Q & A: Changes To Student Loans Scheme
CHANGES TO STUDENT LOANS SCHEME
FACT SHEET AND QUESTIONS
Key Changes
From the 2000/2001 tax year onwards:
the majority of students who are still studying and who borrow in that year will get up to a 25% reduction in base interest rate;
at least 50% of compulsory repayments, less inflation interest, will go first to repaying the loan principal;
a new repayment step of 15 cents in the dollar will come into effect for income earned over $50,000;
From 1 January 2000:
The amount that students can draw down for course costs will be reinstated to $1000 from $500, if borrowers can produce receipts.
How Will The Interest
Write-Off Work For People Still Studying?
Currently,
loans for students who are studying, attract interest at the
present rate of 7% (base rate of 5.3% + inflation adjustment
rate of 1.7%). Under the changes, up to 25% of the base
interest for students who are studying will be written-off
on an income contingent basis. This will bring the total
interest down from 7% to 5.7% .
How Do These Changes Help
Students?
Shorter repayment periods
Limits debt escalation
Greater assistance to
women and groups traditionally under-represented in tertiary
education
Greater assistance to those who borrow
large amounts over longer periods of time
Enables those students who have legitimate course costs
above $500 to meet more of their course costs.
Why Has The
$1,000 Course Cost Entitlement Been Reinstated?
There was
legitimate concern from students that costs for some courses
exceeded the current $500 limit. In reinstating the $1,000
course cost entitlement, the Government had to be confident
the receipting procedures were robust and not open to abuse.
We now have that confidence.
Why Have You Brought The
Changes Forward A Year?
In 1998 IRD advised that they
were unable to implement the changes before 2001. In August
1999 the Government asked IRD to review its position. IRD
advised us it could now implement the changes in
2000.
What Is The Effect Of These Changes On Net
Debt?
The cumulative effective of the 1998 policy changes
was estimated to reduce the total student debt in 2024 by
$4.74 billion (25.1%). The new arrangement will ensure even
greater savings.
How Much Do The Changes Cost?
The
changes will cost $11.7 million in 1999/00, $23.6 million in
2000/01,
$5.0 million in 2001/02 and $7.1 million in
2002/03. This is in addition to the costs of the changes to
the Scheme announced in 1998.
What About Low Income
Earners, Or Women Taking Time Off Work?
The policy
includes a base interest write-off that effectively freezes
the debt in real terms.
Part or all of the base interest rate is written off if a borrower does not earn enough to repay it. In which case only the remaining 1.7%, or inflation adjustment interest, is added to the borrowers’ loan.
Do All Students Have Massive Loans?
No. In 1998
less than 50% of students took out a student loan. In 1999
the average cumulative per student loan debt was estimated
to be $11,700. In June 1999, 58% of loans were under
$10,000.
What Is The Government’s Contribution To
Tertiary Education?
The Government still continues to be
the single biggest investor in tertiary education through
tuition subsidies, student allowances and a subsidised
Student Loan Scheme. The Government pays nearly three
quarters of the cost of a student’s tertiary study. This
fact is often overlooked in the student loan debate.
For
instance, in the 1998/99 fiscal year Government
provided:
$1,236 million on tuition
subsidies;
$378 million on student allowances;
and
$618 million on student loans.
Why Have
The Loans Scheme – What Is It Supposed To Achieve?
All
main political parties, except the Alliance, believe that
students should pay something towards the cost of their
tertiary education.
An average graduate can expect to earn over half a million dollars more over their working lifetime than a non-graduate. Student loans are an investment in a student’s future for a significant financial return.
The Scheme also means all New Zealanders can have access to tertiary education.
Is The Scheme Working?
Yes. The
Student Loan Scheme has helped students from all financial
backgrounds access tertiary education. Since 1990, 75,000
more students are at tertiary institutions.
Groups with traditionally lower participation rates in tertiary education, such as those from Maori and Pacific Island backgrounds, have shown large increases in participation. Between 1994 and 1998 the total growth rates were 24% and 30% respectively.
In addition, postgraduate enrolments grew in total by almost 20% between 1995 and 1998.
Why Is
Interest Charged?
The interest rate ensures borrowers
meet the cost of the interest charged to the Government for
the money it borrows and advances to students.
As the Government does not profit from the Scheme, not charging interest would greatly increase the cost to taxpayers. In 1995 it was estimated that each dollar advanced to students costs taxpayers 11 cents.
Why Is Some Interest Charged
While Students Are Studying?
Charging no-interest on
loans while studying was one option looked at during the
1998 Student Loan Scheme review. A full interest write-off
while studying was not chosen because of concern it could
encourage students to borrow student loan money for profit
and for other non-education purposes, as well as greatly
increasing the cost to taxpayers and decreasing expenditure
in other high priority areas such as health.
Is The Scheme
Causing A “Brain Drain”?
Only 3% of those with student
loans are currently registered with IRD as non-residents.
Furthermore, the New Zealand Vice-Chancellors’ Committee
Report (1997) on New Zealand graduate destinations indicates
that those who do leave return within five years.
Evidence suggests, raising taxes to fund free student loans may encourage more people to either go or stay overseas in search of higher incomes
Ends