Student loan costs set to rocket

The economic recession will be a "double whammy" for the Government's massive student loan scheme, a University of Otago academic says.

The number of loans would rise as people unable to find work chose to study instead, and loan repayments would slow as employment options for graduates shrank, Associate Prof Paul Hansen, of the department of economics, said.

"A reduction in repayments is inevitable as people lose jobs or hours . . . I would think the Government would be very, very nervous."

More New Zealanders have student loans than have mortgages.

The Ministry of Education's student loan report to the end of June last year showed 530,000 New Zealanders had loans, while the number of active mortgages recorded at the 2006 census was 478,000.

Student loans are repaid through the PAYE system at a flat rate of 10c in the dollar once people earn more than $19,084 a year.

A person on $30,000 a year repays $1091, or just under $21 a week.

People can also make voluntary repayments.

Graduates living overseas were expected to pay, too, although extracting the money from them was difficult and their repayments were lower and slower, the report said.

About a fifth of borrowers were behind in their payments.

Prof Hansen said he would not be surprised if the Government tightened the rules to ensure borrowers paid off their loans more quickly.

The Government regarded the loan scheme as a financial asset, on the basis of the value of the money anticipated from loan repayments.

However, if loans remained unpaid, both the Government and taxpayers who underwrote the scheme were in trouble, he said.

"If a bank had bad debtors and couldn't extract the money from them it would go under. But the New Zealand Government won't go under. If people don't pay back their student loans, the only way the Government can cover that is to tax us more."

Ministry of Education spokesman Roger Smyth said on Friday he did not disagree with Prof Hansen's comments.

The "difficult labour market" meant there would be more graduates without jobs or earning less, and loan repayments would decline.

A clearer picture on the rate of slowdown would emerge by about October, when information for the 2008-09 financial year was analysed.

But Mr Smyth, the manager of tertiary sector performance analysis, said New Zealanders had to take a long-time view of the student loan scheme.

"There might be lower repayments for a while, but these things are cyclical. When the labour market corrects itself, that will change," he said.

The system was continually being "tweaked" to make it easier for people, particularly those living overseas, to repay their loans.

In April this year, an incentive was introduced which reduced loan balances by 10% of the amount of voluntary repayments over $500 made in one year.

For example, a person paying an extra $600 off their loan over and above their Paye commitments would have their balance reduced by $60.

Both Prof Hansen and Mr Smyth said the student loan scheme had a social benefit to New Zealand as well as a cost, as it enabled people to undertake tertiary study who might not otherwise be able to do so.

Mr Smyth said research showed people with tertiary qualifications had more employment options, a greater earning capacity, and were generally happier.

allison.rudd@odt.co.nz