Students' associations have rubbished suggestions the government should start charging interest on new student loans.
Photo: 123RF
A report by the New Zealand Initiative think tank said the government could afford more help for poor students if it reintroduced interest.
It said the loan scheme was costing taxpayers $600 million a year in interest write-offs and had not increased participation by students from disadvantaged families.
The think tank's head of research, Eric Crampton, said the rising cost of the no-interest policy had prompted limits that meant students could not even borrow enough to cover their living costs.
He said the government could afford to change that if it charged interest and it could also afford to do more for poor students and children in low-decile secondary schools.
"We suggest that the money the government is currently spending be instead devoted to means-tested student allowances for those who are in real financial need, as well as programmes targetting secondary schools that have had less of a tradition of sending kids on to tertiary study," he said.
'People started borrowing more and repayments went down' - NZ Initiative researcher Eric Crampton
Dr Crampton said an interest rate of 7 percent would add about one year to the repayment time of the average Bachelor's degree graduate with a $16,000 loan.
He said zero interest had failed and charging interest on the loans was a "no brainer".
"If the scheme were intended to improve tertiary accessibility for low income communities or non-traditional tertiary communities, it's failed magnificently in achieving that end, and it's failed to the tune of about $600m per year in interest write-offs."
Union of Students Associations president Linsey Higgins said charging interest was a bad idea.
"It's stupid. There's this really negative viewpoint that it has to be either/or. That you have to have interest on your loan or else there won't be increased student support, and I think it's just a really poor argument," Ms Higgins said.
She said abolishing interest had dramatically reduced women's loan repayment times and bringing it back would hurt them in particular.
Auckland University Students Association president Will Matthews said loans were already a major disincentive to study and charging interest would make that worse for people from poor families.
"Having to take on a loan of tens of thousands of dollars is an incredibly intimidating concept for a lot of people. Adding interest to that is just going to make the repayment of that loan more punitive than it already is."
Tertiary Education Minister Steven Joyce said the settings for loans and allowances were about right and the government was not planning to make any changes.
He said there were more tertiary graduates than ever before and it was hard to argue that particular groups were missing out.
The New Zealand Initiative report said thanks to the no-interest policy, students paid about 18 percent of the cost of their education.
It said that benefited rich and middle income families that could afford to pay more for their children's tertiary education.
The report said tertiary institutions could be required to cover some of the cost of defaulted loans in order to encourage them to ensure their courses lead to employment.
It said in June 2015, 730,000 people owed money to the loan scheme and by March this year, the total debt owed to the scheme was $15 billion.
The think tank is not the first organisation to query the value of the no interest policy.
Earlier this month the Child Poverty Action Group called for more help for students, especially those with children.
It said many were living in hardship because the maximum amounts available to them through loans or allowances for living costs were $100 a week short of their actual expenses.
The group said more students should be eligible for allowances, and the amounts paid to them should be higher.
It said the zero interest policy helped governments and institutions push more of the cost of study onto students, because the public assumed those costs were easily dealt with under the no-interest scheme.
The group did not call directly for the reintroduction of interest. But it said it might be time to evaluate if it would be worth trading the zero interest policy for more financial assistance for students while they were studying.