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Student loan loophole to be closed

29 November 2005

Student loan loophole to be closed

The government will move to close a potential loophole in the transition to interest free student loans when the legislation returns to the House, Minister of Tertiary Education Michael Cullen announced today.

Under current rules, borrowers who have made repayments above the minimum may seek to have the money refunded. A Supplementary Order Paper will be introduced during the committee stages of the bill to:

- Ensure that refunds relating to the 2004-05 and 2005-06 tax years remain subject to interest;

- Prevent refunds being claimed for previous years unless the claims have already been lodged;

- Remove the opportunity to apply for special deduction rates below the standard 10 per cent rate for the balance of the current tax year.

The changes will apply from the time of this announcement. Inland Revenue will have the discretion to exempt from interest refunds made in cases of serious financial hardship.

Dr Cullen said the aim of the SOP was to prevent people from trying to “game” the system. It follows reports of a borrower who, in anticipation of the interest free regime, got a $15,000 voluntary repayment refunded and invested the money in an interest bearing account.

“It is important to the scheme’s integrity that we discourage this sort of gaming.”

The costings for the interest free policy, to be included in the December Economic and Fiscal Update, assume that the volume of voluntary repayments will fall to 20 per cent of their present value over three years.

“But repayment of the principal will still be compulsory above a certain income threshold, currently $16,588 a year, and loans will continue to be available only to cover fees, course-related costs and, in the case of full-time students, living costs to a maximum of $150 a week,” Dr Cullen said.

ENDS

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