High inflation leads to $637 million debt write-off for uni graduates

The New Zealand Taxpayers’ Union is raising the alarm over a $637 million debt write-off for university graduates, driven by inflation and funded by taxpayers.

While it is well-known that student loan balances do not accrue interest, it is often forgotten that balances are not even adjusted for inflation. This means student loan balances shrink in real terms every year in line with the inflation rate – effectively a taxpayer-funded debt write-off.

The total value of outstanding student debt sits at around $10.8 billion*, listed as an asset in the Government books. But the real value of this debt has been eroded by high inflation – at a rate of 5.9%, the Government has effectively written off $637 million in student debt in the space of one year. That's almost as much as the Government was planning to spend on the Waitemata Harbour bike bridge.

A lawyer who graduated in 2017 and has an $80,000 student loan has had at least $9,000 in today’s money paid off by the taxpayer. The longer the graduate takes to repay their loan, the larger the taxpayer-funded debt write-off.

The incentive problem is obvious: savvy students will repay their loans as slowly as possible, maximising costs to taxpayers in terms of both the inflation write-off and the interest write-off.

This is a regressive wealth transfer from working New Zealanders to the privileged – people with university degrees earn significantly more than those without. Even under Australia’s interest-free student loan scheme, recognised as one of the world’s most generous, loan balances are still indexed for inflation.

The Government has recently dismissed income tax relief for workers as a handout for the wealthy. That’s rich when Grant Robertson is spending millions to pay down the loan balances of lawyers, doctors, consultants, and bankers.

We’re calling on the Government to urgently begin indexing student loan balances for inflation.

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*Source: HYEFU, page 120