Poll Dancer by Keith Ng

Matters of Interest

If David Farrar's blog is anything to go by, it looks like National has discovered from the failure of their own policy the trick to torpedoing Labour's - throw screeds of meaningless numbers at the problem and bury any semblance of sense. While it might serve National's purpose to obfuscate what "no interest" means in dollar terms, it misses the point: The interest-free policy's strength is not financial, but psychological.

Have you ever seen a student loan statement? On my $50,000 loan, each interest line is around $300. Per month. That's more than a quarter of my income (no, Salient does not pay well).

I *know* that I'll get some kind of interest write-off, but it doesn't help. For the whole year, all I can do is stare at the spinning Loan-o-Meter, worrying about how much I'm earning, what kind of write-off I'm eligible for, what I actually have to do to get it... then I contact IRD, spend hours on hold, get an earful of arcane Bureaubabble, fill out forms, and at the end of it, nothing. No cheque in the mail, no flashing lights. The statement comes again eventually. It might show a slight dip in the balance. It might not, in which case I have to stick my head up the tax wazoo again.

A lot of it is poor communication and IRD being IRD. A lot of it is the sheer terror of seeing a wall of numbers signifying owed money with your name on it. Either way, it sucks.

The biggest problem with student debt has always been the *feeling* that paying off the loan was a Sisyphean task. And as with Sisyphus, it's not the boulder that's the problem - it's the bloody hill! Get rid of the hill, and pushing the same boulder will seem like a much more straightforward (and less epically torturous) task.

And it is for that reason, dear National partisans, that nobody gives a toss about how much the difference is between this policy and a top-rate tax cut of 6% over 45 years (see endnote). Sure, students & co. are being bribed, but it's not about the money.

If it was, then National's $70m bribe should have had a quarter of the effect. The analysis of the Herald poll, sampled mostly before Labour's no-interest announcement, showed that National's own complicated bureaucratic tangle of a tax rebate actually *cost* them a whooping 12 points among students! (And to a lesser extent, their parents.) It proves that throwing money doesn't necessarily help; throwing money in a way that necessitate explanation by way of an IRD Bureaubabble sonnet *certainly* doesn't help. I'm sure National would have seen this as a major defeat. If only they didn't get nuked to oblivion afterwards.


An interest-free student loan might look like debt on paper, but it doesn't work like debt, and most importantly, it doesn't feel like debt.

Labour should consider that this works against them, too, in that this is bound to affect borrowing behaviour. They argue that when they introduced partial interest write-offs, there was only a modest jump in the number of borrowers. Well, it didn't give them a gigantic boost in the polls, either! The partial interest write-off scheme was another complicated bureaucratic tangle that didn't have as much of a political impact as it should have because it wasn't well understood. *That's* why it didn't affect borrowing behaviour much.

By the same rationale, everyone understands "no interest". The political impact reflects the attitude change, which should be a good indicator of change in borrowing behavior.

But even without changes to borrower behaviour, the cost of Labour's policy will *at least double* within a decade, simply because student debt was already projected to double. This was a projection made before Labour's announcement and is a plain, simple, apolitical Ministry of Social Development/IRD projection that is uncontested and uncontroversial.

Contrary to the oh-my-god-the-Debt-Monster-is-out-of-control scaremongering of the Greens and NZ University Students' Association, the growth in the total debt is simply because more people are entering the tertiary system and thus more people are borrowing. And because it takes graduates a decade to pay off debt that they accrued in 2 or 3 years, you need at least three or four times as many graduates working and paying off their loans to offset the number of new students borrowing. This is the "breakeven" point, after which the total debt would stabilise.

But here's the interesting part - the original projection for the breakeven point was in 2015, with total debt at $13b. Even if we play along with Labour's fantasy that making loans painless will not encourage more people to borrow, there's still the matter of voluntary repayments, which Mallard has been conspicuously quiet about.

