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Thursday, November 10, 2011

Essay 3: The Social Effects of the Student Loan Scheme

(A Full length research paper based on a New Zealand Perspective)
Student loan scheme was introduced to New Zealand in 1992. The aim of the scheme is to assist tertiary students to overcome financial barriers. According to the scheme, tertiary students who meet certain criteria can apply for an official loan to cover the tuition fees, but they need to repay the loan with interest in the future. A consequence of the SLS is to create a huge amount national educational debt. In fact, the soaring student debt stresses not only individuals, but also government. Predictably, the SLS will significantly affect New Zealanders’ life styles in the long run.

This essay is trying to explore the long-term social impacts of the SLS by comparing the lifecycles between tertiary students and non-tertiary students. The evaluation comprises three steps: illustrating the most common individual difficulties caused by student loans; generating the most possible long-term social impacts of the scheme; and discussing the strategies to minimize the negative impacts.


The SLS is a product of the ‘economic reforms’. Since 1984, neo-liberalism has become the mainstream political ideology in NZ. The notion of ‘user pays’, therefore, dominates the policy-making. In the case of the tertiary education, students have to pay much higher fees for the service. Consequently, financial capacity becomes a vital criterion in deciding the opportunity for individuals pursuing tertiary study. However, such ‘money talks’ policy is fundamentally against the political principle of equal opportunity. Besides, narrowing educational opportunity for citizens also restricts the national economic growth, because education expansion is an essential strategy to build the knowledge economy. In order to overcome political and economic embarrassment, the NZ government introduced the SLS to provide basic financial support for people to pursue the tertiary education.

Currently, three government departments are involved in the performance of the SLS: the Ministry of Education, the Ministry of Social Development and Inland Revenue. Generally, the Ministry of Education monitors the tertiary institutions’ operation; the Ministry of Social Development delivers the loan services to tertiary students; and Inland Revenue is in charge of the repayment of student loans.

According to the student loan scheme annual report to 30 June 2001, up to 2001, the average amount borrowed in an academic year was $6,135; 360,612 borrowers were with loans outstanding to Inland Revenue as at 30 June 2002; the overall average loan repayment times are estimated at 10.3 years. The present amount of student loan reaches $ 5 Billion, and is predicted to reach $ 16 Billion by 2020.

Most overseas literature is based on studies in the United States (US) and the United Kingdom (UK). In addition, gender differences and economic risks are focused in NZ research.

Among the overseas studies, Volkwein, Szelest, Cabrera and Npierski-Prancl (1998) find that the most crucial factor relating to educational loan default was low educational achievement, although many other factors, such as the kind of college institution attended, sex and civil status, and the number of dependent children, also have an influence. Moreover, in 1997, Boyd conducted a research to analyse the relationship between discrimination in mortgage lending and educational loans. She found that students were supposed to repay their educational loan fully, before they entered the credit market for an assortment of consumer loans. Her research conclusion was that educational loans enhanced the boundaries for those in disadvantaged groups to pursue better economic conditions (Boyd, 1997). According to Kramer and Dusen (1994), educational loans put students into a serious financial hardship. In other words, educational loans contributed to student poverty and high risks of loan default.

In NZ, Warner did a cross-country comparison of the SLS in 1999. He concentrates on analysing economic risks of the SLS. Warner proposes that as an official investment in human resources, government needs to know how to keep a balance between encouraging tertiary education and ensuring investment returns. He suggests that the loan amount, the interest rate, and the pace of repayment should be considered comprehensively when operating the SLS (Warner, 1999). In addition, Ehrhardt (2002) analyses the different impacts the SLS on gender. She claims that the SLS has more negative effects on women than on men, because females earn less, and pay more interests than males. Because of the scarcity of time and resources, this evaluation has some unavoidable limitations.

