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Chapter 2 - Background

2.1 More than half a million people have student loans, and this number grows each year. Most borrowers are people who have finished their studies and are paying off their loans. The repayment system they experience is complex and requires a yearly assessment and square-up of how much they paid and how much they borrowed over the year. This administrative requirement can be a burden for some borrowers.

Many borrowers receive statements and letters from Inland Revenue several times a year, and may have to contact the Department by phone if they have questions about their loan balance or repayment levels. Borrowers may also experience delays in getting a response from the Department since Inland Revenue has to perform many of these tasks manually, which consumes significant administrative time and resources. These resources could be devoted to more front-line support for borrowers and taxpayers generally. The Government considers that there is room to improve the administration of the scheme.

Reasons for change

2.2 The student loan scheme is a major Crown asset and it is essential that it be well managed. Each year approximately 60,000 new borrowers join the scheme. The nominal value of loans totalled $9.573 billion in June 2008.

2.3 The existing student loan scheme is difficult to administer and potentially confusing to borrowers. This is largely because the systems are modelled on tax principles, which place an emphasis on absolute accuracy over simplicity. This stress on accuracy results in high compliance costs. For example, borrowers have to square-up their loan payments each year which often results in unforeseen debt, or little change in outcome compared with the time and resources invested by borrowers and Inland Revenue. The current rules carry with them the risk of significant late payment penalties, a deterrent which is essentially an income tax concept, and which is of questionable suitability in administering student loans.

2.4 The majority of borrowers are likely to be comfortable with the use of online services so there is scope to move from the current inefficient paper-based system to one which is primarily online. An electronic environment would improve the services available online which will give borrowers, especially those based overseas, greater access to information about their loans whenever it suits them. Expanding online services will also free up Inland Revenue resources to focus on proactive services and better support for borrowers.

Necessary trade-offs

2.5 For borrowers, these ideas, if implemented, would improve services, reduce compliance costs and allow a high degree of self-management. Other benefits include protecting the value of the Crown’s asset, and enabling administrative resources to be used more effectively to focus on higher value activities.

2.6 However, the gains, which largely arise from moving employed borrowers to a pay-period based assessment, are likely to result in higher costs for some borrowers and some employers. For example, the pay-period assessment will mean that borrowers who work part of the year are likely to be paying more towards their loan during that time than under the current annual assessment system. Similarly, there will be some increase in compliance costs for non-compliant employers. For example, an employer will be contacted by Inland Revenue if he or she continues to make incorrect repayment deductions.