Adjusting the overseas-based borrower repayment rules

2014 Student Loan amendment to adjusts the overseas-based borrower repayment rules by introducing a fixed repayment obligation and two new repayment thresholds.

Section 110 of the Student Loan Scheme Act 2011

The legislation adjusts the overseas-based borrower repayment rules by introducing a fixed repayment obligation and two new repayment thresholds.

Background

Under the previous rules, there was a four-step repayment obligation for overseas-based borrowers based on their loan balance, as shown in the table below.

Loan balance (at start of year) Amount due per year
<=$1,000 The whole balance
>$1,000 and <=$15,000 $1,000
>$15,000 and <= $30,000 $2,000
>$30,000 $3,000

Under those rules, as a borrower repaid their loan, their loan balance would decrease, along with their repayment obligation. This meant that a compliant borrower's repayment obligation decreased over time, while their ability to pay was likely to be the same or better (as, for most people, their income increases over time).

The new legislation introduces fixed repayment obligations for overseas-based borrowers. This will reduce repayment times and the interest cost for compliant overseas-based borrowers. It also brings overseas-based borrowers' repayment obligations more in line with how commercial loans operate and their New Zealand-based counterparts.

Key features

The new legislation introduces fixed repayment obligations for overseas-based borrowers, which ensures that their repayment obligation is maintained, even when their loan balance is decreasing.

It also introduces two new repayment thresholds. Overseas-based borrowers with a relevant loan balance of more than $45,000 but less than or equal to $60,000 will have an annual repayment obligation of $4,000, and borrowers with a relevant loan balance greater than $60,000 will have a repayment obligation of $5,000.

The new repayment obligations are:

Relevant loan balance Amount due per year
<=$1,000 The whole balance
>$1,000 and <=$15,000 $1,000
>$15,000 and <= $30,000 $2,000
>$30,000 and <= $45,000 $3,000
>$45,000 and <= $60,000 $4,000
>$60,000 $5,000

Detailed analysis

Under the previous rules, an overseas-based borrower's repayment obligation was determined based on their current loan balance. As a borrower repaid their loan, their loan balance decreased along with their repayment obligation.

New section 110 fixes an overseas-based borrower's repayment obligation so their repayment obligation does not decrease as their loan balance decreases.

From 1 April 2014, overseas-based borrowers will have their repayment obligation maintained at the same rate as when they became overseas-based.1

Borrowers who are already overseas-based at 31 March 2014 will have their repayment obligation fixed at the same rate they had on 1 April 2014.

These rules only apply if an overseas-based borrower's loan balance is decreasing. A borrower may have their loan balance increase if they continue to draw down on a loan while overseas or if they are charged interest.

If a borrower's loan balance increases so that it rises into a higher repayment threshold, the on-going repayment obligation will be fixed at the new higher threshold.

Borrowers whose loan balance is decreasing

New section 110 achieves the goal of fixing a borrower's repayment obligation by setting a borrower's repayment obligation based on their "relevant loan balance". For a borrower whose loan balance is decreasing, the "relevant loan balance" is the borrower's loan balance on their "start date".

A borrower's "start date" differs depending on whether the borrower is an "existing borrower".

An "existing borrower" is a person who was overseas-based on 31 March 2014 and has been continuously overseas-based since then. For "existing borrowers" their relevant loan balance is their balance at 31 March 2014 (their start date).

For all borrowers who are not "existing borrowers", their relevant loan balance is their loan balance at the date they became overseas-based.

This distinction ensures that current borrowers have their repayment obligation fixed based on the loan balance at 31 March (which is the end of the annual assessment period).

The requirement that borrowers be "continuously" based overseas will affect borrowers who are existing overseas-based borrowers at 31 March 2014, but who later become New Zealand-based borrowers. If a borrower were to become overseas-based again following being New Zealand-based, they will no longer be classified as an "existing borrower".

