Roger is right, this is an issue that will not go away. it is interesting that there is a disturbing similarity between subsidising tertiary education and superannuation: both involve vast amounts of taxpayers money and a growing number of voters with a direct interest in at least maintaing the status quo. Tricky.

The options are not great: ignore them and hope that a crisis won’t force painful adjustments on your watch, continue to use both as political footballs, do something and risk political oblivion or seek some sustainable common ground.

the last one is the most sensible but ….

Jim, I agree, it’s difficult!

Paul, I think the point is that we should decide what proportion students and the government should pay upfront and not distort that through mechanisms such as interest-free loans (of which 47% are written off on day 1). It would be more efficient right now to halve fees and have loans at market rates, while using the excess funds to increase funding rates – it would be much more transparent. (I also think that would set fees too low, of course.)

If we’re discussing rates of return, we’ll need to get our calculators out, and that might be a bit much work for a comment!

I also think some data on the impact on IRR is essential if for no other reason to be sure it’s maintained by any change in arrangements.

I do see it as a distortion. If you borrow $4,000 for fees, but the government automatically writes off 47%, your actual real fees paid are $2,120. You might be put off by the sticker price, while others in the community might think $2,120 is unreasonably low. Interest-free loans distort the apparent cost of fees.

It’s been a while… I don’t follow the logic of this? How does the scheme automatically write of 47 per cent of the debt on day one?

I think part of the issue is that I’m focusing on loans for fees (which are about 2/3 of loans) and you’re focusing more on loans for living costs. And the overall issue is a bit complicated to discuss in parts.

I wondered if that wasn’t where we were talking past each other a little.

I recall Norman Kingsbury saying the that original scheme was never intended to accommodate fees such as they’d been allowed to increase and I wondered what the debt composition was now.

My argument is that, and assuming NZ’s similar to Australia, when calculating the salary and wage benefits (IRR) on investments in education, the majority of the “cost” is foregone income not the “sticker price”.

Under the NZ scheme, some of the borrowing (you say a third) replaces income otherwise forgone – and this I figured was where Roger thought there was highest deadweight cost – thus reducing the cost and increasing the IRR.

If access to this funding is reduced, as per Roger’s suggestion, even assuming lower fees (as per your suggestion), the IRR mightn’t be strong enough (since individuals capture only the discounted rate of their fee and potentailly lose more in the limitation on borrowing for allowances).

This is why I think the calculations are important to Roger’s argument unless it’s of no particular concern that participation may in fact be reduced.

Incidentally, in the years since HECS was introduced in Australia in 1989, the higher education participation rate has increased 84 per cent. However, compared with the dramatic increase in the participation of students from middle and high-socioeconomic backgrounds, the participation of students from low-socioeconomic backgrounds has in fact been stagnant.

The NPV of the debt?

Ok, but that’s not the same as a discounted price incurred by students. By comparison a discounted price is available under HECS where the fee cost is reduced when students pay it up front rather than borrowing it.

I think what you are describing is the crown value of the debt/asset in aggregate. However, each individual student still initially incurs the “sticker” price of the fee (even if it’s value is depreciated in real terms over the lifetime of the debt).

So I’m still not so sure I agree that it’s “distortion”. I think the interest offset is a design feature even if it’s not one you agree with.

No their not dumb, indeed.

We do disagree to an extent but really only insofar as the 47 percent’s a furphy…

I’m not yet sure what Roger’s saying however; does he propose to reallocate the savings from students to the costs of delivery? Assuming he does, I do think the IRR calculation is critical so too is some forecasting of equity effects as per my post about Australian participation.

I thought Roger was just saying that if you try to control both prices and quantity (as with the Soviet Union and Muldoon) you end up in a very big mess. This of course is exactly what’s happening with respect to student fees (prices) and numbers of students (quantity). It would probably be best, therefore if a consensus was sought on the solution given the highly political nature of the issue.

I agreed with his conclusion but suggested that was trickey given the large amounts of money involved on the one hand and the very large numbers of people (voters) involved on the other.

