Friday, May 27, 2011

Obvious points on student loans

John Key's suggested limiting access to New Zealand's zero percent government guaranteed student loans; folks nearing retirement age will no longer be eligible to get zero percent loans from the government for living expenses while in tertiary study.

Folks in the Labour Party have called the move discriminatory; some implausible parallels were tweeted.

Two obvious points that perhaps need spelling out.

First, there is a good market failure argument for government guarantees of student loans. Namely, asymmetric information about the likelihood that human capital investments will yield returns that would be paid to the bank combined with the bank's inability to foreclose on your B.A. in Poetry. So the banks may abstain from participating in that market without some kind of guarantee. Nothing in that argument justifies low interest or zero interest loans.

If the point of policy is to remedy the market failure, then best policy would have the government act as backstop guarantor on student loans where the government expects to be able to recoup the loan. Government can always force repayment through the tax system and by confiscating the passports of those with outstanding debt, so long as the debtors have sufficiently augmented earnings consequent to education to pay off the loan.* If it's exceedingly unlikely that someone would be able to repay the loan, it would make sense for the government to decline to extend the guarantee; it's not a market failure that a bank refuses to extend a home loan to an overvalued property where the buyer has little prospect of paying the mortgage. And, by and large, near retirees taking on student loans will be in this group. Sure, some will be retraining for a late career change. But even for those, paying off the loan will be tough. And many others will be taking courses for consumption rather than investment purposes.

So if government guarantees of student loans are meant to solve market failures resulting from asymmetric information, putting in an age cutoff doesn't seem obviously discriminatory. It's no more discriminatory than that a life insurer might refuse to extend coverage to the terminally ill.

If the point of policy is other than solving market failures, then maybe it's a bad idea to restrict access to the elderly. But we'd need to specify then what the purpose of policy is. Barring specifying some point other than meliorating market failure, I'll stick with that it's entirely reasonable to restrict government student loan access.

* Note that the alternative solution to the market failure would solve things by allowing banks to make more restrictive and enforceable contracts with folks taking on loans for human capital. Government is able to solve the problem by compelling payment through the tax system: future income streams then become collateral. Were banks able similarly to compel payment, I'm not sure there would be any particular failure to solve.


  1. Were banks able similarly to compel payment

    RIght. Or the other alternative - as proposed in the 2025 taskforce reports - is even more obvious: parents or others with property step in as guarantors, so the student loan becomes e.g. a lien on the parental home. This also eliminates the market failure.

    In the current circumstances, the only responsible option is to pass one or both of these measures, call in all government loans (or sell them to credit control agencies) and then follow the UK example: remove all government funding for tertiary study, and remove most of the caps on fees.

  2. @Anon. I'd agree on parental guarantors, except the failure will still obtain for worthy students whose parents are either without capital or on bad terms with the children. It seems unlikely that those losses exceed the losses under the current system, but they would exist.

    I would be far worse off if government funding for tertiary study were removed so let's not do that just yet. I speak only from self-interest on this one; I don't purport that this also furthers the general interest.


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