Saturday, December 03, 2005

Editorial: Loan move unfair for early payers

Why, in all fairness, is the Government closing a "loophole" in the student loan scheme that lets some students who have already made repayments take advantage of the interest-free offer?

Labour's election sweetener to students was inevitably going to be unfair to those who have already paid back their loans with interest.

When the Government was alerted last week to a clause in the legislation that allows people to reclaim voluntary repayments within six months, Tertiary Education Minister Michael Cullen could have welcomed those people to the fold of Labour's beneficence.

Instead he has decided to legislate retrospectively, preventing them from renewing their loans on the interest-free basis that will apply from April 1. These are people who had voluntarily repaid all or part of their debt before they had to. There will be no reason for anyone to do that after April 1 when loans will cease to accumulate interest.

Indeed, it would be astonishing if anybody has made a voluntary repayment since Labour announced the interest-free policy early in the election campaign as a desperate response to the National Party's popular tax-cutting intentions.

It was the National Party that drew Dr Cullen's attention to the "loophole" last week with a certain glee. It had found a former student, Thomas Banfield, now a Wellington stockbroker, who had used the refund provision to recover his voluntary repayment from Inland Revenue and put the money into an interest-bearing account.

But National, too, has taken the case the wrong way. The party is congratulating itself for identifying a slip-up in the Government's policy. "This proves beyond any doubt that Labour's no-interest loans scheme is rushed and reckless, thrown together in desperation before the election," says finance spokesman John Key.

But that is not the worst of it. The offensive feature of the no-interest policy is that it is unfair to many thousands of people who have been paying interest on student loans and now find interest to be waived for no reason that will stand scrutiny.

A great deal of claptrap is heard about student debt. Figures released by the Statistics Department this week show that in the six years to March last year borrowers had an average balance of $13,000. Half of them owed less than $8570.

Sums such as those are manageable for a person earning a regular income, and nobody makes compulsory repayments of a student loan until he or she is earning a specified minimum income, at present $16,588 a year. Contrary to what is often claimed, women are paying back their loans at about the same rate as men, according to the figures.

Of those who have taken out the loans since 1997, about 14 per cent have paid them back in full - with interest. They have a right to feel aggrieved when they hear the Government cancelling interest from the end of this tax year for no better reason than it felt a need to shore up the votes of students, the parents of students and many former students who still had outstanding debt.

The losers under this policy will be those who cleared their debt as soon as they could. The winners will be those we constantly hear have skipped the country or otherwise put off repaying their debt to the taxpayer for as long as possible.

The Treasury estimates that early repayers will fall to a fifth of their present number when interest is abolished. And the number of additional loans taken out is anyone's guess. Who would not take free money when it is offered? Quite a number, the Government consoles itself.

But the Banfield strategy caught it by surprise. It takes a dim view of "gaming" with taxpayers' money but it had better get used to it. The terms it is offering make borrowing the maximum, and repaying the minimum, the only intelligent response.

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