tertiary education spokesman Gareth Hughes branding it "ridiculous".

Alistair Shaw, executive director of the New Zealand Union of Student's Associations, said the proposal was unworkable, and would make saving for a first home or a family even more difficult for young people.

However, Act Party leader David Seymour said the proposal should be taken seriously.


Think-tank New Zealand Initiative was also in favour, saying: "Our research leaves no doubt that zero per cent loans have done nothing to promote tertiary education attainment, but they have come at large fiscal cost."

Among a number of recommendations to the sector, the Commission also proposes a radical idea - the introduction of a Student Education Account. It would see the $2.8 billion of Government money spent on tertiary tuition and training every year split evenly among every 16-year-old in the country - giving them around $45,000 each - to spend on courses of their choice.

The idea could "transform our education system" to one responsive to the needs of students, improve access to education, provide more options, and drive innovation, the report said.

However, the idea was roundly denounced by students, politicians and university leaders who called it unworkable, likening it to a free-market privatisation model.

Joyce - who commissioned the report, alongside Finance Minister Bill English - also ruled out the proposal, saying it was "unlikely" the Government would adopt it.

Universities New Zealand executive director Chris Whelan said similar models in other countries "often ended up becoming incredibly expensive", such as in the US.

However, Seymour said the idea was "revolutionary".

"For too long interest-free loans, fees freezes and Government interference, for example on university boards, have eroded students' choices of a quality education."

'Provocative' report supports free market model

The report hit on a number of relevant problems facing the sector, but did not get the solutions right, a number of parties told the Herald.

Whelan said the report was "deliberately provocative" and designed to get a conversation going, but acknowledged that it had picked up "a few of our concerns".

"We've also seen a system that's become increasingly inflexible, performance measures that are perhaps not really encouraging performance, and I think we welcome anything that simplifies or streamlines the system," he said.

However, he thought the report's recommendations pointed to a deregulated, free market approach, which was "risky".

"We already have a lot of this machinery in place, are we better to throw it all up in the air and try to rebuild it from the ground up, or are we best to try to keep what's working well and fix the bits that are not working so well?"

Labour's education spokesman, Chris Hipkins, said deregulation and privatisation was not the way to address inequality and lack of innovation in the system.

"The commission too closely associates the value of learning with monetary measures, and in doing so overlooks the wider public good," he said.

Hughes said the report was a "mixed bag", with some good suggestions around the need for more autonomy for universities, but "bad suggestions" such as deregulation and self-accrediting.

The report comes after at least six of the country's eight universities revealed they would be increasing tuition fees by 2 per cent for the 2017 year, and Labour claimed the amount owed in student loan default payments by overseas borrowers now exceeds $1 billion.

All student loan borrowers resident in New Zealand have been exempt from paying interest on their loans since 2006.

The Productivity Commission is an independent Crown entity, tasked with carrying out in-depth reports on topics selected by the Government.

Submissions for feedback on the commission's report close on November 21. A final report is expected by the end of February.

Rosalie Pedersen, 22, says having to pay interest on a student loan would have changed her decision to go to university.
Rosalie Pedersen, 22, says having to pay interest on a student loan would have changed her decision to go to university.

'I wouldn't have gone to uni if I had to pay interest'

Saddled with $50,000 worth of student debt, Rosalie Pedersen, 22, from Auckland counts herself lucky - she has one of the smallest student debts among her circle of friends.

But faced with a university education that came with interest charged on her loan, she believes her future would have looked very different.

"I think if there had been interest when I was considering studying, I think it would have definitely impacted my decision to go to uni," the graduate teacher at Pakuranga College said.

"It's already punishment enough, having this massive debt. I was lucky because I had student allowances for three years, so it was in my fourth year that I had to take out extra costs."

Many people would not be able to afford to go to university if they had to pay interest on their loan, she said.

She recently calculated it would take her until she turned 31 to pay off her student debt, she said.

"If you're going to start looking at buying a house or moving overseas and stuff, it impacts all these decisions. Pretty much I can't do anything serious financially until I pay off this debt."

Some of Pedersen's friends, who are also teachers, have moved out of Auckland to be able to afford to pay their repayments, she said.

Pedersen, who graduated last year, said the repayments already eat up $250 of her pay cheque every week, "which would be helpful when it comes to rent and food".


• It is "not well placed to respond to uncertain future trends and the demands of more diverse learners".

• It is "not good at trying and adopting new ways of delivering education", or the ability to react flexibly to changing needs.

• It is not student-centred, and does not reach out to those groups who have traditionally missed out on tertiary education.

• It is supply driven, with providers "more responsive to Government than to students".

• There is "considerable inertia" in the sector, but it is a fault of the system rather than providers.

• The "system stymies or prohibits innovations, punishes risk-takers, and reinforces existing practices".

• Government regulation of the sector is too rigid, and tends to "bestow market power, grant local monopolies, and require cartel structures".

• The funding and regulation settings have led to a "relatively homogenous range of providers and offerings".

• The current funding model gives "providers an incentive to cherry-pick the best students"; and the Government incentive to limit how many people go into tertiary education.


• Bring back interest on student loans, at a rate that covers the cost of the Student Loan Scheme;

• Scrap University Entrance, because it does not "reliably signify preparedness for higher-level study";

• Ditch Performance-Linked Funding, and instead adopt a system where poor quality means providers lose their licence;

• Give tertiary institutions more autonomy and responsibility - particularly in terms of their money and debt. And make them pay local body rates;

• Significant reform of the funding model, to create a more flexible and responsive system, and one that is more student-centred;

• Allow institutions to self-accredit;

• Relax legislative requirements to bundle teaching and research;

• Consider a Student Education Account, which would give each teenager $45,000 to spend on further education.