Firstly, the research is a general analysis, which is based on the assumption that all New Zealanders belong to one hegemonic group: ie that there are no differences in terms of students’ gender, social status, and ethnicity, before they entry the tertiary institutions. However, realistically, the effects of the SLS on different cultural, socio-economic groups are different. Therefore, a general study, like this evaluation, cannot reflect reality perfectly.

Secondly, it is difficult to define how long is ‘long-term’. ‘Long-term’ is a relative concept. For example, 10 years seems to be long enough to check out if the SLS assists students to finish their tertiary education and go smoothly into the work force, but it is too short to estimate how well their careers go. Hence, long-term study on social impacts should be a systematic process rather than a haphazard activity. Therefore, this evaluation cannot be considered as a complete assessment of the SLS.

Finally, SLS is not an isolated social policy. It, in fact, has close relationships with other social agencies, such as economic performance (Boyd, 1997). For example, the September 11 affected many graduates’ careers, when foreign capital withdrew from NZ. However, in this evaluation, the analysis only focuses on a theoretical model of the lifecycle, which ignores other social agencies’ influence. Therefore, the isolation is likely to produce over-simplified outcomes.

The methodology of the research is based on the grounded theory thinking. It is a bottom-up process. The evaluation starts by illustrating individuals’ experiences. After comparing the lifecycles between two typical groups: the non-tertiary student group and the tertiary student group, the most likely social impacts will be generated. All data are from the official publications.

There are three assumptions in the study:

There is no differences in social conditions between the two groups, tertiary and non-tertiary students, before they enter into tertiary institutions. Both groups gain little financial support from their family; Both groups have the same level of motivation in working hard and pursuing life success.

Theoretically, human social experience can be summarized as a model of a lifecycle. It is “a developmental model, which outlines the social changes encountered as a person passes through the stages of childhood, adolescence, mind-life, old age and death” (Bilton et al., 1996, p.518). In the case of this study, five stages are considered: pre-schooling phase, compulsory schooling phase, pre-children phase, child-rearing phase, and retirement.

In NZ, because education is compulsory for all children aged between six and sixteen years (Ministry of Education, 2001), age 0 - 5 is the pre-schooling phase, and age 5 - 16 is the compulsory schooling phase. In addition, NZ women are very likely to have their first child at age 30 (Statistics New Zealand, 2003), so the pre-children phase is from age 16 to 30. Moreover, as NZ superannuation is given to people who are 65 and over (Work and Income & Development, n.d.), the child rearing phase is from age 30 to 65, and the retirement phase starts from age 65.

Furthermore, according to Statistics NZ (2003), the median ages for men and women to be married for the first time were 29.4 and 27.6 years respectively in 2002, and the average fertility rate was 2.0 births per woman in 1999, therefore, age 28 is regarded as the marriage age, two children are expected in a family generally.

In this evaluation, age 18 is chosen as the beginning point of the lifecycle comparison by giving a couple of years for the non-tertiary and tertiary students to seek jobs or prepare for Bursary after high school study.

Because of the lack of job guarantee in NZ, the research divides students in both groups into lucky and less lucky members. The lucky members refer to those students who are able to follow their career plans smoothly; while the less lucky members are those who fail to do so. Considering to the realistic possibility, the average income of sales assistants’ is chosen to represent the lucky members’ economic condition in non-tertiary group; and the overall salary of marketing manger is used to be the average income for the lucky members in tertiary group.

According to Kiwicareers (2003b), the income of sales assistants varies from $8 to $15 per hour, depending on how long they work in the shops. Therefore, the lucky members in the non-tertiary group are likely to double their income in three or four years. Thus, they can be reasonable independent at age 22 or 23. By age 28 when they are getting married, they seem to have enough credibility to borrow money from banks to buy houses. By age 55 when their children grow up, they can have a few more years to complete the house loans. By age 65, they can enjoy their retirement with mortgage free lifestyle. Therefore, those lucky non-tertiary students seem to have no difficulty to catch up the standard lifecycle in NZ.