How would this projection look if people stopped voluntarily forking out real money to repay an interest-free debt? For all the combined might and wisdom of IRD and MSD, they say "it is not possible to calculate the amount of voluntary repayments made in a year". However, we know that around 47% of repayments are made directly by borrowers. Some of this is from self-employed or overseas graduates, but one would expect a lot, if not most, of it would be from voluntary repayments. Given that this represents nearly half of all repayments, that's er... a lot. Without behaviour modelling, I can't give an educated guess on how much this will change, but put it this way - total repayments *can* go down by as much as 30-40%, and the only reason it might not is that people are not rational about it.

Stuff the borrowing - this alone will move the breakeven point back massively, and the point at which the loan stabilises will be much higher than $13b.

But put borrowing changes back into the equation. Around 20-40% of students eligible for a loan don't get one. Again, all we know is that total borrowers *can* go up as much as 20-40%.

[UPDATE: I've lowered the rough estimate from 40-50% after a statement from Mallard's office saying that the Westpac numbers (which, like mine, used the total eligible students vs total borrowers data) doesn't take into account the part-time students, who are much less likely to borrow. Seems reasonable.

They also burn Westpac, big-time, for sticking their necks out into the poltiical arena when they have a financial interest in it (banks + loans = duh!). "Inflammatory, self-motivated garbage like the analysis from Westpac is totally unacceptable." Burn!]

The two don't just combine - they compound. More borrowers who repay less on their loan will mean a multiplied increase on total student debt.

And Labour's $300m costing excludes the write-offs that are already part of the system, too, which stands at $208m in 2003/04 (I'd overlooked this before, and this explains why the costing seemed so low). If more borrowers come into the system and pay it off at a slower rate, not only will the $300m increase, but also the existing interest write-offs.

I won't bore you with more factors, lest I be accused of trying to obfuscate the issue on National's behest. But, all the factors are big, and they all point to one direction: Up.

That doesn't mean I think the policy is bad. As economically irrational as a non-inflation-adjusted loan is, it can also be considered as an ingenious equaliser. Those who take the longest to pay off their loan (who can be considered to be most disadvantaged or burdened by the loan system) will receive the most benefit out of this. Back to the Sisyphus analogy, it's as if the boulder is being pushed down a very gentle slope.

That, in itself, is a piece of mad, loopy genius. But just because it's good, it doesn't mean it's good at any price. $300m sounds perfectly reasonable and affordable now, but what about 10 years down the track, when the total student debt is two, three or five times its current size?

As much as I love Labour's bribe, I have to join the chorus asking them to go back and give us a real costing, and what it's going to look like a decade down the line - since we're paying for it and all.


[Funny aside: One of my reporters at Salient, Matt Jones, covered Mallard's visit to Vic at the beginning of this year.

Mallard suggested that that major changes in student loan policies were only likely to happen "if the country struck oil, and we were guaranteed economic security for the next 50 years". In the meantime: "I want to keep improving things but it will be at the margins rather than a massive change."

(The article was part of a "Topless Politicians Talk About Your Lives" series of reports, which is why it looks a bit funny on its own.)]


[Economics wonk aside: All the working-life taxes-vs-interest-free-loan calculations floating around need to be approached with extreme caution. If they include inflation, or calculate salary growth without *cancelling* inflation, then they're not calculating in present-day value, and will therefore be horrendously skewed and completely wrong *coughdavidfarrarcough*. After that, there's the principle of the Time Value of Money to consider - that money is worth more sooner rather than later, completely separate from inflation. And finally, there's the consideration of marginal utility of money - $1,000 is worth a lot more to me when I'm a poor graduate on a crappy wage than when I'm a gazillionaire on my private fortress island with a giant Death-Ray holding the world to ransom. Grossly simplified - money is worth significantly more when you're younger and poorer.]


[A slightly belated congratulations to, and snipe at, NZUSA: I was originally going to do a post on how economically irrational bits can't be grafted onto a loan system. Who knew that all it took was a quick snip to make the Debt Monster harmless? And who knew that they would actually do it? I stand corrected on both counts. However, I maintain that the focus on total student debt is intellectually dishonest. The de-horned Debt Moomoo will grow massively as a result of something that's really good for students. Will they now dare voice their objections against debt? What can they say? "Government, stop making students take the money that we asked you to give away for free?"]


[Apologetic aside: Alright, I should really have split this into two pieces rather than have four "asides", now, shouldn't I?]