Detail - Student Loan Scheme (Repayment Bonus) Amendment Act 2009

2009 amendment to the Student Loan Scheme provides a 10% bonus for borrowers who pay $500 or more in excess of their annual compulsory repayment obligation.

Sections 45A to 45H of the Student Loan Scheme Act 1992

The Student Loan Scheme (Repayment Bonus) Amendment Bill was introduced into Parliament on 27 April 2009. The Bill had its first reading on 5 May 2009 and was considered by the Education and Science Committee, which reported the Bill back to the House on 3 August 2009. The Bill completed all remaining parliamentary stages on 17 September 2009 and received Royal assent on 22 September 2009.

The Act amends the Student Loan Scheme Act 1992 to provide a 10% bonus for borrowers who pay $500 or more in excess of their annual compulsory repayment obligation.

The bonus will not be of financial benefit to all borrowers. The Commissioner of Inland Revenue is unable to provide financial advice. Borrowers may therefore wish to seek independent advice before making excess repayments.

Background
The Act gives effect to a commitment given by the National Party in the lead-up to last year's election to introduce a bonus scheme for borrowers to encourage them to make voluntary repayments so their student loans are repaid more quickly.

Key features
A 10% bonus will be available for those who make excess repayments on their student loans on or after 1 April 2009. The bonus will be available to both New Zealand and overseas-based borrowers. Only repayments made to Inland Revenue will qualify for the bonus.

Excess repayments will be any repayments in respect of a tax year that exceed the borrower's compulsory repayment obligation for that tax year by $500 or more. The excess repayment can be made in a lump sum or by smaller contributions throughout the year.

The loan balance needs to be at least $550 at the beginning of the tax year for excess repayments to attract the bonus. If the loan balance was $550 or more at the start of the tax year, but between $500 and $549 at the time of the final repayment, the maximum bonus will be $49. Borrowers wishing to repay their loan in full will need to pay 10/11ths of their loan balance (provided all obligations are up to date).

Borrowers who are required to make interim instalments during the tax year will have until the third interim instalment date - 7 May after the end of the tax year for most borrowers - to make repayments that will count towards the bonus.

For borrowers fully repaying their loan during the tax year, the bonus will be credited to the loan balance as at the date of the final repayment. Borrowers repaying in full before 31 March 2010 will have the bonus backdated to the date on which the final repayment was made.

For borrowers who do not repay in full, the bonus will be calculated after the end of the tax year and credited to their loan balance as at the following 1 April. This is because it is not until after the end of the tax year that a borrower's compulsory repayment obligation, which is income-contingent for New Zealand-based borrowers, and thus the amount of any excess repayments, can be established with certainty. Borrowers will generally not have to apply for the bonus. (The exception to this is PAYE errors which are discussed below.) After the end of the tax year, or at the time the final repayment is made, Inland Revenue will check borrowers' entitlements and apply the bonus accordingly.

Examples

Janis is a salary and wage earner who has asked her employer to deduct $20 extra from her fortnightly income and pay it to Inland Revenue for repayment of her student loan. After the end of the tax year, her compulsory repayment obligation is established at $700 and the total deductions from her salary are $1,220. Janis will be entitled to a bonus of $52 ($1,220 - $700 x 10%) and this will be credited to her loan account on 1 April of the next tax year.

Martin is a salary and wage earner who has just the standard deductions made from his weekly wages, and these total $2,560 for the year. When Martin heard about the bonus scheme in June 2009 he set up automatic repayments of $100 a month from his bank account and these repayments total $1,000 by 31 March 2010. Martin's compulsory repayment obligation for the 2009-10 tax year is assessed in May 2010 at $2,550. A bonus of $101 ($2,560 + $1,000 - $2,550 x 10%) is credited to Martin's loan account as at 1 April 2010.

