The hidden ‘$700m’ cash-flow benefit in the Government’s fees-free switch

There are a lot of eyes on how the Government will manage to fund its $14.6 billion tax package.

But the Government’s plan to pay for tertiary students’ “fees-free” year of education in their third year, rather than their first, could help more than expected.

Most attention has focused on the fact that a decent proportion of tertiary students drop out during their studies, so the Government will pay the benefit to fewer students.

Indeed, NZ First lobbied for the change on the basis that there was little benefit to the taxpayer in subsidising fees for students who ultimately didn’t want or weren’t able to complete their studies.

But there is a bigger immediate benefit for the Government’s cash-flow, as it means there will be two years when it won’t need to pay any students’ fees at all. Its intention doesn’t appear to be to pay two years of fees for any individual students.

That means it would only start paying the third-year fees once all the students who had already received their first year’s fees had completed their studies and moved on.

It will be, in effect, paying for the feesfree year in arrears, rather than in advance.

Tertiary Education and Skills Minister Penny Simmonds says the Government has yet to receive briefings from the Education Ministry on the costs of the changes to the scheme or make decisions on its final design.

The cost of the policy has bounced around a bit as student numbers have overshot or undershot forecasts and the “overs” and “unders” get squared out. But the former Government paid $387m under the fees-free policy in the year to June and budgeted $317m in the current year.

Assuming the Government stopped paying first-year fees at the first opportunity at the end of next year, it would have no fees to subsidise in the 2025 and 2026 calendar years, when it could expect to “save” in the order of $700m.

Exactly how that showed through in the Treasury’s books could depend on how it did its accounting. If it decided that when a student started their studies, it needed to recognise the third-year fees that it would probably need to pay as a liability on its books, then that might take the gloss off for the Government. But its cash position would still reflect the hiatus.

Any extra financial benefit it got from the student drop-out rate could only accumulate from 2027 onwards. That’s not within the current term of the Government, but still partly within the forecast period within which the Government is obliged to attempt to bring its operating budget back into the black — so definitely a bonus.

As far as students are concerned, the switch to third-year payments should make no difference to their finances. That’s so long, of course, as they complete their studies and they can tack their first-year fees on to an interest-free student loan.

If the answer to both questions is ‘yes’, they could benefit slightly, assuming their third-year fees end up costing more than their first year due to inflation.

The flip-side there, is that the Government would weather any higher cost of third-year versus first-year fees.

There is no obvious practical downside from the two-year fee-payment “holiday”. Just if a future Government did can the policy, it would need to delay that two years if it wanted to ensure students who had already entered tertiary education didn’t lose out.