Distributional Impacts of Interest Free Student Loans

Abstract

Prior to 2006, New Zealand charged one of the highest rates of interest on student loans in the world; however, in line with the Labour government’s agenda to increase access to tertiary education, this was the year a blanket subsidy was applied to interest on all such loans. Literature theorising on the implications of introducing an interest-free arrangement of this nature suggests the policy is likely to exacerbate income inequality. This distributional effect is attributed to the consequent non-price rationing of scarce educational resources and, in the case of income-contingent repayments, the benefit is greater the wealthier the borrower.

Changes in inequality owing to New Zealand’s education subsidy are examined from two aspects in this thesis. First, data from the New Zealand Income Survey (2002-2007), is analysed to determine the distributional effects on a subgroup of likely student loan holders relative to the total sample population. Propensity score and kernel matching techniques reveal that the subgroup of likely student loan holders have higher average incomes irrespective of the subsidy, which suggests the large subsidisation may in fact be an inefficient way to target income inequality.

Second, public opinion regarding inequality in New Zealand is evaluated using data from the International Social Science Survey (1999 & 2009). OLS and probit regression models both suggest citizens would prefer to live in a society with less inequality; although, individuals from 2009 were less likely than those surveyed a decade earlier to believe it is the Government’s responsibility to intervene. This indicates a policy such as the blanket subsidy on student loan interest may not adhere to public opinion as a solution to mitigate inequality.