Student loan interest rate to remain unchanged
The headline interest rate for the student loan scheme is to remain at 7% following the Government's decision to adopt a new rate setting formula, Associate Education Minister (Tertiary) Steve Maharey announced today.
Mr Maharey also announced adjustments to the thresholds of the student loan scheme. The repayment threshold will rise from $14,678 to $15,132, and the income threshold at which part-time students receive a full interest write-off will rise from $24,596 to $25,073.
"The Government has acted to keep the costs of the loan scheme down.
"The 2001/02 tax year headline interest rate is the first set under a new formula which has arisen out of the student loan interest rate review. Under the previous formula the interest rate would have risen to 7.9%.
"That equates to a saving of up to $180 per year in interest charges for a borrower with a $20,000 debt.
"The headline interest rate is the highest rate that borrowers can possibly pay. However less than 20% of borrowers actually face the headline rate.
"Under changes introduced by this Government, most borrowers qualify for full or partial interest write offs depending on their level of income, the size of their debt and whether they are full or part-time students.
"The average interest rate actually faced by borrowers is estimated at 3%," Steve Maharey said.
Contact: Michael Gibbs, Press Secretary, (04) 471 9154 or (025) 270 9115, e-mail: [email protected]. Attached are further details about the review of the student loan headline interest rate setting formula.
Fact sheet: Review of the student loan headline interest rate setting formula
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.