Paula is currently at home looking after her children and, as her income is under the repayment threshold, does not have any compulsory repayment obligation. Her parents decide to give her the money to fully repay her loan. Paula rings Inland Revenue at the end of April 2010 and is told that her loan balance is $11,000 and she will need to repay $10,000 to fully repay her loan. Her parents give her this amount and she pays it to Inland Revenue on 20 May 2010. Inland Revenue calculates her bonus at $1,000, credits it to Paula's loan balance as at 20 May 2010 and advises her that her loan has been fully repaid.

Dennis is working in the UK on 17 July 2010. He accesses his IR online services and establishes that his loan as at that day, including interest, is $24,453 and that, allowing for the bonus, he needs to pay $22,230. He calculates that this is equivalent to £8,900 and the following day arranges for his bank to transfer this amount to Inland Revenue. However, because of exchange fluctuations, the amount that Inland Revenue receives is actually $22,460. Inland Revenue credits a bonus of $2,223 and refunds $230 to Dennis.

Brendon is working in Australia on 1 September 2010. He accesses his IR online services and establishes that his loan as at that day, including interest, is $15,972 and that, allowing for the bonus, he needs to pay $14,520. However, Brendon does not actually make the payment until 15 October 2010. By that time his loan has increased to $16,106 because of interest charged since 1 September. To clear the loan balance Brendon would need to pay a further $122.

Margaret's loan was $2,300 at the start of the 2010-11 tax year. By 22 November 2010, repayment deductions made from her salary and wages have reduced this to $530. Margaret decides to pay off the loan in full before she heads off overseas and sends Inland Revenue a cheque for $500. Inland Revenue applies this and a bonus of $30 to Margaret's loan balance and advises her that her loan is now fully repaid.

Small inaccuracies may arise in the repayment deductions that are made from salary and wages during the tax year. In addition, employers sometimes make errors in the amount of these deductions. The Commissioner has therefore been given the ability to allow the bonus if the Commissioner considers that the borrower did make a voluntary repayment(s) of $500 or more, but the end-of-year excess was less than this because the shortfall arises under the PAYE system and is:

  • less than $20;
  • due to the borrower starting or ceasing employment; or
  • due to the employer's error.

Inland Revenue has no way of automatically identifying whether one of these events has occurred and it will be necessary for any affected borrower to bring this to Inland Revenue's attention.

Examples

Gary tells his employer that he has a student loan, but his employer overlooks deducting the $165 that should have been deducted for April 2009. In March 2010, Gary receives a bonus and decides to use $500 of it towards repayment of his student loan, which he pays directly to Inland Revenue. Gary's repayment obligation for the 2009-10 tax year is $2,000 and his repayment deductions for the year are $1,830. His excess repayment is therefore $330 and no bonus is initially allowed. Gary contacts Inland Revenue and points out his employer's error. Inland Revenue checks this out and then allows Gary a bonus of $50.

The bonus will not apply to any excess repayment for which a refund is subsequently requested or to any repayment that needs to be applied to another liability, such as an amount in respect of an earlier tax year.

Examples

Miriam made excess repayments of $3,000 and was credited with a $300 bonus. However, shortly after receiving notice of this, she decides that she wishes to have $1,000 refunded to cover an unexpected bill. Inland Revenue makes the refund and reduces Miriam's bonus to $200.

Grant made excess repayments of $2,000 and was credited with a $200 bonus. He subsequently decides that he would be better off using this money to reduce his mortgage and asks for the full amount to be refunded. Inland Revenue makes the refund and reduces Grant's bonus to zero.

Brent's repayments for the 2009-10 tax year exceeded his repayment obligation for that year by $650. However, his terminal repayment obligation for the 2008-09 tax year of $210, which was due on 7 February 2010 has not been paid. After crediting $210 to the 2008-09 tax year, the excess repayment amount is less than $500 and no bonus is allowed.

Application date
The Act comes into force on 1 April 2010, but the bonus will apply to excess repayments made on or after 1 April 2009.