As far as the less lucky members are concerned, they are likely to rely on the government benefits, approximately $11,000 per year (Work and Income, 2003). Therefore, they tend to have more economic difficulties in marriage and housing. However, because of their debt-free condition, they may find it is relatively easier to gain support form commercial banks than those people in debts.

The life experiences of the tertiary students appear to be different. Initially, because of lack financial support from home, the tertiary students are forced to take the student loan and the student allowance during the study period. The tuition fees vary from institution to institution, and also have significant difference in different subjects. In the case of Auckland University of Technology (AUT), the average tuition fees for the Bachelor of Arts is $3550 per year, which seems to be the cheapest option for degree study (Auckland University of Technology, 2003). Excluding tuition fees, tertiary students need an extra $1000 to cover study related expenditure in each year. Thus, by the end of their tertiary study, the students will have total amount $13,650 debt, even if their institutions do not increase the fees. Besides the debt, the students have to face financial hardship as well. According to the Ministry of Social Development, a single student under 25, living away from home can get maximum $201.65 weekly supplement (student allowance plus accommodation benefit in Auckland) from the government, which is only available for 40 weeks per year (Studylink, 2003). It means the guaranteed income for a tertiary student is $8066 per year. If the student lives in Auckland, the common cost of accommodation is about $5200 per year. Consequently, there is only $2866 left for those students to use for food and other things, which is about $55 per week or $8 per day.

After graduating, for those students who are able to find jobs quickly and develop their careers smoothly, a student loan seems to have little negative effects on their life. According to Kiwicareers (2003a), the salary of marketing manager varies from $38,000 to $70,000. Therefore, if graduates start the salary at $32,000, it will take about 12.75 years for the students to payback their educational loan fully, even if they receive no wage increases (Owezero organisation NZ, 2003). Thus, those lucky students are likely to be able to borrow money from the bank to buy a house at age 34, though 6 years later than the average lifecycle. However, considering their relatively higher and more stable economic status, the effects of such delaying should not be significant.

However, university degrees have never been a job guarantee. Once the tertiary students could not find reasonable income jobs after graduation, they would face very difficult lifestyle. For instance, if graduates with $13,650 debt in hand can only gain a job as sales assistant, they need to start at $10,650 annual income at age 21. Because they are unable to repay their debt immediately, the debt will be over $18,000 (7% interest) in three years. Thus it will take those students more than 21 years to pay back the debt, even if they are able to keep the $32,000 salary after age 25. It means those graduates cannot be debt free until they are 43-year old. Consequently, they have much less opportunity to buy their own houses. In other words, the educational debt can lead to a life-long financial hardship for some tertiary students.

Additional Reference Material and Fact Sheet:
Financial Aid and College Affordability Issues

• Low-income, African American, and Latino families are less informed about financial aid; they tend to overestimate the cost of tuition and underestimate available aid. (Longanecker, D.A., & Blanco, C.D. (2003). Student financial assistance. In Student Success: Statewide P-16 systems. Denver, CO: State Higher Education Executive Officers and Pathways to College Network Research Paper)

• The cost of attendance and financial aid availability are more important factors in determining college enrollment for low-income, African American, and Hispanic students, than for White, middle-income, and upper-income students. (Heller, D.E. (1997). Student price response in higher education. Journal of Higher Education, 68(6), 624-659)

• Low-income students face formidable financial barriers to college access and success. (A Shared Agenda: A Leadership Challenge to Improve College Access and Success. (2004) The Pathways to College Network)

• College affordability has become a much greater problem for low-income families. In 2002, public college costs amounted to 60 percent of yearly income of low-income families; private college costs were 160 percent of income. (The College Board. (2002). Trends in college pricing. Washington, DC: The College Board, p. 9)

• Financial aid has not kept pace with increasing college costs: the average Pell grant now covers 25 percent of total costs at public four-year colleges – down from 47 percent in 1975 – and down to 10 percent of private college costs – down from 24 percent in 1975. (The College Board. (2002). Trends in student aid. Washington, DC: The College Board)

