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Bill writes off interest on many student loans

13 June 2000

The Student Loan Scheme Amendment Bill, introduced today, writes off interest for full-time, full-year students and low-income, part-time students. It also introduces a new base interest write-off that will reduce the loan balances of many other students and former students. See the Minister's media statement:


Media Statement

Office of Hon Dr Michael Cullen
Treasurer
Minister of Finance
Minister of Revenue
Minister for Accident Insurance
Leader of The House of Representatives

Government legislates to abolish interest on student loans for current students, reduce interest for former students

Legislation introduced today scraps interest on student loans for full-time, full-year students and for low-income, part-time students while they are studying.

Also potential winners are many former students paying off loans. They may see their loan balance reduced by hundreds of dollars a year.

The changes, which were announced late last year, will be backdated to 1 January 2000 for loans taken out after that date, and to 1 April 2000 for earlier loans.

"This will make a real difference to thousands of students and former students," said Revenue Minister Michael Cullen.

"Although most students earn little or no income while they are studying, until now the interest on their loan has compounded each year. By the time they completed their studies the interest could have represented a significant part of the debt. After a four-year course, for example, the interest component could have been as much as one-fifth of the total debt."

"Many former students will also be better off as a result of the new base interest write-off, which will help them to pay off their loans more quickly. For example, someone who earns $25,000 and has a $15,000 loan to pay off will save about $400 this year," Dr Cullen said.

The changes to interest charged on student loans are:

  • Current full-time, full-year students, irrespective of income, will have their interest fully written off.
  • Current students whose courses are not full-time and full-year and whose income is $24,596 or less will also have their interest fully written off.
  • For former students and current students who do not meet the criteria above, 50 percent of their compulsory repayment obligation will be credited to the base interest charged on their loan, with any excess written off. The other 50 percent will be credited to the CPI component of the interest charge and to the principal, thus accelerating repayment of the principal.

The loan statements issued by the Department of Work and Income and the Inland Revenue Department will continue to show accrued interest on all loans. The interest of eligible borrowers will be written off after the end of each income year.


Attachment 1: Do you qualify for an interest write-off or reduction?

Do you qualify for an interest write-off or reduction? (NZ resident borrowers only)

Flowchart - Do you qualify for an interest write-off or reduction?
Larger version of the flowchart

Non-resident borrowers engaged in full-time study overseas may be entitled to a base interest write-off on hardship grounds. Refer to section 55 of the Student Loan Scheme Act 1992.

Calculating Your 2000/01 Base Interest Reduction

1. Take the total interest charged* to 31 March 2001 $..........(a)
2. Calculate the base interest component
a x 6.1 = (a)
7
$..........(b)
3. Calculate 50 percent of your repayment obligation
 
 
  Net Income for 2000/01
Deduct
$
$14,768
_______
$..........(c)
_______
 
  Multiply (c) by 5% (half the 10% rate) $..........(d)
4. Enter figure at (b) $..........
  Subtract figure at (d) $..........
  BASE INTEREST REDUCTION IS
If the figure at (d) is greater than (b), you do not qualify for a base interest reduction.
$..........

(*From your loan statement from Inland Revenue. If you wish to make the calculation before 31 March 2001, multiply your loan balance by 6.1% for the approximate amount of your base interest and enter this figure at (b).)


Attachment 2: How much will the new base interest write-off save you in the 2000/01 income year?

Loan Balance
Income $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $40,000 $50,000 $60,000
$15,000 $12 $12 $12 $12 $12 $12 $12 $12 $12
$20,000 $43 $262 $262 $262 $262 $262 $262 $262 $262
$25,000   $98 $403 $512 $512 $512 $512 $512 $512
$30,000     $153 $458 $762 $762 $762 $762 $762
$35,000       $208 $513 $818 $1,012 $1,012 $1,012
$40,000         $263 $568 $1,178 $1,262 $1,262
$45,000         $13 $318 $928 $1,512 $1,512
$50,000           $68 $678 $1,288 $1,762
$60,000     NO CHANGE     $178 $788 $1,398
$70,000               $288 $898
$80,000                 $398
$90,000                  

NB: The above figures are the maximum savings for borrowers who do not qualify for a full interest write-off. The savings arise because, from the 2000/01 income year, only 50 percent of the repayment obligation will be credited to the base interest charged and any excess will be written off. The other 50 percent will be credited first to the interest adjustment interest (this is equivalent to CPI and until now has been capitalised as at 31 March each year) charged for the year and second to the loan principal. This means that your loan balance will reduce faster.

The savings vary according to the size of the loan balance (which determines the amount of base interest charged) and the borrower's income (which determines the amount of the repayment obligation). The maximum amount saved is 50 percent of the compulsory repayment obligation. For simplicity, the above figures assume that no payments were made during the year. Because the maximum amount that can be saved is 50 percent of the repayment obligation, payments (which would reduce the interest charge) may not reduce the above savings.

The savings for any particular borrower can only be determined on the basis of his or her income and loan balance.


