Student Debt Projections

I’ve gone to some official stats to try and estimate how much student debt will blow out by, due to Labour’s policy pledge. These come from the 2004 annual report on the student loan scheme.

In 2003 156,250 students borrowed $987 million, an average of $6,300 each. Only 60% of eligible students borrowed, and as more part-time students are now eligible the projected rate was 55%.

Now as one would have to be clinically insane not to borrow interest free money, the borrowing rate could go up to 100%. Allowing for 10% clinical insanity, I’ll assume 90% borrowing rate which means an extra 99,500 people will borrow. Let’s say 100,000 more.

So each year 100,000 more borrowers at the average of $6,300 is an extra $630 million a year borrowed.

Now in 2003 there were also 428,000 students enrolled at tertiary level, so this is still quite conservative predicting only 255,000 borrowers.

Of the $2.3b repaid since the scheme began, $1.2b has been compulsory repayments and $1.1b voluntary. Last year $200 million was voluntarily repaid.

Finally we also have that the average amount borrowed was $6,300, and now there will be no incentive to borrow less than the maximum which looks to be for an average student $9,000 to cover fees, materials and allowance. But again I will be conservative and say only an extra $1,000 will be borrowed per student, so this increase borrowing each year by $250 million.

Therefore we have a conservative scenario of an extra $880 million a year borrowed and $200 million a year of less payments. This is extra student debt of $1.1b a year. Against this you have $300 million a year of less interest so I think a conservative prediction is an extra $800 million a year of student debt.

So over a 15 year period, the total amount of student debt is likely to increase by $12 billion. And this excludes any upsurge in enrolments in wananga type courses due to the interest free money on offer to enrol.

Now this is just my unofficial calculations but the official ones when released after the election (would be a good idea for someone to try and PQ or OIA them beforehand) I am sure will also show a massive increase. When Labour did interest free loans while studying I predicted it would increase long-term debt projections, and indeed the official projections almost doubled. This will have at least as large an effect.

So people should be very aware of the huge distortions in incentives this policy will have. The incentive is to borrow the maximum and to never ever repay more than the minimum.

People should also read Kiwi Pundit on how Labour’s calculator is somewhat misleading.