4.2 If the student loan residual repayment obligation is $1,000 or more the borrower is required to make three interim repayments during the year. Late payment penalties apply from the third and final instalment date if payments have been missed. Currently, no late payment penalty applies to the earlier two payment dates.
4.3 If too little has been paid during the year through interim instalments the shortfall is due on 7 February of the year following (or 7 April if you have a tax agent). Penalties are imposed if the shortfall is not paid on time.
4.4 The annual repayment threshold for repayments (currently $19,084) applies and is the same as that for wage and salary earners.
Proposed changes
4.5 Under the proposed changes, the system would generally remain the same. Borrowers would be required to file a return at the end of the year and square-up their student loan repayment obligations. All interest and dividend income would continue to be part of the end-of-year student loan repayment calculation. The annual repayment threshold for repayments (currently $19,084) would continue to apply.
4.6 Borrowers would be required to pay one-third of their liability on the three interim repayment dates if their annual student loan residual repayment obligation is $1,000 or more.
4.7 If the borrower does not pay their three interim instalments by the due date it will attract interest at, say 6.8 percent, from the due date. The interest rate would be the same as that for overseas-based borrowers, which at present is 6.8 percent. However, it would not attract a late payment penalty, as is currently the case. This approach would give borrowers an incentive to pay during the year but does not result in the application of much more significant late payment penalties (currently 1.5 percent a month or 19.56 percent a year).
Example: Missing a payment
Anjii is self-employed and is required to make three student loan payments of $4,000 each throughout the year.
Anjii misses his first payment, which was due on 28 August. He makes the payment at the end of September. Under the current system, he is not charged interest until the third instalment date which is 7 May of the following year.
Under the new proposals, interest is charged from the date of the instalment that he missed. Anjii will be charged one month’s interest (currently 6.8% per annum) on the $4,000. The interest charged will be $22.
4.8 Under the proposed changes, if a borrower overpays during the year, at the end of the year they will be able to get a refund or they can apply the overpayment towards their loan balance.
4.9 If at year-end a borrower has underpaid their liability, the underpayment will be collected over the next three interim instalments.
Example: Interim instalments
William is self-employed. Last year he underpaid his student loan repayments by $900.
Under the current system he would have to pay this all at once on 7 February of the following year (or 7 April if he had a tax agent).
Under the proposals, instead of paying the whole amount on the following 7 February (or 7 April), his following year's instalments will each be increased by $300 to recoup the underpayment. By the end of the year he will have made up the shortfall.
4.10 The 10 percent voluntary repayment discount would apply to any repayments of $500 or more above the compulsory repayment obligation, as long as there are no arrears.
4.11 Inland Revenue will still be able to set a due date and undertake debt collection if a borrower fails to meet their obligations.
4.12 If a borrower does not make their first and second loan instalments on time, they will be charged interest on the amount due from the date the payments were due, rather than a late payment penalty from the final of the three due dates.
4.13 This change is to encourage borrowers to make regular payments rather than wait until the final due date to make a lump sum payment.
4.14 It means that if a borrower is late with their first and second payments, they will pay interest under the proposals.
4.15 If a borrower overpays, they can get a refund or can apply the overpayment to the loan balance.
4.16 If the borrower underpays, they would pay off the debt in three instalments added to their regular loan payments, rather than paying it in one lump sum on 7 February (or 7 April if they have a tax agent). There would be no interest as long as interim payments were made on time.
We welcome submissions on:
- Interest being charged from the first repayment date if repayments are late, instead of late payment penalties from the final payment date.
- Repaying an underpayment at year-end by increasing the following year’s interim instalments, instead of one lump sum at year-end.
- Any other changes you think we should consider.