Student Aid: Income and Subsitution Effects

Rodney Hide, a member of Parliament in New Zealand, has a fascinating blog that I highly recommend. He is an outspoken critic of big gubmnt and feel-good policies that have unintended consequences.

In one of his recent entries, he addresses the topic of the huge debt load taken on by students for their post-secondary education. He notes that the NZ gubmnt, in an effort to reduce the amount of outstanding student debt, actually induced students to take on more debt:

The Labour Government promised free money while students studied back in 1999. Within a year, the proportion of eligible students who borrowed jumped ten percent and the amount that each student borrowed jumped on average 23 percent.

The result was more student debt, not less.

The effective interest rate on a student loan is now 2.8 per cent.

The problem is about to get much worse as National promises to make interest payments tax deductible.
The very politicians who are complaining about student debt are the very ones encouraging it. What student now won’t take on debt – and the maximum amount?

It gets worse:

National’s policy to buy votes by making interest on student loans tax deductible has now been outbid by big-spending Labour promising to wipe interest on graduates who stay in New Zealand.

We can’t outspend Labour. That’s why sticking to principle and sound policy is critical.

National started a bidding war and got outbid.

New Zealand has an election scheduled for this September. I hope Mr. Hide is re-elected and with strong support.