Why I’m not worried about struggling students
The recent budget reduced the number of students who are eligible for the student allowance, particularly for postgraduate students. There have since been almost daily articles in the newspapers lamenting the students’ plight. Today there is an article in which a student describes how she will have to take on extra debt to finance her postgraduate education. Similarly, my Facebook is full of people wondering why the government refuses to ‘invest in our future’. The reason is fairly straightforward: when the government pays for tertiary education it transfers money from poor people to wealthy people. Tertiary students, particularly those in postgraduate education, are some of the wealthiest people in our society and don’t deserve to get a free lunch on top of it.
You might wonder how I can justify that statement when most students have very low incomes. Well, they are not rich because of their present income, but because of the income they will earn in future. Three years after completing their degree, a bachelor’s graduate will earn 51% more than someone with only secondary qualifications. Someone with a master’s degree will earn 74% more and a doctoral graduate 120% more. Yet it was the secondary graduate, working full time while the student was studying, that helped fund about 75% of their education. How can that possibly be fair?
OK, you might say, but the tertiary students would have earned more anyway because they are overwhelmingly from the privileged classes of society. That is very true and we can adjust for that in our calculations. Supposing that we adjust for differences in age, sex, ethnic group, field of study, industry of employment, and provider type, bachelor’s graduates only earn a 27% premium over their secondary counterparts. Masters and doctoral graduates a mere 37% and 83% respectively. Still a healthy margin of $8,000-$23,000 per year of extra income over secondary graduates within three years of completing their studies. In addition, tertiary graduates will see their incomes continue to rise considerably through to middle age, while many secondary graduates will see little increase in real income throughout their career.
Looking at those figures it’s hard to claim that tertiary students are hard done by simply because their living costs are not also provided from taxation. Of course, they do not have all of that wealth during the period of study, which is why the government provides them with unsecured loans for their living costs during that time. Essentially, students are given the opportunity to borrow against their future income to fund their lifestyle while they study full time. In fact, the current interest-free loan scheme actually subsidises them hugely: for every dollar a student borrows the government only recovers about 40% of the cost of borrowing from students in repayments. So, despite the reduction in allowances, tertiary students are still having their lifestyle choices, which will probably make them wealthy, largely funded by society. It’s hardly the tough deal that it’s being sold as in the newspapers!
This is a good post James, I’m ejoying your contributions to tvhe which seem to have picked up in recent times.
I think the single element of the changes to student support that does bother me is the freezing of the parental income threshold for allowance availability. Allowances specifically taregt poorer students (allbeit through an imperfect means testing proxy) and, I think, provide a useful mechanism for some to get into study that wouldn’t otherwise. I agree that for many of us a loan is appropriate (perferrably with modest interest if you ask me) but for someone from a lower socio economic background, and lower social capital, the calculas around taking a loan may be more of a challenge: less role models of tertiary students who took a loan and paid it off without a problem, for example.
I also wonder how you feel about the proposal that I have been agitating for that loan repayment rates be progressive?
Thanks for your comment Joe; you’re making me blush!
I agree that the poor participation rates of students from a low socioeconomic background are a problem; however, that is unlikely to be affected by restricting student allowances to undergraduate courses. Moreover, the barriers you identify, such as the lack of role models, may be a greater difficulty to overcome than the need to take out a loan. Certainly, it is something that I’d hope would be carefully considered if further cuts were to be made to the allowance scheme.
I haven’t really thought about progressive repayment; what’s the rationale? If it’s wanting loans to be paid off then why not have a repayment scheme as for private loans, but with a rebate for low income earners? I think that simply reintroducing interest on the loans would be a good start, though.
I agree the low socioeconomic feature needn’t really be part of the debate about restricting allowances to undergrad, but it is in freezing the parental income threshold for allowances, which has also happened.
There’s a few rationales for progressive repayments.
The increase made this budget (accross the board from 10 to 12%) which be much harder for lower income individuals to manage, than craft beer drinking professional services graduates. *Insert generic arguments for progressive policy*. So there’s an argument there about ability to pay.
