There is no such thing as a free lunch.

The very same logic applies to tertiary education. Someone, somewhere along the line has to pay for it. And yet many New Zealanders believe that free tertiary education should be provided as a basic right.  

But do tertiary students fully grasp the degree to which taxpayers help fund their education?

New Zealand extended the interest-free student loan policy in 2005 in a bid to improve access to tertiary education (and buy student votes). The New Zealand Initiative is currently looking into the zero percent policy a decade on as part of our wider research in the education sector. This signals the Initiative’s first foray into the complex maze of higher education.

Tertiary education, it is often proposed, generates positive externalities that benefit the whole of society. This is the basic rationale used to justify public funding in higher education. It is also argued that a greater number of educated people will help improve everyone’s productivity. Advocates of free tertiary education claim free tertiary education is not only desirable, but somehow affordable too.

Arguments then, in favour of free tertiary education ignore two considerations. The first is that governments face resource constraints which limit how much funding can be allocated to the tertiary sector. The second is that while an educated population may provide wider economic and social benefits, the greatest benefits accrue to the individual who undertook the education in the form of increased earnings, a higher quality of life and reduced unemployment.

Under the current scheme, for every dollar the government lends through its student loan scheme (as at 2014) a mere 58.17 cents is treated as an asset. This means that 41.83 cents in every dollar lent to a student is written off as an expense – largely the cost of the zero-percent interest policy.

In short, the Government expects that less than 60% of each dollar lent will be recouped. The difference then must be funded from taxes.

How and to what degree the public should finance higher education is an issue that countries worldwide grapple with. And public pleas for free tertiary education are not limited to New Zealand.

But reducing the book value of the student loan asset by almost half is significant. The total write-down for the 2014 financial year was $630 million. Tertiary education as is, already requires a major public financial commitment. The cost of free tertiary education would be considerably more onerous on taxpayers.

Excluding the public subsidy inherent in the interest-free student loan scheme, the average university student’s share of the direct cost of higher education fell from 32% in 2000 to 27% in 2010. The reduced cost proportion for students was largely the result of fee regulation policies, like tuition caps, which dictate to what maximum percentage tertiary education providers may increase their fees. But take into account the implicit subsidy provided through the interest-free student loan scheme, and on average, students paid 16% and government 84% towards the direct cost of tertiary education in 2010.

These were some of the findings of a study conducted by Victoria University of Wellington in 2012. The study sought to analyse university student’s knowledge of government subsidies towards their education.

The study found that an overwhelming proportion of students underestimated what percentage of a dollar lent is written off due to the interest-free loan scheme, doubtful debts, and the opportunity cost of capital.

More than half of those students surveyed also underestimated the proportion of government education expenditure allocated to the tertiary sector. The majority of students misjudged the direct tuition subsidy that universities receive for each full time student enrolled. And almost 70% of university students surveyed underestimated how much of the tertiary education budget is spent on direct financial aid to students.

The study thus illustrates that the majority of New Zealand tertiary students have a poor understanding of just to what degree the taxpayer foots the bill for their education. Responses differed little among international and domestic students, as well as across demographic, education and financial aid profile.

Clearly, there is insufficient public debate on how tertiary education costs are currently shared. Much of this stems from a lack of transparency about tertiary education funding. Public information on subsidy rates, and governmental spending in the tertiary sector is not easily accessible. And tertiary education providers have little incentive to provide comprehensive information in this area.

As a consequence, there are often major discrepancies between what the public and what the government thinks is affordable. The Victoria University study concludes that the lack of information feeds into the complexity around the debate on interest free student loans and questions around current cost-sharing arrangements.

Providing a viable solution to the fiscal conundrum of the current scheme is the challenge for New Zealand. Student loan debt is growing by approximately $1 billion per year. It is also a challenge for The New Zealand Initiative. Our research in this area will, we hope, help inform the public on the intricacies of the current scheme, the unintended costs and suggest alternatives that could be better targeted.

Of course, higher education makes a real difference to the lives of New Zealanders. Those with tertiary qualifications are more likely to be happier, better paid and live longer. But improving the affordability and accessibility of higher education must be balanced with what is publicly financially tenable.

Because there is no such thing as a free lunch.