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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

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