Student Loans: The good the bad and the Ugly

National announced yesterday that it is going to keep interest free student loans. As someone with a student loan I love the scheme and the free money it gives me. When I put my economist hat I think that it is terrible policy since it provides terrible incentives to for students to borrow. I personally didn’t have a student loan until they became interest free at which point I borrowed as much money as I possibly could.

Not only are National not avoiding electoral suicide by alienating students, they have also said they will provide a 10% bonus on early payments of more than $500 to help combat the fact that students have no incentive to pay back their loan while they are still in New Zealand (0% nominal rate=negative real rate due to inflation, i.e. your debt shrinks over time, isn’t that cool?).

Now this sounds nice on the face of it, but David Farrar has put on economist hat and worked out that while this improved incentives for repayment, it exasperates the perverse incentives regarding borrowing. DPF notes that an optimal strategy for a student would be to borrow as much as you could and then pay it off at the end of the year giving you a nice 10% return for your effort. However the problem is actually worse than that. Read more

Interest free student loans and compulsory schooling: Is there a better way?

Recently the two main political parties in New Zealand have announced schemes that aim to, in some ways, help up-skill 16 and 17 years olds. At the same time, National has come out stating that it will leave student loans interest free, but provide a reward for repayments (leading to much debate).

Although these may seem like separate issues, when I look at the economy the issues of youth employment/skills, education, and unemployment/employment are intensely linked. As a result any policy that the parties take up on one of these issues must take into account how it influences these other sections of society.

In this post my aim is to put forward my current belief of what an ideal policy would look like for these three sectors – that’s right, I said policy not policies. Personally I think that all three are so closely linked that we have to use the same or very similar instruments in order to provide the right sort of outcome. Now, this analysis will be unashamedly normative, I’m going to be packing it with value judgments. I will try to make these judgments clear so you can either i) attack me on them, ii) work out where my objective logic may have gone wrong, separate of the value judgments.

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Education for the Dole : Why does it sound dirty?

Yesterday John Key delivered the National Party’s new plan for youth. I leave commenting on the many social issues related to the plan to others with who are better equipped to discuss whether his ideas will work. The thing that bothered me was when I was watching the news last night and they mentioned that opponents are labeling John Key’s plan for 16 and 17 year olds to not be able to receive a benefit if they are not working or attending a course that the government will pay for.

I don’t see what’s wrong with this. I’m not old enough to know what went wrong with the working for the dole scheme and why it has such dirty connotations in New Zealand, but on the face of it I don’t have problem with the idea. I have absolutely no problem with a welfare system, but it’s a safety net. It is there for people who can’t work for various reasons and people who are transitioning between jobs. Maybe it’s just my terrible upbringing where my parents told me that if you want something in life you have to work for it combined with that gem of a saying in economics that there is no free lunch, but I have no issue with people taking courses to receive their benefit. My sister was once dating a guy who was 18 and on the dole. He was making absolutely no effort to do anything with his life, he just played American football and thought it was perfectly normal for him to cruise along doing nothing while the government supported him. I realize (and hope) that he doesn’t represent all young people on the dole and I don’t want to stigmatize the welfare system, I just don’t see what the problem is with requiring people who are able to, to give something back to society in return for the support they receive from it?

Again, I wasn’t around when New Zealand had a work for the dole scheme so maybe I’m missing something here, I just don’t understand why there is a stigma being attached to requiring young people who can, to contribute if they are going to receive welfare.

Apologies for the rant 🙂

Agnitio