The pervasive and pernicious long-term effects of the dynamics of the funding system is on the mindsets, both of students, and education administrators, and Roger is quite right when he points to ‘taxpayer subsidisation of the loans scheme. This encourages over-borrowing and slow or non-repayment of loans.’ I can verify this from observation of my children’s and their friends attitudes to their debt, which should be of concern to us all. What the education system as currently configured is teaching a significant proportion of our educated elite are bad attitudes to debt.
Likewise I am perturbed by the signals that various educational leaders are sending when they speak of ‘rubber bands only stretching so far’ in relation to government funding. This mindset, that they can only produce outputs to the extent that they are directly funded for each unit of delivery displays a woeful lack of ( denial? of) any entrepreneurial consciousness that economies of scale exist, and that it is the role of leaders to seek innovations that can provide improvements in efficiency and effectiveness. These are the business values that are being transmitted to our youth.

Grant Hodgson’s points about debt (to which I concur) go to a more general point which is that the neo-classical liberal assumptions of the Student Loan Scheme is predicated on the basis that tertiary education has a positive economic rate of return. Invest now to reap the private benefits (and the country the public benefits) later. Now, Mr Kerr and I might disagree about the percentage distribution, but the true costs/benefits (to both the individual and the Crown) are shielded at the very point at which this decision is made: student enrolment. In part, this is (or at least was) a good thing (income-contingent loans linked to the introduction of fees was to encourage access). There is however, currently very poor signalling (through price, information from Career Services or anything else) about the economic rates of return for qualifications which has resulted in inefficient and poor resource allocation.
Students take on more personal debt (that collectively isn’t going down) and the Crown eats $849.5m per annum (December 09 Treasury estimate).
But one party does benefit from all of this slack decision-making. Have a guess who?
That’s right: Tertiary Education Organisations (TEOs) for whom the long-term costs of uneconomic student decisions are of little or no import. Apart from reputational risk, they are completely shielded from the economic consequences. They do, however, get the immediate benefit of government subsidies and student fees.
Also (if this is possible) it is even worse than what Mr Kerr thinks. The economic return rates for degree qualifications (according to the OECD) are the worst in the western world. So over time the ability of students to pay back debt is lessened. And guess what are contributing factors for the MoE recalculating the discount rate for student loans to nearly 48%? Higher levels of unemployment and worsening repayment rates. And this discount rate has steadily worsened. At the outset, from memory, it was more like 34%, then 41% … I might disagree with Mr Kerr about solutions, but I sure heck agree with him and Mr Doyle that this won’t go away.

Mr Williams
By my calculations all skilled New Zealanders with tertiary education qualifications move to Australia (the status quo) the repayment rates (and thus discount rate) improve. Those loans would also attract interest, again benefiting H.M. Treasury. I can’t think of any negative externalities … no wait

David, the Soviet analogy wasn’t mine, it was Roger Kerr’s. In addition he wasn’t takling about regulation, he was talking about ‘fixing’. There is a difference.

The reality is that this is not something that can be resolved by some arcane debate, however interesting. This is all about raw politics. it was a sorry day when this issue was used as a political card. Letting it loose was easy, getting it back into the box it needs to be in is going to be a nightmare.

Fair point, Jim. I hadn’t been reading the thread in sequence, and the Soviet and Muldoon references hadn’t leapt out at me in Roger Kerr’s initial post (perhaps because he makes such allusions so readily).

The regulation v fixing distinction is a valid one, too, although if you define capping as fixing, then capping both volume and price are by no means uncommon internationally.

Paul, you’re assuming that students are all that price sensitive. I don’t think they are, or rather we are some way away from a major decline in participation based upon price. The major discounting introduced after the 2005 election did not have a marked increase on participation, hence I’d suggest that a reversal of interest free loans is unlikely to lead to a marked decrease in participation – demand is on a plateau. And no, I’m not going to run thru all the stats on that – it’s just a hunch on a blog comment.

Well, that’s why I support student loans – because they shift costs in time and make it easier for low SES students to participate.

I remember when NZUSA railed against the loan scheme in the early days because poorer students would not take out loans, and then when they did take out loans, railed against the loan scheme for preying on poor people…

I dunno Paul. I think you’ve picked up one element of an op-ed piece in a newspaper and are hammering it a bit more than you need to. Roger hasn’t written a manifesto, a Cabinet paper or a book. I assume he was trying to stimulate debate (which he’s done), not write a comprehensive policy. It’s good there’s debate here, but I reckon you’ve made your point about the further issues to be dealt with