National promises incentive to make voluntary loan repayments

National has announced two major policies today on the student loans scheme. They are:

  1. No repeal of interest free loans
  2. To provide an incentive for voluntary repayments, with a 10% bonus on any repayment over $500

These are linked because I am pretty sure you would not do (2) if it wasn’t for (1). Let’s take them in turn.

The interest free loans policy announced by Labour is a bad policy. If you wanted to spend a few hundred million on helping tertiary students it would have been far better to have spent it on student allowances or lowering tertiary fees. The policy is a bad one because it provides bad incentives – specifically the incentive to borrow money unnecessairly (as one can profit from it at taxpayers expense) and the incentive never to make voluntary repayments (as it is zero interest).

But there is a world of difference between introducing a policy, and not repealing something already in place. National has judged that campaigning on a policy of reintroducing interest on student loans would be electoral poison. Also as John Key points out people have made decisions on taking out loans based on the policy.

This does not mean they are endorsing the original policy. If you employ that logic, then you have to claim Labour endorses the 1991 benefit cuts because they have never reversed them. The reality in politics is relatively few policies get reversed with a change of government. Expecting National to reverse the interest free loans policy would be like expecting Labour in 1999 to reverse the 1997 tax cuts.

So you have National having to agree not to reverse the policy. But you still have the problem of the bad incentives it provides. That is when the voluntary repayment rebate comes in. Sure you can’t reverse the policy, but by providing the voluntary repayment rebate, you provide an incentive for people to pay off their debt quicker. And have no doubt many graduates can pay it off quicker – the level of repayments has dropped massively in the last couple of years.

Now it isn’t all good incentives though. While National’s policy does help correct the repayment incentive, it may make worse the incentive to borrow unnecessarily. Because sure as hell if I was a student I would borrow the maximum, and then repay it the next year and bang I am 10% better off. But this is not a new problem. Zero interest already provides the incentive for people to borrow money they don’t need and invest it. But it does exacerbate the problem somewhat.

So the policy gets a tick on the repayment incentive but a cross on the borrowing incentive. It also gets a tick I suspect on the vote for us incentive!

UPDATE: Colin Espiner has a good piece on the policy change. I like this part:

In all honesty, National couldn’t enter an election campaign promising to raise interest rates on student loans. That would have gone down like an empty keg at a student union orientation.

A nice comparison.

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