• Wyatt Creech

The Government is cutting the student loan interest rate in line with the downward trend in market rates - benefiting all those with a student loan, both existing and former tertiary students.

Education Minister Wyatt Creech and Revenue Minister Max Bradford announced today that the interest rate for student loans for the next tax year would drop from 8 percent to 7 percent.

In addition, the Ministers announced a new policy that introduces an interest write-off regime targeted at students while they are studying.

"The Government is concerned about the interest that students accrue while they are studying. This interest adds significantly to a borrower's student loan debt and can mean a student spends longer paying back their loan.

"Under the new policy students will have up to a quarter of their base interest rate bill written off on money borrowed while they are studying," Mr Creech said. "For computer development reasons the Inland Revenue Department is unable to introduce this policy until the tax year beginning 1 April 2001.

"This change will cut the level of debt by half a billion dollars by the year 2024.

"Under the current scheme students borrowing while they are still studying face compounding interest on their loans at the full interest rate. Writing off up to a quarter of the interest will benefit those students who borrow over longer periods of time."

The Ministers said the new 7 percent interest rate for the 1999/2000 tax year had been calculated using ten year bond rates - the existing method of setting rates. It is made up of a base interest rate of 5.3 percent and an interest adjustment rate of 1.7 percent. The repayment threshold will remain the same at $14,716.

"Cabinet has also commissioned further work to establish whether the current methodology is the best way of working out the interest rate to ensure students aren't paying more than market rates. Officials are due to report back on this issue next year," the Ministers said .

Today's interest rate changes follow last month's review of the student loan scheme which will see 50% of all compulsory student loan repayments automatically going to the repayment of principal.

Other measures in the November package include:

An end to paying out student loans in lump sums
Fortnightly direct-crediting of the living costs entitlement into students' bank accounts
Parental consent will be required before students under 18 can get a student loan
Students fee entitlements must in future be direct-credited to their tertiary education providers
The amount students can borrow for course costs will be a maximum of $500, and this will be linked to the actual costs
Student union fees will no longer be covered through the loan scheme
The minimum amount acceptable as a repayment in the year of borrowing will be reduced from $200 to $100
High income earners will be required to repay their loans at the rate of 15 cents in each dollar of income earned over $50,000.