And many of the generic arguments against progressive taxation don’t easily apply. Graduates are unlikely to “work less hard”, I’d say, because the work they are doing is laying a foundation for a whole career, for most of which they will have a student loan. Progressive repayments shouldn’t “drive graduates overseas” because if they do go overseas they will bare interest on their loans, more in fact than under current policy.
The argument for government support of tertiary ed is that it recognises public benefits from an educated populace. But there is invariably also a personal benefit, as you outline in your main post. I would hazard to guess that personal benefit accrues more and faster to folks that earn more. Having to pay off a loan faster counter-balances that somewhat.
The final argument is framed politically: assume that for whatever political reason interest reintroduction (or even CPI adjustment) is off the table, there are few mechanisms left for decreasing generosity. If you agree the system is too generous, this is a politically viable option with left-right crossover appeal.
I see why you might be in favour of progressive repayment, but I’m not sure what problem it solves. The reason the loan scheme is expensive is not that successful graduates don’t pay their loans back. It’s mostly because the government pays the interest on the loans. It’s also partly because there are lots of graduates who earn below the repayment threshold, and a small part of it is the graduates who go overseas and don’t repay.
I suppose a progressive repayment regime would decrease the cost of interest, although I don’t know by how much. I think to make it a good idea you have to assume that introducing interest is not feasible, otherwise the interest reintroduction solves the entire problem. If it is infeasible then perhaps the progressivity is a good proxy, though.
You’re right. The problem you’re solving is the govt paying interest. The faster a loan is paid back the less of that they do. But yea I don’t know quite how much that would save, obviously depends on the structure of the rates, but presumably could be analagous to increasing repayments from 10% to 12%.
I also favour reintroducing interest, but that doesn’t seem likely. I have sometimes wondered whether CPI adjusting loan balances might be possible too, if full borne interest isn’t.
Regarding the costs of interest absorbed by the taxpayer, the average graduate will pay between $200000-300000 more in tax than the average non-graduate; far more than double. The net benefit to the taxpayer is greater than the cost of providing interest free student loans (if the graduate stays in NZ admittedly). Yes the graduate benefits too, and that is a necessary incentive to draw them into study and eventually a higher tax bracket. This windfall more than covers the costs of interest and the government subsidy of tuition fees.
I also hope you can see the necessity of these policies to allow low income individuals the opportunity to study. We are an aspirational society, or using your terminology; the poor want to become wealthy. Some form of finance becomes necessary for those without the means to pay for study outright. The benefit of studying tends to be lost on someone who is faced with loan likely to triple in size from interest before it is paid off, especially when this loan dwarfs any income they may initially have. Yes you can say, “get a loan and study, nobody is stopping you”, but the reality is they won’t and in fact still don’t even with the current scheme. But for the loan scheme and student allowances, you consign low income individuals to remain just that, poor people.
You talk about future income, which not only benefits your poor taxpayer, but also never eventuates for many if they do not study. How exactly can you say the government paying for tertiary study is taking from the poor and giving to the wealthy?
*$200000-300000 more in tax during their working life.
Thanks for your thoughtful comment. I apologise in advance for not addressing all of it. You seem to be discussing the funding of tertiary education provision, as opposed to funding living costs for people while they are postgraduate students. I was trying to stay away from the subject of tertiary funding here because there are many more issues that bear upon it, particularly the externalities of tertiary education.
As discussed in the comments above, I think the lack of participation among people of low socioeconomic is certainly a problem. However, the question is whether the allowance for postgraduate students has a significant effect on that participation rate. I think it unlikely that it does and, moreover, I think the allowance for postgraduates is inequitable, as you picked up. The question of financial assistance for people from poor backgrounds who wish to obtain initial tertiary education seems quite separate.
The reason allowances for postgraduates are inequitable is that they are funded out of general taxation. Postgraduates already have very high earning power as a consequence of their undergraduate degrees and benefit further from their postgraduate education. I don’t see a good reason for society to subsidise their living arrangements when they are already so rich in assets (meaning their human capital.)
That the subsidy is paid out of general taxation means that part of it is paid by low income people and those without a tertiary education. Essentially, we are taking some of their money to fund the lifestyle choice of a wealthy graduate student who prefers to obtain further education.