Current and proposed base interest write-off: detailed examples

Loan Balance $12,000

Base interest rate: 6.1 percent
Interest adjustment interest rate: (equivalent to CPI) 0.9 percent
Repayment rate: 10 percent
Repayment threshold $14,768

Income Current Proposed Savings
$15,000 Opening balance 12,000.00 Opening balance 12,000.00 The saving is equal to the increase in the base interest write-off, i.e., $11.60. This has been offset against the interest adjustment interest which was previously fully capitalised. The closing balance has therefore reduced by this amount.
Base interest 732.00 Base interest 732.00
Interest adjustment interest 108.00 Interest adjustment interest 108.00
Repayment obligation (23.20) Repayment obligation (23.20)
Base interest write-off
($732 - $23.20)
(708.80) Base interest write-off
($732 - $11.60)
(720.40)
Closing balance $12,108.00 Closing balance $12,096.40
$20,000 Opening balance 12,000.00 Opening balance 12,000.00 The saving is equal to the increase in the base interest write-off, i.e., $261.60. This amount has reduced the previously capitalised interest to zero and has reduced the opening balance by $153.60.
Base interest 732.00 Base interest 732.00
Interest adjustment interest 108.00 Interest adjustment interest 108.00
Repayment obligation (523.20) Repayment obligation (523.20)
Base interest write-off
($732 - $523.20)
(208.80) Base interest write-off
($732 - $261.60)
(470.40)
Closing balance $12,108.00 Closing balance $11,846.40
$25,000 Opening balance 12,000.00 Opening balance 12,000.00 The saving is equal to the base interest now written off of $220.40 and the closing balance has further reduced by this amount.
Base interest 732.00 Base interest 732.00
Interest adjustment interest 108.00 Interest adjustment interest 108.00
Repayment obligation (1,023.20) Repayment obligation (1,023.20)
Base interest write-off
($732 - $1,023.20)
Nil Base interest write-off
($732 - $511.60)
(220.40)
Closing balance $11,816.80 Closing balance $11,596.40
$30,000 Opening balance 12,000.00 Opening balance 12,000.00 No change.
Base interest 732.00 Base interest 732.00
Interest adjustment interest 108.00 Interest adjustment interest 108.00
Repayment obligation (1,523.20) Repayment obligation (1,523.20)
Base interest write-off
($732 - $1,523.20)
Nil Base interest write-off
($732 - $761.60)
Nil
Closing balance $11,316.80 Closing balance $11,316.80

NB: For simplicity, the examples assume that no payments were made during the year. If payments had been made the interest charge would be less.

Loan Balance $20,000

Base interest rate: 6.1 percent
Interest adjustment interest rate: (equivalent to CPI) 0.9 percent
Repayment rate: 10 percent
Repayment threshold $14,768

Income Current Proposed Savings
$15,000 Opening balance 20,000.00 Opening balance 20,000.00 The saving is equal to the increase in the base interest write-off, i.e., $11.60. This has been offset against the interest adjustment interest which was previously fully capitalised. The closing balance has therefore reduced by this amount.
Base interest 1,220.00 Base interest 1,220.00
Interest adjustment interest 180.00 Interest adjustment interest 180.00
Repayment obligation (23.20) Repayment obligation (23.20)
Base interest write-off
($1,220 - $23.20)
(1,196.80) Base interest write-off
($1,220 - $11.60)
(1,208.40)
Closing balance $20,180.00 Closing balance $20,168.40
$20,000 Opening balance 20,000.00 Opening balance 20,000.00 The saving is equal to the increase in the base interest write-off, i.e., $261.60. This amount has reduced the previously capitalised interest to zero and has reduced the opening balance by $81.60.
Base interest 1,220.00 Base interest 1,220.00
Interest adjustment interest 180.00 Interest adjustment interest 180.00
Repayment obligation (523.20) Repayment obligation (523.20)
Base interest write-off
($1,220 - $523.20)
(696.80) Base interest write-off
($1,220 - $261.60)
(958.40)
Closing balance $20,180.00 Closing balance $19,918.40
$25,000 Opening balance 20,000.00 Opening balance 20,000.00 The saving is equal to the increase in the base interest write-off, i.e., $511.60. This amount has reduced the previously capitalised interest to zero and has reduced the opening balance by $331.60.
Base interest 1,220.00 Base interest 1,220.00
Interest adjustment interest 180.00 Interest adjustment interest 180.00
Repayment obligation (1,023.20) Repayment obligation (1,023.20)
Base interest write-off
($1,220 - $1,023.20)
(196.80) Base interest write-off
($1,220 - $511.60)
(708.40)
Closing balance $20,180.00 Closing balance $19,668.40
$30,000 Opening balance 20,000.00 Opening balance 20,000.00 The saving is equal to the base interest now written off of $458.40 and the closing balance has further reduced by this amount.
Base interest 1,220.00 Base interest 1,220.00
Interest adjustment interest 180.00 Interest adjustment interest 180.00
Repayment obligation (1,523.20) Repayment obligation (1,523.20)
Base interest write-off
($1,220 - $1,523.20)
Nil Base interest write-off
($1,220 - $761.60)
(458.40)
Closing balance $19,876.80 Closing balance $19,418.40

NB: For simplicity, the examples assume that no payments were made during the year. If payments had been made the interest charge would be less.