Fact Sheet On Student Loan Scheme With Amendments
STUDENT LOAN SCHEME (1992)
Established to ensure no-one is prevented from undertaking tertiary study because of financial hardship. "Under this scheme more students than ever before have been able to participate in tertiary education and training."
Reviewed in 1998 which resulted in several major changes to the way student loan money is accessed and repaid. (See page 3)
What Can Be Borrowed?
Full-time tertiary students can borrow:
the compulsory fees charged by their institution at enrolment,
up to $500 each year to assist with course-related costs, and,
a living costs entitlement of $150 per week of the course less any net entitlement to student allowances.
A loan is available to students at a private training establishment (PTE) as long as the course is at least 12 weeks long and it has been approved by the Ministry for student loans purposes. The maximum for compulsory fees is $6,500.
All students studying on a programme approved by the Ministry.
Students aged under 18 need parental consent before they can borrow.
Students studying an approved programme on a part-time, full-year basis can only apply for a student loan for fees and course-related costs.
How loan money is made
$500 course-related cost component: students need to provide documented justification of their expenditure, e.g. receipts or a statement from their education provider giving details of the items needed for the student’s course and an estimate of the expected cost.
The living cost component is made available in fortnightly instalments; each instalment is a maximum of $300 dollars (less any student allowance received). Students nominate the amount they wish to draw each fortnight. If the full fortnightly entitlement is not drawn the balance is forfeited, so that there is no accumulation of lump sum entitlements.
Student loan fee entitlements must be direct credited to tertiary education providers.
The repayment is income dependent and includes generous interest write-off provisions for nil or low-income earners after they have finished studying.
Borrowers don't have to make repayments until they earn more than $14,716. This threshold is reviewed annually.
Borrowers are only required to pay ten cents in each dollar of taxable income earned over the threshold.
Voluntary repayments solely repay loan principal rather than interest and can be made to Inland Revenue at any time.
The Government will not suddenly demand the repayment of a student loan.
Borrowers who earn under $14,716 are eligible for an interest write-off. As are borrowers whose repayments do not cover the base interest charged.
The interest rate covers the interest charged to the Government on the money it advances to students.
The rate is calculated through the average of the ten-year bond interest rate over the last 12 months and the next 18 months.
The interest rate can't be compared to the interest rate on mortgages. A student loan has no collateral security whereas mortgages are secured loans that banks reserve the right to demand the repayment of.
In contrast to banks, the Government lends student loan money regardless of their credit rating, the security they can offer, and whether they are likely to have difficulty in repaying a student loan.
The interest rate is currently 7%. A significant part of this (5.3%) is the base interest. Part or all of the base interest 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 account.
The interest adjustment charge protects the loan as a Crown asset and is only written off at death.
1998 Review of the Student Loan Scheme
Following the 1998 review of the Scheme, the Government introduced a set of measures.
measures cover two main areas:
(1) more controls around the amount of money available to borrowers, particularly young students
(2) helps borrowers to reduce their debt more quickly and pay less interest.
(1) Greater Control On
Access To Student Loan Money
Loan entitlements will be aligned with students’ immediate educational needs
These measures will greatly reduce the ability of students to use student loan money for non-educational purposes, such as cars, holidays, fancy stereo systems, the sharemarket etc.
From January 1999 no new loans will be paid out to students in lump sums.
Loan living cost support will be paid out in fortnightly instalments to help students better manage their money.
From January 1999, the course cost entitlement will be a maximum of $500 and eligibility for this will be linked to students actual course cost requirements.
Parents will have a say over borrowing by students under 18, so the decision to take out a loan will be a joint responsibility.
(2) Help To Reduce
Debt More Quickly And Pay Less Interest.
From the start of the 2001/2002 tax year three major changes will be introduced to encourage quicker and easier repayment of student loans.
Compulsory repayments won't repay interest in the first instance. Instead, 50% of each compulsory repayment, minus the inflation adjustment interest, will automatically go to the repayment of outstanding principal. For most this will reduce the amount of interest being accrued and the time it takes to repay the loan.
Students will have up to 25% of their base interest written-off while studying. This will ensure that:
a) a student not earning over the repayment threshold will have a full 25% of their base interest charge written off;
b) students earning over the repayment threshold will have 50% of their compulsory repayments, minus inflation adjustment interest, directed to the repayment of principal; and, if half of their repayment obligation does not cover the base interest charged, the student would have either the remainder of their base interest written-off or 25% of their base interest written off, which ever is the smaller.
Borrowers will be required to repay fifteen cents in each dollar of taxable income earned over $50,000
Most borrowers with low income relative to their debt will no longer make repayments without reducing their outstanding principal meaning they will pay off their debt faster and pay less interest. (Women and underrepresented groups like Maori and Pacific Island people, who tend to have lower incomes, will especially benefit from this measure).
Borrowers earning higher incomes will be required to repay at a higher rate. This will ensure that they reduce their debt more quickly and pay less interest.
The cumulative effect of this package is estimated to reduce the total student debt in 2024 by $4.74 billion (25.1%)
Interest rate for 1999/2000 tax year: 7%
Average borrowing in last academic year (1997) : $5,494
Number loan balances held by Inland Revenue at 30 June 1998: 220,913
Total Debt at 30 June 1998: $2.444 Billion, estimated to be $3 billion by 30 June 1999
Average level of student debt at 30 June 1998: $10,600
Benefits of New Base Interest Write Off
People earning below the threshold do not benefit from the new policy (but benefit from the old policy).
People earning a very low wage will benefit by $14 per year for any level of debt about $1000 or more.
Someone on $30,000 would begin getting a small benefit of $31 if they had a debt of $15,000. This benefit would increase to a maximum of $764 for any debt of $29,000 or more.
Examples of benefits when earning to
A debt of $15,000 would get a maximum benefit of $381 for someone earning $23,000. The benefit would be less if the income was above or below this figure. Once income hits $31,000 there would be no benefit.
Someone with a moderately high debt of $30,000 would get a maximum benefit of $776 when they are on an income of $31,000. They would get no benefit once their income reached $47,000.
Someone with a significantly high debt of $100,000 would get a maximum benefit of $2,636 when they are earning $62,000. They would get no benefit once their income reaches $121,000.