News // 22.01.2016 // Curated by Ed.

Student Loan Defaulters: Good Politics vs. Good Policy

The cartoon above was published today by the talented NZ Herald cartoonist Rod Emmerson following the news yesterday that a man had been arrested for failing to make repayments on his student loan after a period overseas.  Ngatokotoru Puna, who has been living in Rarotonga for the last 13 years or so, completed his studies with a loan of around $20,000.  With interest and penalties, this has ballooned to over $130,000.  Although the ability to arrest student loan defaulters at the border has been law for nearly two years, this is the first time it has been invoked and it has raised a number of questions with regards to fairness, proportionality and why people leave in the first place.

First of all, the vast majority of learners who take a loan to pursue higher education repay their debts.  Further, overseas-based borrowers repaid a hefty $184.7m in the 2014/15 financial year.  Clearly, there are plenty of people abroad who are working hard to repay their loans and make headway on the interest imposed.  More on that later.

Fairness

The question of fairness is: “Is it fair for almost everyone to pay for their education, while a few get it free?”.  The comments section of news articles is no place to look for wisdom, but even when you discount hysterical comparisons to theft and lynch-mob calls to throw them all in Mt Eden Prison, much is made of defaulting on the loan being unfair to those who make their repayments.  Of course it’s not fair.  Repaying a student loan is hard work and takes years of slogging away at it – and that’s without the interest.  So, understandably, those who do this feel aggrieved that there are those who don’t and then get away with it.

As for those who were loved and supported by the State through their studies without having to have a loan?  Not sure if they have anything to complain about fairness-wise.

Proportionality

The question of proportionality is trickier: “Is the threat of arrest the right ‘stick’ to be using to promote repayment from overseas?”.  Judging by the mood of the commentariat, yes.  The problem is that we all love a bit of righteous indignation, don’t we?  There is something enjoyable about feeling wronged and therefore right, getting outraged, witnessing retribution and delighting in the misery of the poor souls who ‘brought it on themselves’.  As a result of this resonance with the masses, arresting student loan defaulters is good politics.  But is it good policy?  Is it possible we might just be over-reacting?

Think of the person-hours and overheads that went into the effort to arrest this man.  Valuable resources (police and the courts in particular) that could have been directed to more important and urgent matters.  As a response to what was (originally) a $20,000 student debt.  What might a more cost-effective approach be?

Interest & Why People Leave

Charging interest to those borrowers based overseas is supposed to discourage people from leaving NZ after they graduate.  That clearly isn’t working at all.  People leave and stay abroad for all sorts of reasons – love, family, experience and job opportunities – interest on their student loan may be a consideration but not a major one next to those.  It is also supposed to encourage people to make repayments as not doing so can result in the situation Mr Puna is facing – $110,000 of additional debt.  But this can be demoralising, particularly for those on low incomes – essentially, why bother trying at all?

 

Student Debt

Cartoon by Jeff Parker – Cagle Cartoons

Finally, one reason interest is imposed is apparently because NZ is not receiving any benefit from the education provided to the individual if they leave our shores.  What if a graduate goes overseas and starts a business importing NZ goods, thereby helping our economy?  We also conveniently overlook the thousands of skilled migrants who arrive each year educated by their home countries, some of them entirely on their taxpayer.  Apparently we’ll take them in without paying a cent for their education from which we are benefiting, but we’ll charge our own citizen for contributing to the global economy while based in another country.  Keep in mind we’re in an age of net inward migration.

Really, the implementation of interest charges doesn’t seem to be playing out as envisaged and the underlying rationale looks a bit flaky.

What to do?

Well, that’s not an easy question.  That’s why we are where we are.  But if we use that great Kiwi value of ‘fairness’  as a lens, some ideas could include:

  • Removing interest on loans for overseas borrowers (perhaps with conditions related to loan repayments);
  • Capping any interest and penalties that are charged;
  • Link minimum repayments to percentage of income as is the case for NZ-based borrowers;
  • Introduce other disincentives for non-repayment (e.g. family repayment, maybe? yes? no?); and
  • Find an alternative to arrest as the last line of defence for chronic defaulters.

Mr Puna is in an awful situation.  He admits that it is of his own making and, a young man at the time, he probably tucked his loan away in the back of his mind where it languished as he put his mind to other tasks like trying to build a life on a low income.

Yes, he needs to repay his loan – because that is the fair and responsible thing to do.  Let’s make sure he and others like him do that – but through good policy, not good politics.