Interest free student loans

Stuff reports:

will remain interest free, despite forecasts the national student loan bill will grow to more than $14 billion in the next three years, Prime Minister John Key says. …

Charging interest would bring in considerable extra revenue for the Government, but Key said he would be voted out if National did so.

“Bluntly, if you want me to be really crude about it there are 565,000 student loans out there. If we add interest back on the student loans, it doubles repayment time of the loan.

“If your loan is $50,000, and it’s estimated it will take you eight years to pay it off, we effectively turn it into a loan that is about $90,000 with interest that takes you about 15 years to repay,” Key said.

“That is about the only thing that will get [young people] out of bed before 7 o’clock at night to vote, but it’s not politically sustainable to put interest back on student loans. It may not be great economics, but it’s great politics. It is a bit of a tragedy because it sends the wrong message to young people, it tells them to go out and borrow debt.”

Sadly this is right. Labour’s bribe in 2005 was too big to undo, and we will be paying for it for many years. I’d like to see interest charged at least at the level of CPI, so that loan balances don’t actually reduce in real terms despite no repayments (hence discouraging repayments). But that could only happen if Labour agreed not to reverse it. If National did it unilaterally, it would lead to a change of Government and then the policy would revert back.

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