Student loans

Government efforts to trim the costs of student loans should be commended.

The loans scheme is extremely generous, thanks to interest-free terms for those living in New Zealand, and extremely costly at $1.5 billion a year and rising.

More than 560,000 New Zealanders now have student loans, totalling about $10 billion, with more students borrowing more money each year.

Total drawings have increased 20% in the past 12 months, and every year the burden on the taxpayer increases.

Isolated, small and debt-burdened New Zealand simply cannot afford to carry on this way and needs to spend every dollar prudently and wisely.

While student loans have helped make tertiary education more widely available, they are open - like so much other Government funding in so many spheres - to waste and abuse.

Student loans were first introduced by National in 1992.

They became interest exempt while studying under Labour in 2001, and then interest exempt for those resident in New Zealand from 2006 after what was widely seen as a blatant election bribe.

Now, there are good reasons for reintroducing interest charges, perhaps at the estimated inflation rate plus a tiny margin.

That would encourage borrowers to think twice about student-loan debt while also avoiding the previous perils of the compounding effects of higher-than-inflation interest rates.

Many students faced spiralling debt before, and even as, they began to pay off their loans.

Under lower interest rates, the Government would still face a high-priced gap between the cost of its borrowing and its lending.

But, at least, the taxpayer impost would be hundreds of millions of dollars lower.

National is, however, at least for the foreseeable future, committed to interest-free loans and, politically, dare not go back on that.

Unfortunately, some students with easy access to "free" money will borrow more than they strictly need, fostering spendthrift ways rather than thrifty habits.

Others, with discipline and foresight, borrow maximums and invest as much as possible.

A combination of inflation eroding the value of their debts year-by-year, as well as their investment income, means they are making money at the taxpayer's expense.

Of course, as well, there are others who are forced to borrow large amounts to complete expensive courses and for basic living costs.

Where, then, does all this leave Tertiary Education Minister Stephen Joyce? The best he can do realistically is trim costs here and there, try to minimise potential abuse and send signals that discourage debt and encourage repayments.

In this light, extending the yearly $50 administration fee already paid by students to those who have finished their studies is fair, reasonable and pragmatic. Although the estimated $15 million raised in the first year is small change compared with the scheme's cost, every bit helps.

The administrative fee is also a small prod towards paying back debt faster than required, especially in conjunction with the 10% bonus discount National instituted last year.

Restricting loans to residents who have lived in New Zealand for at least two years will prevent a ploy used by some new immigrants to gain cheap education before returning home or shifting to Australia.

For others, this has provided an opportunity to seize Government tertiary support for the two-year period they are ineligible to welfare benefits or student allowances.

And while many universities and polytechnics already reject failing students, Mr Joyce's proposal that those who fail, say, half their courses over two years lose access to loans might prevent a few from institution hopping.

It is also hard to argue against undergraduate loan access being limited to six or seven years.

The cost of student loans has risen to more than 40% of Government tertiary funding, a proportion out of kilter with direct funding.

The current and proposed changes fail to alter radically that proportion.

Nevertheless, a prudent Government must it do its best to contain student-loan costs.

It must send signals to students that it is in their interest to borrow as little as possible and to repay loans as quickly as they can.