Can someone explain this?

Stuff quotes NZUSA:

The presumably has a few budding economists at its fingertips and has calculated putting interest on a $50,000 loan would see it grow to a $90,000 repayment, yet the extra value to the Government would be only $3000 out of the extra $40,000 paid.

So who would the extra $37,000 go to? Can someone in NZUSA provide their calculations, because on the surface,  I don’t see how this works.

Maybe they are saying that students would end up spending the $40,000 on goods and services, which would generate economic activity which would produce $37,000 of income for the Government? Any economists out there want to take a stab?

UPDATE: NZUSA have kindly responded:

The $50K becoming $90K if interest was added (and taking 15 years to repay instead of 8) was John Key’s. You’ll have to ask him where he got those numbers from.

According to IRD’s student loan calculator, to pay back a $50K loan in 8 years requires a salary of just over $80,000 – about twice the (university) graduate average. Of course as we all remember from 2005, IRD’s calculator doesn’t have income growth – or growth in the repayment threshold – built into it.

$70+2.5% gets a similar result.

The average graduate salary is around $40K. $45K – $48K if you believe the marketing on the NZ Immigration website. Not sure about salary growth rates in the midst of the Great Recession.

 The Net Present Value of $50K in 8 years is ~$29K; that of $90K in 15 years, is ~$32K. Hence $3,000. That’s at a 7% discount rate. Key’s interest rate seems to be higher than this, but it always was much higher than the actual cost of capital.

 These are terminal payments. Of course this is an unlikely scenario. However, since it depends on the actual cashflow, it is hard to know without the Prime Minister’s numbers. If the money comes quickly, high starting salary, low growth (to still get the repayment time), then the difference between the two would be greater, if it came later, lower starting salary with high growth, then the difference would be relatively smaller, especially if there was a break in payments – unemployment, travel overseas. These could likely be quite reasonably be factored in.

Okay this makes more sense.  What would be good is to model an actual scenario based on actual repayment times for say the average graduate. I don’t think any policy change is likely here (which will please NZUSA) but it would still be good to understand what the “cost” of no change is.

 

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