These rules result in a borrower having their relevant loan balance remain the same over time as it is fixed at the amount of their loan balance at the "start date". As a result, their associated repayment obligation also remains the same over time.

Example Calculating a borrower's repayment obligation based on the relevant loan balance at their start date

Shannan becomes overseas-based on 1 May 2014 with a loan balance of $31,000.

Shannan is not an "existing borrower", because she became overseas-based after 31 March 2014. Her "start date" is therefore 1 May 2014 (the day she became overseas-based).

For the purposes of calculating her full-year repayment obligation as an overseas-based borrower for the year to 31 March 2015, her "relevant loan balance" is her consolidated loan balance at the start date.

So her relevant loan balance is $31,000 and her full year repayment obligation is $3,000.

Shannan is an overseas-based borrower for only part of the tax year. As a result, she does not have to pay her full year repayment obligation. Instead, her repayment obligation is apportioned to the amount of the year she is overseas-based. Her part-year repayment obligation is therefore $2,750.

Shannan makes payments throughout the year and at 31 March 2015 her loan balance is $29,500 (after interest is applied).

For the 2015-16 year her relevant loan balance will be $31,000 (the consolidated loan balance at the start date). This ensures her repayments are fixed in relation to her loan balance when she became an overseas borrower. Her full-year repayment obligation therefore remains at $3,000.

Note: The loan balance numbers used in these examples are rounded, and are used for illustrative purposes only. The actual amount of interest charged to overseas-based borrowers on any given loan balance, plus any penalties for non-payment, will vary.

Borrowers whose loan balance is increasing

Some borrowers' consolidated loan balances may increase after their start date.

If a borrower's consolidated loan balance has increased since their start date, their "relevant loan balance" is the borrower's highest loan balance on any 31 March balance date.

This means that if a borrower's loan balance is increasing, the associated repayment obligation also increases. This ensures that borrowers whose loan balance is increasing make payments sufficient to make progress on their loan repayment.

Example Calculating a borrower's repayment obligation based on their relevant loan amount at 31 March date

Hannah becomes overseas based on 16 May 2014 with a loan balance of $14,500. Her annual repayment obligation is $1,000.

Her start date is 16 May 2014 (the day she became overseas-based).

Hannah fails to make any repayments on her loan for the next two years, and fails to contact Inland Revenue to discuss a repayment plan. Hannah therefore accrues both interest and penalties.

By March 2015 her loan balance has increased to $15,500. Her relevant loan balance is therefore based on this higher amount of $15,500 and the amount she is required to repay for the year to 31 March 2016 is now $2,000.

In the year to 31 March 2017 Hannah makes arrangements to repay her loan. Her loan balance at 31 March 2017 now sits at $14,600. However, in calculating her "relevant loan balance" the highest of the loan balances as at her start date, or any subsequent balance date, 31 March is used. So Hannah's "relevant loan balance" remains as at 31 March 2016 ($15,500) and her repayment obligation for the year to 31 March 2017 is still $2,000.

Repayment thresholds

Section 110(2) introduces two new repayment thresholds. Borrowers with a relevant loan balance of more than $45,000 but less than or equal to $60,000 will have a repayment obligation of $4,000 and borrowers with a relevant loan balance that is more than $60,000 will have a repayment obligation of $5,000.

The new repayment obligations are:

Relevant loan balance Amount due per year
<=$1,000 The whole balance
>$1,000 and <=$15,000 $1,000
>$15,000 and <= $30,000 $2,000
>$30,000 and <= $45,000 $3,000
>$45,000 and <= $60,000 $4,000
>$60,000 $5,000

These new thresholds for borrowers with higher loan balances will ensure that more borrowers will have repayment obligations which will at least cover their annual interest charge.

Application date

The amendment applies from 1 April 2014.

1A borrower is overseas-based if they are not in New Zealand for 184 consecutive days. When a borrower meets the 184-day test they are treated as being overseas-based from the first day of the 184-day period.