New Zealand Offers Interest-Free Loans.

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Author: Chen, David

As part of an effort to keep talented college graduates from emigrating, New Zealand's government has abolished interest payments on all student loans taken out by graduates who remain in the country.

Students who take out loans will be required to repay only what they borrow, while those with existing loans will not be charged any further interest, provided they have been in the country for at least six months of the previous fiscal year.

The new legislation does not cover interest charged before this month. The government has also offered amnesty on interest payments to New Zealand graduates living abroad with outstanding student loans â€" there are now an estimated 62,000 of them â€" who move back to their homeland over the coming months.

Graduates in full-time postgraduate programs abroad will also be eligible for an interest write-off. But those who remain overseas or who leave the country with loans still outstanding, including graduates who take up positions at foreign institutions of higher learning, will continue to have interest levied on any unpaid debt.

Unlike the mortgage-style loans commonly used in the United States, the New Zealand system favors an income-correlated scheme in which debtors make repayments at a specified percentage of their income in the years after graduation.

As a consequence, repayment periods typically vary among borrowers here. Critics say that, under that system, New Zealand college graduates often end up paying more in compounding interest than would their counterparts in the United States, where repayment periods usually are fixed.

New Zealand's government calculates that the new policy will cost around $610-million (U.S.) in forgone revenue over the next five years.

The measure is among higher-education incentives aimed at stemming the country's perceived "brain drain" of skilled New Zealanders quitting their homeland over the past decade for better financial opportunities abroad. According to figures released last week, about a quarter of all New Zealand college graduates are living abroad.

The conservative opposition, however, has warned that the plan could cost many times the official estimate, might prove difficult to administer, and would cause students, lured by the "fatal attraction" of interest-free debt, to ratchet up higher levels of debt during their undergraduate years.

Read more at http://chronicle.com/extras

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By David Chen