While we at The Initiative have been pretty happy with the hearing our report on zero percent loans has received, some of the partisan responses have been more than a little depressing.
It would have been surprising if Labour would have said, “Yeah, you know what, we messed that one up. Shouldn’t have done it. Oops.”
Labour’s education spokesman Chris Hipkins takes that a step further and says taking away interest-free student loans “reinforces inequity”.
“It would make inequity worse because those on the lowest incomes would be penalised the most. It’s an incredibly regressive system.”
Hipkins said the think tank was taking a “narrow view of the value of tertiary education”.
“This is exactly the type of ideological right wing clap-trap i’ve come to expect from the successor to the business roundtable.”
“They assume it’s all personal benefit, they don’t look at the fact we put significant taxpayer subsidies into higher education…because it is not a purely personal benefit, the whole of the country benefits,” he said.
Chris has things entirely backwards here, in a way that has me not sure if he knows what the word regressive means, or whether he doesn’t know how the student loan repayment system works. Or maybe it’s just a fingers-in-the-ears “If I say right-wing enough times maybe nobody will read the report” thing – I was a bit surprised by the twitter traffic following Labour’s playbook on that one.
First off, we never assumed that the returns to education are entirely private. We noted that students currently cover 16-18% of their costs of study, but we didn’t say that should go to 100%. Reallocating some of the money currently spent on tertiary subsidies back into secondary schools, as we recommend, would increase the private contribution towards tertiary education a bit. If we thought it was entirely private benefit, we would have recommended scrapping the remaining tuition subsidies built into the system. We didn’t do that though.
The regressive part is at least as odd. We recommended taking something that’s currently universal and targeting the spending in highly progressive fashion. Means-tested funding can include debt forgiveness for hard-cases down the track, as the UK does when it wipes out student debt that has no chance of being recovered. The reallocation of spending toward secondary schools with poor track records of sending kids to tertiary would disproportionately go to schools serving poorer kids. And the benefits of better guidance counselling, which we also recommended as part of the package, would disproportionately go to kids whose families don’t know how to navigate NCEA and tertiary – again, not my family.
And remember too that loan repayment under the income-contingent repayment scheme is highly progressive. On leaving study, student debtors are charged 12 cents on every dollar earned above $19,084 until the balance of the loan is paid off. So the marginal tax on every dollar above that threshold is 12%, but the average tax rate starts off very low and then rises. A person earning $19,085 pays 12% on the last dollar earned, but only pays $0.12 in loan repayment tax on $19,085 in earnings: a 0.0006% average tax rate. A person earning $119,084 on graduation pays 12% on the last dollar earned, but pays $12,000 in tax: a 10% average tax rate.
A tax schedule where the marginal tax rate is always above the average rate is the definition of a progressive tax. The income-contingent student loan repayment scheme is then rather progressive. If you take out $100,000 in loans and only ever earn $19,000 per year, you will never pay off your loan, but neither will you ever make a payment on your loan. The effective burden (on the debtor, but not the taxpayer) is zero, except in cases where the existence of the student debt makes accessing other credit more difficult. Those on the *lowest* incomes wind up paying nothing back.
I’d have thought that our policy proposal, which takes money that is currently given indiscriminately as interest rate subsidy to every person taking out a loan for tertiary study, regardless of their means, and targets it instead to poorer cohorts and poorer schools, was really rather strongly progressive. But Hipkins calls it ‘inequitable’.
I’ll turn to what the Ministerial Consultative Group had to say on “ensuring equity” in their 1994 report:
Both society and individuals benefit from higher education. For this reason both should be expected to contribute. Until now, most direct costs have been met by taxpayers. However, unless those who benefit contribute in an equitable manner, as demand increases, the needs of others will go unmet.
Ensuring fairness requires individuals to contribute to the costs of their tertiary education in accordance with their ability to pay. This is best measured by their lifetime incomes. Individuals who earn significantly higher lifetime incomes should be expected to make a greater contribution to the cost of their tertiary education.
As an illustration, the present average value of the additional income earned by a male graduate is around $150,000. Currently, such a graduate would typically contribute no more than 20% of tuition costs. The balance of tuition cost is met by the taxpayer. In effect, the taxpayer confers a large capital grant to graduates. Similar grants are not made available to people who want to establish a business. For example, a young farmer buying a herd to become a sharemilker could not expect the taxpayers to meet 80% of the costs.
The income-contingent repayment scheme achieves the kind of equity that the Ministerial Consultative Group here talks about. That doesn’t require zero percent interest rates.
In our view, the real inequity is in access to tertiary study. If you’re coming out of a school with no guidance about which NCEA courses to take, no idea what’s involved in tertiary, and poor preparation in those courses you have taken – that’s a far bigger barrier to tertiary success than potentially having to spend an extra year or so making student loan payments at the end of study.