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A fresh start for overseas student loan borrowers

A fresh start for overseas student loan borrowers

There will be a fresh start for those overseas with student loans under new rules unveiled by Tertiary Education Minister Dr Michael Cullen and Revenue Minister Peter Dunne today.

"The changes introduced in the Student Loan Scheme Amendment Bill today are part and parcel of our aim to enhance the quality and lower the cost of tertiary education," said the Ministers.

"We want to improve the skills base of New Zealand by ensuring greater numbers of students have access to high quality tertiary education. This is essential if we are to transform New Zealand into a higher wage, knowledge-based economy.

"Interest-free student loans are a key part of improving access to tertiary education. However, it is clear the rules around overseas borrowers need to be improved as they discourage many from meeting their obligations and may deter some from coming home.

"We recognise that graduates want to travel overseas and gain valuable skills and experience and that repaying student loans during their OE can be difficult.

"However, we don't want them to accumulate an unmanageable debt in the process which ends up discouraging them from returning home and contributing to the economy. Therefore, we need a fresh start.

"The new rules will make it easier for students heading overseas to stay on top of their repayment obligations and give more breathing space for those who are overseas and are struggling with rising debt.

"The fact that interest-free loans are generally limited to borrowers living in New Zealand has increased financial incentives for borrowers to leave New Zealand without informing Inland Revenue because their loans would then attract interest.

"In future Inland Revenue will know when borrowers go overseas. A law change will allow data matching between Inland Revenue and the New Zealand Customs Service. This will ensure that only those entitled to interest-free loans have access to them.

"The data match is expected to reveal about 40,000 borrowers who are or have been non-resident and whose loan accounts will therefore have to be adjusted," said the Ministers.

New rules for borrowers overseas from 1 April 2007

Fresh start The amnesty for non-resident borrowers in arrears will be extended to 31 March 2008. This means penalties will be wiped. If they apply for the amnesty and meet certain conditions, including making regular payments based on the new repayment rules for two years, their loan balance will not increase except for interest.

Making it easier to repay There will be a repayment holiday for borrowers going overseas of up to three years, during which time they will not have to make repayments, although their loans will still attract interest. This also applies to those who have met the amnesty conditions. For all overseas borrowers who are not on a repayment holiday, their yearly repayment obligations will be based on the size of their loan balances. A borrower with a loan balance of $15,000 or less will be expected to repay a minimum of $1000 a year, a borrower with a loan of between $15,000 and $30,000 is expected to pay $2000 a year, over $30,000, the minimum repayment is $3000 a year. Repayments are currently based on 1/15th of the size of the loan.

Encouraging overseas study Inland Revenue will be able to grant interest-free loans to undergraduates studying full-time overseas to bachelor’s degree level.

Other changes Simplifying the rules that determine whether someone is a New Zealand borrower, and thus required to repay the loan on an income-contingent basis, or an overseas borrower, whose payment will be based on the size of the loan (see above). Fine tuning specific interest write-off rules to reflect the introduction of interest-free loans. Borrowers who had repaid their loans by 13 November 2006 and had an interest write-off to which they were not entitled will not have the write-off reversed.

Changes applying to all borrowers The late payment penalty for all borrowers will reduce from 2.0 per cent per month to 1.5 per cent per month. The change will apply to amounts subject to a late payment penalty on or after 1 April 2007. Inland Revenue’s powers to grant hardship relief will be made more flexible by allowing it to suspend payments during the year for borrowers who apply for it.

Information on these and other technical changes in the bill is available in the commentary on the bill, published at: http://www.taxpolicy.ird.govt.nz./

Questions and answers: Student Loan Scheme Amendment Bill

Why are the repayment provisions being changed and why has the Government chosen to introduce a repayment holiday and a three-tiered repayment arrangement?

The changes aim to provide fairer, less punitive, repayment provisions for borrowers living overseas, to ensure that their loans do not increase in such a way that discourages them from returning to New Zealand. This is consistent with the intent of interest-free loans.

