Burden eased for overseas student loan borrowers

The passage today of a student loan scheme bill will make life easier for borrowers who are overseas and simplifies the administration of the student loan scheme, Tertiary Education Minister Michael Cullen and Revenue Minister Peter Dunne said today.

The changes for borrowers who are overseas include a repayment holiday of up to three years, new repayment obligations, extension of interest-free loans to full-time undergraduates, and extension of the amnesty for those who have fallen into arrears with their payments.

Other changes in the Student Loan Amendment Bill include a reduction in the late payment penalty for all borrowers, and allowing data matching between Inland Revenue and Customs to ensure correct entitlement to interest-free loans.

"The changes bring the student loan scheme rules into line with the aims of interest-free loans, one of which is to reduce barriers to the return of skilled New Zealanders," the Ministers said. "The new rules recognise that it is not always easy for people to repay their loans while doing their OE and working in holiday jobs, so it is probably unrealistic to expect them to make regular repayments under those circumstances.

"By making it easier for them to repay their student loans and avoid mounting debt, we remove a disincentive for them to return to New Zealand when they are ready.

"At the same time, the introduction last year of interest-free loans that 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. "That is the reason for introducing data matching between Inland Revenue and New Zealand Customs, to ensure that only those entitled to interest-free loans have access to them.

"The bill also reduces the late payment penalty for all borrowers, here and overseas, to make it less punitive, and amends the hardship provisions to give greater flexibility to Inland Revenue in requiring payment.

"Borrowers will receive more information about the changes that affect them in a newsletter that will be enclosed with their Inland Revenue statement of account, which they will receive in early May," said the Ministers.

"I welcome these changes, which are designed to make it easier for borrowers to meet their repayment obligations and for Inland Revenue to administer the student loan scheme efficiently and fairly," Peter Dunne said.

"These changes underline our efforts through interest free loans and other support measures which are helping to make tertiary education more accessible. We are ensuring greater numbers of students can gain the skills needed to help transform this economy," Dr Cullen said.

Summary of the student loan scheme changes

New rules for borrowers overseas from 1 April 2007

A new repayment “holiday” of three years for borrowers going overseas is being introduced. Borrowers will not have to make repayments during the holiday, although their loans will still attract interest. For overseas borrowers who are not taking a repayment holiday, there will be progressive repayment obligations, based on the size of their loan balances. For many borrowers overseas, that will mean annual repayment requirements that are lower than they are under previous law. Interest-free loans for people studying overseas will be extended to undergraduates studying full-time at bachelor’s degree level. The change will apply to loans taken out before leaving New Zealand. The amnesty on penalties declared last year for non-resident borrowers who are in arrears with their payments will be extended by one year – to 31 March 2008. This will allow borrowers who are identified by data matching between Inland Revenue and the Customs Service to come within the amnesty. For overseas borrowers to qualify for an interest-free loan on the basis that they are working overseas as volunteers, or for token payment as an employee of a charitable organisation, they must establish that they are engaged in one or more specified purposes that include the relief of poverty, or the effects of war or disaster, and the raising of economic or educational standards of a developing country. The law on which repayment rules borrowers are subject to will be simplified by basing the decision on whether they are eligible for an interest-free loan rather than on their tax residence. Interest write-offs for borrowers living overseas that were in place before the introduction of interest-free loans are being abolished. Borrowers who 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 borrowers living overseas and in New Zealand will reduce from 2.0% a month to 1.5% a month. 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.

Administering the student loan scheme rules

Inland Revenue and the New Zealand Customs Service will match information to help determine whether a borrower is eligible for an interest-free loan, is based in New Zealand or overseas, and is resident or non-resident. Border-crossing information will be matched with information supplied for student loan purposes. The care and management provisions in the Tax Administration Act have been amended to ensure that they apply to the Student Loan Scheme Act in relation to interest. The amendment will ensure that there is adequate basis for correcting any balances that may be in error as a result of a miscalculation and is important to Inland Revenue’s ability to protect the integrity of the tax system.

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

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