New repayment rules for overseas-based borrowers

2007 amendment to the Student Loans legislation introduces new repayment rules for borrowers who are based overseas.

Sections 31 to 36B and 106 to 111 of the Student Loan Scheme Act 1992

New repayment rules have been introduced for borrowers who are based overseas.

Background

Non-resident repayment obligations were initially designed so that loans would be repaid in a maximum of 15 years. This was achieved by requiring quarterly payments of a fixed amount of the principal (based on the loan balance at the beginning of the tax year following the year of departure), plus the estimated interest for the year. If the loan balance was less than $15,000, $1,000 of principal was required each year. For loans over $15,000, principal of one-fifteenth of the original loan balance was required. For many borrowers the amount that they were expected to pay was simply not achievable.

The repayment rules were inconsistent with the objective of encouraging borrowers to return to New Zealand and undermined the government's intent to ensure that debt levels are commensurate with the benefits borrowers receive from their tertiary study.

Key features

Part 3 of the Act has been repealed and replaced with a new Part 3 (sections 31 to 36B).

Three-year repayment holiday

Section 32 allows borrowers who become overseas-based after 1 April 2007 an automatic repayment holiday for a maximum period of three years, so their repayment obligation is nil during that period. The repayment holiday may be taken in more than one period, but entitlement remains only for periods during which the borrower is overseas-based.

Under section 33, a borrower may choose not to have a repayment holiday by giving notice to the Commissioner. An opt-out period can be taken more than once, and may be from an earlier date than when the borrower gives notice to the Commissioner. An opt-out period ends if a borrower becomes New Zealand-based. Notice of an opt-out period may be given to the Commissioner by telephone, in writing, or in any other manner acceptable to the Commissioner. However, the Commissioner may still require the notice to be in writing.

Transitional rules for borrowers who are overseasbased on 1 April 2007

Sections 106 and 107 restrict entitlement to a repayment holiday for borrowers who were overseas-based on 1 April 2007:

  • Borrowers who are not in arrears on a repayment obligation (whether established or not) are entitled to a three-year repayment holiday.
  • Borrowers who are in arrears and have been non-resident for a continuous period of more than 364 days, but less than two years, are entitled to a two-year repayment holiday.
  • Borrowers who are in arrears and have been non-resident for a continuous period of two years or more, but less than three years, are entitled to a one-year repayment holiday.
  • Borrowers who are in arrears and have been non-resident for a continuous period of three years or more are not entitled to a repayment holiday.
Example 1

Katrina had lived in New Zealand all of her life. On 12 May 2008 she goes to the UK to do her OE. Katrina is entitled to a three-year repayment holiday from the day she becomes overseas-based. While she is on the repayment holiday her repayment obligation is nil, but she can make voluntary repayments if she wishes.

Example 2

Peter is overseas-based on 1 April 2007. He went overseas in 2002 and has always met his repayment obligations. Peter is entitled to a three-year repayment holiday from that date.

Example 3

Cath is overseas-based on 1 April 2007. She went overseas in September 2005 (and has been non-resident since leaving New Zealand). Cath has failed to meet her obligations since going overseas and is entitled to a repayment holiday of two years.

Example 4

Doug is overseas-based on 1 April 2007. He has been overseas for eight years (and has been non-resident since leaving New Zealand) and has failed to meet some of his repayment obligations. Doug is not entitled to a repayment holiday.

Repayment obligations of overseas-based borrowers not on a repayment holiday

Section 34 sets out the repayment obligations for overseas-based borrowers who are not on a repayment holiday. This includes the repayment obligations for borrowers who have chosen to have an opt-out period.

If the borrower's loan balance is less than $1,000, the borrower's repayment obligation for the first tax year that they are overseas-based and not on a repayment holiday is the amount of the borrower's loan balance.

Otherwise, repayment obligations are calculated as follows:

  • $1,000 a year for loan balances of $15,000 or less;
  • $2,000 a year for loan balances of $15,001 to $30,000; and
  • $3,000 a year for loan balances over $30,000.

If the repayment obligation is for less than a full tax year, the obligation is multiplied by:

the number of days in the tax year
during which the borrower is overseas-based
365

The amount of loan balance is the balance on the date the borrower took the repayment holiday and then at 31 March each year after that date (including interest compounded by that date).

Under section 35, for each tax year an overseas-based borrower is liable to pay a penalty on their entire loan balance, the borrower's repayment obligation is zero. In addition, if the repayment obligation calculated above is greater than the portion of the borrower's loan balance that is not subject to penalties, the repayment obligation is the amount of the loan balance not subject to penalties.

Section 36 specifies that repayments must be paid in two equal instalments that are due on 30 September and 31 March. If, however, a borrower is overseas-based for part of a tax year, under section 36A, the repayment obligation is payable in instalments determined by the Commissioner. For the part of the tax year that the borrower is New Zealand-based, the borrower's repayment obligation is determined in accordance with Part 2 of the Act, except that the amount of the repayment threshold is decreased in proportion to the number of days the borrower is New Zealand-based.

