5.4 Taking account of student loans

There is an important aspect of the measurement of net wealth that warrants clarification, as it influences the estimates of the number of families at risk. A relatively high proportion of all non-partnered individuals and couples under the age of 35 were deemed to have had negative net wealth. The figure is most striking in the case of individuals aged 18-24, where the proportion with negative net wealth was estimated to be about 60%.

Negative net wealth implies that the measured value of all liabilities exceeds the measured total sum of assets. Of course, there could well be measurement errors, but it is very unlikely that systematic over-reporting of liabilities and under-reporting of assets could alone explain such a high incidence of negative wealth.

Further analysis reveals that for 45% of individuals and 28% of couples who had negative wealth, their net wealth became positive when their student loan was excluded from their liabilities. This raises two further issues. In the first place, while the survey records student loans as a liability, no corresponding asset is recorded. This is in contrast to housing for example, where both the liability (the outstanding mortgage) and the asset (the gross value of the property) enter the calculation of net wealth.[56] Without an offsetting asset net wealth will be systematically underestimated for those with a student loan.[57] The implication is that the estimates of those at risk through high levels of debt servicing and negative net wealth will be overstated. This suggests that the results in Tables 13 and 14 should be treated as upper bounds.

Those who have invested in education can expect to have higher lifetime earnings than those who have not. They have acquired an asset (referred to as human capital) and like all other assets it is expected to generate a stream of benefits. Drawing on the work of Scobie, Gibson and Le (2005) we can illustrate this as follows. Take as an example a Pakeha female aged 25 with a university degree. She can expect to have a lifetime income some $375,000 higher in present value terms than a 25-year-old Pakeha female with only high school qualifications. The present value of expected future earnings until age 65 represents one measure of the asset denoted human capital. In the example above, $375,000 represents the additional human capital she can expect from her investment in education. Clearly, even if this person had borrowed $45,000 (the 95th percentile of all loan balances in 2007), her ability to repay this from her additional earnings would not be in doubt. However, she would be recorded in SoFIE as having substantial negative net wealth. Further, in the event that she is still completing her studies or yet to join the labour force as a graduate, she could well have a very low or no recorded income. This will mean that she is included in the estimates of being at risk because of the combination of her negative net wealth and low income. Yet no such “problem” exists in reality, once the true value of her assets and her ability to repay her debt from lifetime income are correctly accounted for.

In order to recognise the importance of human capital as an asset, we recomputed the estimates of the proportion at risk taking into account that those with student loans have invested in education to acquire additional human capital. We imposed the assumption that the present value of their expected additional future earnings (over and above what they would have expected with only school qualifications) exactly offsets the student loan that they reported in the survey. Put simply, this assumes that the acquired asset is equal in value to their investment.[58]

Referring again to the example cited above, the 25-year-old female with a degree could expect to have additional human capital worth eight times the large liability she was assumed to have acquired; more than sufficient to cover her student loan. It seems reasonable to assume that those with student loans expect to increase their stock of human capital by at least the amount of their student loan. Therefore our assumption that the value of the asset is just equal to the debt (ie, a ratio of 1:1) should give a conservative estimate of average net wealth for those recording student loans.

But for our purposes, it is not average net wealth with which we are concerned. Rather, it is the proportion at risk, so the tails of the distribution are more relevant than the average. This raises the question of the effect of our assumption on the estimated proportion at risk. It may seem that the assumption will overstate the reduction in the proportion at risk if we completely offset student loans as inevitably there will be a few individuals whose additional future earnings will not cover their loan. But although it is likely that there will be some individuals whose actual net investment in human capital will be negative, to calculate current net wealth it is the current value of the asset that is relevant. With any investment in capital, the present value of the future stream of benefits that it will provide is uncertain and yet it has a market value at any point in time equal to the expected value of this stream of benefits. Whether the investment pays off is another issue, which is relevant for investment in any asset, be it housing, financial or other assets. Therefore, our 1:1 assumption should not overstate the number whose net human capital moves from negative to positive when we offset their student loan, provided those individuals expect a return from their investment.

Tables 15 and 16 show how offsetting student loans in this way affected our estimate of the percentage that had negative wealth and the percentage at risk in 2003/04. Tables 17 and 18 show the effect of this on average net wealth for the group whose recorded wealth was negative in 2003/04.

Table 15 reveals a 46% reduction in our estimate of the number of non-partnered individuals with negative net wealth in 2003/04 when student loans are offset, taking the percentage with negative wealth down from 34% to 19%. Table 17 shows that the effect was to increase the estimate of average net wealth for this group from -$11,300 to -$1,300. The biggest reduction in the estimated proportion with negative wealth occurred in the 18-24 age group, where the percentage fell by 60%, down to 24%, and the estimate of average wealth increased from -$11,300 to $600. Through its effect on wealth, offsetting student loans also had an impact on the estimate of the number with negative wealth and high debt servicing costs, particularly for those aged 18-24; for this age group, the estimate of the percentage with negative wealth and debt servicing costs in excess of 30% of income fell from 3.6% to 2.5%. The percentage with negative wealth and debt servicing costs in excess of 40% of income fell from 3.3% to 2.3%.

The corresponding results for couples are displayed in Tables 16 and 18. The results show a 28% fall in our estimate of the number with negative wealth in 2003/04 when student loans are offset by a corresponding asset. The effect was an increase in average net wealth for those reporting more debt than assets from -$34,800 to -$23,600. The effect was largest for those under 35, where the estimate of the percentage with negative wealth fell by about 36% and the estimate of average net wealth increased from around -$20,000 to -$6,000. However, for couples student loans were a very small share of their total debt (2% overall) in contrast to non-partnered individuals (at 12%). As a consequence, offsetting student loans with a corresponding asset had very little impact on the share of couples who had both negative wealth and high debt servicing costs and so did not reduce the estimate of the percentage of couples with debt considered to have been at risk.

¹Excludes those with negative reported income.

Sources: SoFIE wave 2, Statistics New Zealand; the Treasury

¹Excludes those with negative reported income.

Sources: SoFIE wave 2, Statistics New Zealand; the Treasury

¹Excludes those with negative reported income.

Sources: SoFIE wave 2, Statistics New Zealand; the Treasury

¹Excludes those with negative reported income.

Sources: SoFIE wave 2, Statistics New Zealand; the Treasury