FRIDAY GRAPH: STUDENT LOANS

Here is another graph from last week’s Budget.

The accompanying text states:

In 2010/11 the Crown will lend almost $1.6 billion to assist students, up 50% over the past five years. There are currently more than $12 billion of loans outstanding. However, at present, for every dollar lent out the Government receives only around 55 cents back in 2011 dollar terms.

The previous government (Steve Maharey) maintained that making student loans interest-free (first, while students were studying and then on an open-ended basis) would not encourage students to borrow more.

This was the height of naivety.  Economics teaches that incentives matter.  The skyrocketing amounts borrowed were utterly predictable.

Debate about taxpayer subsidisation of higher education should focus on fees: how much should students pay for the private benefits they enjoy from higher education, and what should taxpayers contribute on public benefit or equity grounds?

The loans scheme is not the right vehicle for subsidisation.  Interest on loans should approximate market rates, otherwise over-borrowing and other distortions are inevitable.

Other than in an economic crisis, will a future government be able to overturn this egregious 2005 election bribe?

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