After study, many graduates go overseas on their ‘OE’ and return after a few years. The Government appreciates that, while overseas, most graduates will not be earning high incomes and that they may find it difficult to make repayments. With this in mind, the Government is introducing an automatic three-year repayment holiday with repayment obligations based on the size of the borrower’s loan when the holiday ends.

Is it fair that borrowers overseas aren’t required to make repayments while borrowers in New Zealand are? Won’t this just encourage borrowers to go overseas?

The repayment holiday recognises that it may be unrealistic to expect borrowers who are travelling overseas and doing holiday jobs to make repayments. Because repayment obligations for borrowers in New Zealand are income-contingent, borrowers are protected from having to make repayments when their income is low. This is not the case currently for borrowers living overseas who are expected to make repayments based on 1/15th of their loan size, which can be onerous or impossible for some.

The holiday is limited to three years, so that those going overseas long-term will still be required to make repayments when the holiday ends. In addition, borrowers living overseas are subject to compounding interest, even during the holiday period, while borrowers living in New Zealand are not.

Why not just have income-contingent repayment obligations for borrowers living overseas?

This would cause a number of administration difficulties, such as at what level to set the repayment threshold. Borrowers in New Zealand are required to repay ten percent of all income over $17,160. For a borrower living in London, this threshold is very low given the cost of living there. For a borrower living in Vietnam, for example, this threshold is relatively high. England has seven different repayment thresholds depending on what country the borrower lives in. A similar system would be complex to administer and difficult for borrowers to understand their obligations.

Why is the amnesty on student loan penalties being extended?

The amnesty is being extended by one year to give borrowers identified as non-resident borrowers as a result of the data match – which will take place after the existing amnesty ends – the chance to come within the amnesty. The amnesty allows non-resident borrowers with arrears the chance of a fresh start by having their penalties cancelled. Penalties have been acting as a disincentive for borrowers to return to New Zealand.

Why are the interest write-offs that were in place prior to interest-free loans being abolished?

Borrowers living in New Zealand for six months or more are eligible for interest-free loans. The old interest write-offs therefore only apply in very limited circumstances to borrowers who are living overseas. Having interest write-offs for borrowers overseas is inconsistent with the policy intent of interest-free loans, which is to encourage borrowers to return to New Zealand. Why will borrowers studying full-time at undergraduate level overseas be eligible for interest-free loans?

Interest-free loans for borrowers studying will alleviate debt escalation for borrowers who take time out of the paid workforce to study full-time. Borrowers studying at post-graduate level overseas are already eligible for interest-free loans. Borrowers must provide proof to Inland Revenue that they are studying full-time and evidence that establishes that their course is equivalent to a course in New Zealand of bachelors degree level or above (this evidence is obtained from the New Zealand Qualifications Authority).

This change does not mean that those living overseas can take out a student loan for study that they are doing overseas, rather, that if they have a student loan prior to leaving New Zealand, it will be interest-free while they continue to remain in full-time study.

Why is the penalty rate being reduced?

Borrowers are currently subject to a penalty rate, which is equivalent to an annual rate of 26.82 percent. This rate has often been criticised as being too punitive. The Government has recognised this, but realises that there must still be consequences if borrowers fail to meet their obligations. The new penalty rate is equivalent to an annual rate of 19.57 percent. This rate will be the same for borrowers living in New Zealand and borrowers living overseas.

The hardship provisions are also being altered to give the Commissioner of Inland Revenue more flexibility in cases of hardship. For example, the Commissioner is being given the ability not to require repayment if payment would cause a borrower serious hardship. This means that borrowers will not be penalised if they cannot afford to meet their repayment obligations.

What is the fiscal cost of these changes?

Officials estimate the net cost to be about $15 million for 2007/08. This represents the outstanding penalties and interest write-off reversals from the estimated 40,000 borrowers overseas balanced against the expected write-off of penalties and softening in the repayment and penalty regime.


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