Student Debt Scheme Bad for Young People

Gareth MorganPolitics

Gareth Morgan, Director of Gareth Morgan Investments

The idea of removing tertiary education as a public good doesn't seem so bad. The Todd Taskforce recommendation that students should pay 75% of their fees directly by the year 2000 is of course part of this agenda, as is the associated student loan scheme which enables consumers of tertiary product to fund their purchase. Driving the move to part privatisation has been

(i) a recognition that tertiary education providers require to be accountable for the product they deliver and
(ii) recognition that consumers of the tertiary product must also be accountable for the decisions they make in purchasing resources. Only then can there be any assurance that the sector's resources are deployed to maximum economic efficiency (minimal waste).

Of late, the student loan scheme has attracted criticisms primarily because of the extent of the debt mountain that is being built. Fear of the magnitude of the obligations in themselves is largely irrelevant and comparisons of its projected size with the national debt are pretty meaningless; as irrelevant as comparisons of the amount outstanding on mortgages with the national debt. Both student debt and mortgage debt should be obligations built up directly by the users of the product – that is they are the result of conventional commercial decisions. The public debt however is assumed on our behalf by politicians as they implement policies which however imperfectly, they are elected to do. That is why matters like the underwear of Aotearoa Television require such public scrutiny.

But the question of whether the part privatisation of tertiary education funding is best addressed by the current student allowance scheme is one which requires further scrutiny. The assumption that those taking on the debt are making conventional commercial decisions is questionable. There are other alternatives which may well minimise the dead weight loss which occurs by students wasting resources.

The transition young students are being required to make from the fully-funded world of secondary school to the partly-funded tertiary sector is one many find involves incurring significant financial penalty. Those penalised are the ones who assume the debt, sometimes to the maximum limits allowed, but fail to use those monies effectively for the purposes for which they are intended. Fresh from a world of pocket money and maybe some spending cash from after-school jobs, these freshmen are plunged into one where money is no longer scarce but of course it is "tagged" in the form of a obligation to pay in future.

The issue is whether this transition is too much of a shock for many young students to handle smoothly, whether they "blow" the funds on consumables – clothes, booze, good times – in the naïve belief that payback day is too far away to be an issue. Then one morning the rude awakening occurs. The debt amassed is significant, it attracts substantial cost, and the asset backing (the degree or part degree) may be somewhat inadequate a means of generating the income required to retire the debt.

Now, never one to advocate sheltering people from the realities of market discipline, I can however see that the current student debt scheme is capable of impairing the long term financial base and self-confidence of young, market-ignorant people. The chasm between the extremes of being spoon-fed one's education and incurring debt to purchase it, is substantial.

At issue here is the tenure of the student debt scheme as currently structured. Already the politics of the scheme have dictated a change to its structure with NZ First securing agreement from National to remove targeting (via parental income) of the living allowance and step back to universal entitlement. Clearly if over time, large numbers of students are found not to be making headway reducing their education debt burden over their adult life, then something will have been found to be wrong. Surrendering to universal entitlement at that time will have been a defeat for the whole targeting rationale of the student loan concept. Better to refine the scheme before that political decree comes down.

One way to increase the chances of young students taking on tertiary education, fully cognisant of the financial obligations it entails, is to limit the access to the student debt scheme for those without any workforce experience. This would encourage those fresh out of high school uniform to get some work experience and more importantly, some experience of managing their own financial affairs, before they're asked to enter long term debt obligations. Only then can they be regarded as being capable of making "conventional commercial decisions".

The objective with direct funding of tertiary education has to be to raise the economic efficiency of the resources it employs. Facilitating ignorant recourse to financial resources is no way to get there. It's inviting arbitrary and probably regressive political intervention down the track.

Student Debt Scheme Bad for Young People was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.