3 May 2001 Media Statement

Student complaints misleading

Associate Education (Tertiary Education) Minister Steve Maharey has responded to inaccurate allegations by the New Zealand University Students' Association (NZUSA) about the setting of the 2001/02 headline interest rate.

The headline interest rate for the 2001/02 tax year, which was first set under a new formula arising from the student loan interest rate review, was announced on February 27th. Under the previous formula the interest rate would have risen to 7.9%.

"NZUSA has drawn attention to the fact that the new headline interest rate includes a larger than usual inflation adjustment (3.9%).

"This reflects the rate of CPI increase in December 2000, which has always been the basis on which the inflation adjustment was set. Contrary to NZUSA's claims, I made this quite clear in a Factsheet issued at the time the interest rate was announced (attached).

"NZUSA has suggested that the 2001/02 interest rate has disadvantaged low-income borrowers. In actuality, most borrowers are much better off this year.

"The headline interest rate is the highest rate that borrowers can possibly pay. Only a relatively small minority of borrowers actually face the headline rate, but those that do will benefit from lower interest under the new formula.

"All full-time or low-income part-time students benefit from a full interest write-off. The abolition of interest for this group has been a major initiative of the Labour/Alliance Government and has cost over $400 million over 4 years."

"Another group of students benefit from the new rule that at least 50% of repayments (above of the inflation adjustment) go to pay off the principal, and any remaining interest is written off.

"A minority of students, however, do face a reduced base interest write-off this year because base interest is a smaller proportion of the total interest rate than previously. The impact of this varies from year to year based on the rate of inflation," Steve Maharey said.

Attached is the factsheet about the review of the student loan headline interest rate setting formula that was issued on 27 February 2001.

Fact sheet: Review of the student loan headline interest rate setting formula
[First issued 27 February 2001]

How did the review of the student loan headline interest rate setting formula come about?

The Government inherited the review which was initiated following a period in which the student loan interest rate was higher than the first home mortgage rate for significant periods of time.

How has that problem been addressed?

The Government has decided that the total interest rate should be based on the average of the 10-year bond rate for the December preceding the upcoming income tax year. In the past, the 10-year bond rate has been averaged over both past and forecast rates. While this has tended to smooth out fluctuations in interest rates, it has meant that the student loan interest rate has not been responsive enough to movements in the market.

The interest adjustment rate, a component of the total interest rate, has also been based on more up-to-date information, with the December CPI rather than the September CPI being used.

What other changes have been made?

The margin which is added to the average of the 10-year bond rate to cover administrative costs, and the cost of the amount expected to be written off on the death of borrowers, has also been reviewed and will reduce from 0.9 percent to 0.8 percent.

So is this year's headline interest rate the same as the rate for the previous year?

The combined effect of these changes is that the total interest rate will not change from its present level. However, the interest adjustment rate will increase from its present level of 0.9 percent to 3.9 percent and, as the base interest rate is simply the difference between the total interest rate and the interest adjustment rate, it will decrease from 6.1 percent to 3.1 percent.

What will the changes to the headline interest rate setting formula cost?

Because the lower rate results from a change in the formula for assessing the costs of the scheme to the Crown there is no additional cost against the Government's operating provisions.

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