• Only 21 percent of high school graduates with family incomes below $25,000 were highly or very highly qualified for college, compared with 35 percent of high school graduates with family incomes between $25,000 and $75,000 and 56 percent of students with family incomes greater than $75,000. Further, 36 percent of White high school graduates were highly or very highly qualified for college, compared with 16 percent of African-Americans and 19 percent of Latinos. (The Condition of Education, National Center for Education Statistics, 2000)

• In tax year 1998, about one-third of the estimated eligible families claimed an education tax credit, claiming only about $3.4 billion of the estimated $7 billion in eligible credits. (T. R. Wolanin, Rhetoric and Reality: Effects and Consequences of the HOPE Scholarship. 2001, p. 13, 2001. Citing “Remarks as prepared for delivery by U.S. Secretary of Education Richard W. Riley,” Association of American Colleges and Universities, Washington, D.C., January 20, 2000)

• In 1972, middle-income families needed 13 percent of their income to meet the needs of a four-year public institution. By 1999, this number had risen to 16 percent. In comparison, low-income families in 1972 needed 42 percent of their income to meet college costs and 62 percent in 1999. These affordability indices are more dramatic for private institutions. Middle-income families needed 27 percent of their income in 1972 and 43 percent in 1999 to cover tuition at a four-year private college. Low-income families needed 87 percent of their income in 1972 and 163 percent in 1999. (Trends in College Pricing 2000, College Entrance Examination Board, New York, p. 14, 2000)

• Between 1996 and 2000, tuition at public four-year and two-year colleges increased about 25 percent and increased about 31 percent at private four-year colleges. During this five-year period, median household income rose 25.4 percent, and the cost of consumer goods increased by 12.4 percent. (College Tuition and Fees: Changes in the 1995-1996 to 1999-2000 Period Compared With Median Household Income, United States General Accounting Office, GAO/HEHS-00-198R: pp. 3-6, 2000)

• Unmet financial need for low-income students ranges from $3,200 at public two-year colleges to $3,800 at public four-year colleges and $6,200 at private four-year colleges. (Access Denied, Advisory Committee on Student Financial Assistance, February 2001)

• The average unmet need increased 33 percent from $3,000 to $4,000 between 1995 and 1999 according to the National Postsecondary Student Aid Survey (NPSAS: 2000). (Tom Mortenson, personal correspondence, January 2002)

• A full Pell Grant covered 78 percent of tuition for a public four-year institution in 1975. In 1999, a full Pell covered 39 percent of tuition. Given the increase in the traditional college-age population and assuming Pell funding increases 4 percent each year for the next 10 years, by 2010 Pell funding will be $2.042 billion short of providing the year 2000 level of value. Other reports state Pell Grants covered 84 percent of tuition in 1975-1976 and 40 percent in 2000-2001. (Stephen Burd, “Rift Grows Over What Keeps Low-Income Students Out of College,” The Chronicle of Higher Education, January 25, 2002. JBL Associates, Presentation at the 2000 National Governors Association Center for Best Practices)

• In 2000-01, $51 billion of the $74 billion in total available financial aid was from federal programs. Of the $51 billion in federal financial aid, $37 billion was in the form of student loans administered through the Federal Family Education Loan Program (FFELP) or Ford Direct Loan Program. Since 1980, federal student loans have grown 516 percent compared with 232 percent growth in the Pell Grant program. During the 1990s, Pell Grants grew 23 percent in inflation-adjusted dollars, compared with 58 percent growth in FFELP and 425 percent growth in direct loans (tracked since 1994-95). (Trends in Student Aid The College Board, 2001)

• African-Americans are less likely to borrow for college because the returns on a college education are lower for African-Americans compared with Whites, and because the levels of debt required in many cases exceeds their annual family income. (Robert M. Hauser, “The Decline in College Entry Among African-Americans: Findings in Search of an Explanation,” Prejudice, Politics and Race in America Today, 1992)