As soon as practicable after being notified, or becoming aware that a borrower is or will be overseas-based, under section 36B the Commissioner must make an assessment of the borrower's overseas-based repayment obligation for that year. The Commissioner must also continue to make an assessment of the borrower's repayment obligation for each year the borrower remains overseas-based. As soon as practicable after making the assessment, the Commissioner must give notice to the borrower of the assessed amount, except if the amount assessed is zero.

Example 1

Olivia becomes overseas-based on 20 January 2009. On 5 May 2009, she opts-out of the repayment holiday, and the opt-out period applies from 1 April 2009. Because her loan balance is $31,500 on 31 March 2009, her repayment obligation for the tax year is $3,000. She is required to repay $1,500 on 30 September 2009 and a further $1,500 on 31 March 2010.

Example 2

Roberta becomes overseas-based on 1 February 2008. On 31 January 2011, her entitlement to a repayment holiday ceases. Roberta's loan balance on that date is $17,150. Roberta's repayment obligation for the remainder of the tax year is $2,000 x 59/365 = $323.29. She meets this repayment obligation and does not make any voluntary repayments. Her repayment obligation for the next tax year (1 April 2011 to 31 March 2012) is $2,000. $1,000 will be due on 30 September 2011 and a further $1,000 on 31 March 2012.
Interrelationship between amnesty on student loan penalties and new repayment obligations for overseasbased borrowers

The amnesty conditions override a borrower's entitlement to a repayment holiday or the repayment obligations of overseas-based borrowers not on a repayment holiday.

Under section 110, if a borrower was overseas-based on 1 April 2007, has come within the amnesty and met the repayment requirements, he or she is entitled to apply to the Commissioner for a three-year repayment holiday (once they have met the amnesty repayment requirements). An application may be made by telephone, in writing or in any other manner acceptable to the Commissioner. However, the Commissioner may require an application to be in writing. If a borrower does not make an application and subsequently becomes New Zealand-based, the borrower will be entitled to a repayment holiday of up to three years the next time they become overseas-based.

Under section 108, if a borrower comes within the amnesty but fails to comply with the amnesty conditions, he or she is entitled to a restricted repayment holiday as outlined under "Transitional rules for borrowers who are overseas-based on 1 April 2007". In addition, any amounts that the borrower has paid towards meeting the amnesty repayment requirements may be offset against any overseas-based repayment obligation which the borrower may otherwise have had after their restricted repayment holiday ends or while opting out of a repayment holiday.

Under section 109, if a borrower entitled to a restricted repayment holiday subsequently becomes New Zealand-based, they are entitled to a three-year repayment holiday when they next become overseas-based. However, any restricted repayment holiday they have had must count towards the borrower's total three-year repayment holiday.

Example 1

Jan comes within the amnesty and meets the repayment requirements, the last payment being made on 30 September 2009. Jan applies to the Commissioner for a repayment holiday. She is entitled to a three-year holiday from the date she became overseas-based.

Example 2

Tracey comes within the amnesty and meets the repayment requirements but does not make an application to the Commissioner for a repayment holiday. Her last repayment was made on 31 March 2010. Her loan balance on that date is $8,300. Tracey's repayment obligation for the following tax year is $1,000. Tracey subsequently returns to New Zealand and becomes a New Zealand-based borrower. Eighteen months after returning, Tracey goes overseas again and becomes an overseas-based borrower. Tracey is automatically entitled to a three-year repayment holiday from the date she becomes overseas-based.

Example 3

On 1 April 2007 Sarah had been non-resident for five years and was in arrears, so she was not entitled to a restricted repayment holiday. Her loan balance was $26,000 and therefore her repayment obligation for the year was $2,000. On 31 May 2007 Sarah applied for the amnesty. She met the first required repayment of $1,000 on 30 September 2007 but failed to meet the others. The $1,000 amnesty repayment is offset against her repayment obligation for the year of $2,000. The remaining $1,000 which she failed to pay is subject to penalties from 1 April 2008.

Example 4

On 1 April 2007 Richard had been non-resident for 13 months, meaning that he was entitled to a restricted repayment holiday of two years from that date. On 11 November 2007 Richard applied for the amnesty. He met the first two required repayments of $500 on 31 March 2008 and 30 September 2008 but failed to meet the payments due on 31 March 2009 and 30 September 2009. Richard's loan balance is increased by half of 5% on 1 April 2009 (because he met half of the amnesty's repayment requirements). The restricted repayment holiday of two years applies, so there is no repayment obligation for the 2008-09 tax year. Richard's repayment obligation for the year ending 31 March 2010 is $1,000. If Richard fails to meet this, penalties will apply from 1 April 2011.

Application date

The changes came into force on 1 April 2007.