Next Year: Faster Repayments, Less Interest for Students

  • Max Bradford
Tertiary Education

Next year tertiary students will be able to pay their loans back faster and will pay less interest because of the bringing forward of changes to the Student Loan Scheme, Tertiary Education Minister Max Bradford and Education Minister Nick Smith announced today.

"We are concerned about the debt burden on students and want to make the loan scheme fairer.

"The change to ensure at least 50% of repayments reduce the principal will stop student debt snowballing once students commence work. The other changes will make the loan scheme easier on students while studying," the Ministers said.

The changes being brought forward one year include a percentage interest write-off that will mean students pay less interest, without adding an incentive for loans to escalate out of control, as well as a more generous approach to repayments.

* At least 50% of repayments, less the inflation adjustment, will go first to repay loan principal. This will have a significant benefit on balances of money to be repaid.

* Students will get up to 25% of their base interest written-off while studying. This means most students will pay 5.7% on their loans while borrowing, rather than the full current 7%.

* A new change is that the amount students can borrow for course costs will be increased, from $500 to $1000. But students will still need to produce receipts to verify their costs.

Mr Bradford said the changes will result in students being able to pay back loans many years earlier, and in the process, save tens of thousands of dollars. The changes will mean a typical nurse will repay his or her loan five years faster, a teacher 7.5 years faster and a doctor three years faster.

"The Government strongly rejects Labour's policy of removing absolutely all interest on loans while studying. Students will hardly say no to a free loan and will end up borrowing more.

"Last year, less than half of students had a student loan, and few students borrowed to the limit. Labour's policy is guaranteed to do only one thing - increase student debt," Mr Bradford said.

Dr Smith said the 25% interest rate discount while studying would reduce the burden on students while not encouraging unnecessary debt. "The discount has been set so that no financial advantage can be taken from increased borrowing and re-deposit with a commercial bank.

"Increasing the course-cost entitlement from $500 to $1,000 is in response to student submissions. The new system introduced this year requiring receipts for course costs is working well and we are now confident that the systems are in place to ensure any borrowing will be for educational purposes.

"The interest discount and changed repayment system are not new changes and came out of the 1998 review of the scheme. IRD advised Cabinet last year that it could not implement the changes until 2001. However, in August this year IRD advised it could implement the changes next year," Dr Smith said.

The Ministers said the Government paid almost three-quarters of the cost of a student's tertiary education and it was reasonable for students to make a contribution.

"An average graduate can expect to earn over half a million dollars more over his or her working lifetime than a non-graduate.

"Tertiary students want a fair go. That is what we are delivering - cheaper interest while borrowing and quicker repayments once graduated," the Ministers said.

Media enquiries: Jeremy Kirk: (04) 471 9836, 025 424 565

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