• The higher net costs of college restricts the options for low-income students, who are increasingly attending community colleges. These higher net costs are partly a function of the declining percentage of tuition covered by federal financial aid grants: between 1986 and 1993 the percentage declined from 68 percent to 42 percent. (Michael McPherson and Morton Owen Schapiro, The Student Aid Game: Meeting Need and Rewarding Talent in Higher Education, 1998)

• In general, grants have a stronger influence on college enrollment behavior than do loans. African-American, Latino and low-income students are more price responsive than are White and middle and upper-income students. (Price responsive means that the students are less likely to enroll in college or are more likely to change the type of institution in which they enroll.) (Don Heller, “Student Price Response in Higher Education: An Update to Leslie and Brinkman,” Journal of Higher Education, 68(6), 1997)

• Targeting grants to low-income students is likely to result in increased enrollments. For example, a $1,000 increase in grant aid increases enrollment rates for low-income students by 9 percentage points, while a similar increase in tuition would decrease enrollment rates by 3.4 percentage points. The same increase in grant aid has a 3-percentage-point positive effect for lower-middle and middle-income students. (Alberto F. Carbrera and Steven M. La Nasa, Understanding the College Choice of Disadvantaged Students: New Directions for Institutional Research, 107, Fall 2000)

• An additional $1,000 grant reduces the probability of a first-year, low-income student dropping out by 23 percent. (Challenges in Promoting Access and Excellence in Education, United States General Accounting Office, GAO/T-HEHS-97-99: p. 8., 1997)

• Medium and high debt levels reduce the probability of persistence between 4 and 7 percent for students at private colleges. Tuition levels and the amount of grants exert more influence on persistence at public colleges than do debt levels. (James Cofer and Patricia Somers, “A Comparison of the Influence of Debtload on the Persistence of Students at Public and Private Colleges,” Journal of Student Financial Aid, 30(2), 2000)

• Undergraduates who borrow reduced their odds of obtaining a graduate or professional degree within four years by 9 percent. (Derek V. Price, “Graduate and Professional Degree Attainment Among 1992-93 College Graduates,” unpublished monograph, Lumina Foundation for Education, 2001)

• Summarizing the literature, the authors report that grants and work-study financial aid awards are beneficial to persistence, but that loans are not. They also report “means-tested student aid is effective in compensating for the disadvantage of low-income, so that low-income students who receive it are as likely to persist in college as are more affluent students.” (Therese L. Baker and William Velez, “Access to and Opportunity in Postsecondary Education in the United States: A Review,” Sociology of Education, 1996)

• Almost eight out of ten African-Americans who earn a bachelor’s degree borrow, and the average amount of student loan debt they accrue is $13,000. The average loan debt for African-Americans who complete an associate degree program is $6,500. Among Latino students who graduate with a bachelor’s degree, almost 70 percent have debt averaging $11,500. For comparison, just over half of White bachelor’s degree recipients borrowed while in college, and their average indebtedness is $12,300. (Jacqueline E. King, Money Matters: The Impact of Race/Ethnicity and Gender on How Students Pay for College, American Council on Education, 1999)

• Thirty-nine percent of student loan recipients graduate with unmanageable debt, defined as debt repayments that exceed 8 percent of monthly income. In comparison, 55 percent of African-American and 58 percent of Latino student borrowers graduate with unmanageable debt burden. (“The Burden of Borrowing: A report on the rising rates of student loan debt” (Executive Summary), State PIRG’s Higher Education Project, 2001)

Student loans paid for 95 percent of the increased charges to students at four-year public colleges between 1991 and 1995. In the following four years, loans covered 62 percent of these increases. (Jerry S. Davis, “Higher Education, Increasingly Important for All Americans, is Unaffordable for Many,” Illuminations, Lumina Foundation for Education, August 2002)

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