3.1 Borrowers are required to advise employers that they have a student loan so that employers make deductions from borrowers’ salary and wages during the year via the PAYE system. Inland Revenue monitors the correct use of codes and contacts employers if there is a problem. The student loan deduction rate is 10 percent of a salary or wage when, for the pay-period, a borrower earns more (on an annual basis) than the student loan repayment threshold. This annual repayment threshold is currently $19,084 (which equates to $367 per week). Borrowers who earn an annual income below this threshold do not have to make repayments towards their loan.
3.2 Repayments deducted during the year are squared-up at year-end through the personal tax summary process if requested by borrowers. If too little has been paid through the PAYE system during the year, the shortfall is due on 7 February of the year following (or 7 April if the borrower has a tax agent). Penalties are imposed if this is not paid on time. If the borrower is due a refund it is issued upon request up to six months after the assessment.
3.3 Finally, borrowers in hardship can apply to Inland Revenue to have their repayment obligation reduced.
3.4 Under the proposed changes, repayment deductions would continue to be deducted by employers each payday through the PAYE system. However, the repayment obligation would be set on a weekly, fortnightly, four-weekly or monthly basis, instead of an annual basis. As noted above, the current annual repayment threshold of $19,084 equates to a repayment threshold of $367 per week for those paid weekly. If the borrower earned over this amount in a week the employer would start making a student loan deduction. One implication of this change is that those with fluctuating incomes may pay more than is required under the current rules.
Example: Working while studying
Lisa is a university student and works during the Christmas break. She earns $900 a week for the eight weeks she works, and has an annual income of $7,200.
Under the current system, Lisa won't have to make repayments as her annual income does not exceed the $19,084 annual repayment threshold.
Under the new proposals, Lisa's weekly income for the period she works will be above the repayment threshold. Over the Christmas break, Lisa will have $53.30 deducted from her pay each week for her student loan repayments. This is 10 percent of $533, which is her weekly gross income of $900 less the repayment threshold of $367.
3.5 Inland Revenue will check the amounts of student loan repayments deducted using information currently provided by employers to identify non-deduction and other errors, and contact employers to correct these when spotted. If a minor error in deduction occurs – either an under-deduction or an over-deduction because the employer makes a calculation error, the error will be ignored. Small overpayments would be put towards reducing the balance of the student loan, resulting in the loan being paid off earlier than otherwise.
Example: Repayment error
Arjun has finished studying. He now works full-time for a small employer who has a manual payroll system. He is paid weekly. When Arjun started his job his employer miscalculated his student loan repayments for the first month and he now owes $500 in repayment deductions. The employer did not spot the error when preparing the PAYE return.
Under the current system, Arjun would be sent a bill for $500 after the end of the tax year.
Under the proposed changes, the error may be spotted by Inland Revenue through its ongoing monitoring, or Arjun might notice it when checking his account online.
Once identified by Inland Revenue, it would contact Arjun’s employer to correct the deduction amount for the future. Inland Revenue would consider the problem corrected and take no further action.
Had Arjun overpaid by $500, the new proposals mean that Inland Revenue would contact Arjun’s employer to correct the deduction amount for the future, and would apply the overpayment to his student loan balance. Arjun’s student loan would then be paid off a bit faster.
Under the current system, if Arjun notices the overpayment and requests a summary of earnings and a personal tax summary from Inland Revenue, he could get the overpayment refunded to him at the end of the year. Otherwise, it would be applied to his loan balance.
3.6 A major overpayment, as a result of an employer error, would be refunded if requested by the borrower. If there is a major underpayment, it would be collected from the borrower over following pay-periods through a higher rate of deductions. For example, the deduction rate for that borrower would increase to 12 percent, rather than the standard 10 percent.
3.7 Some borrowers may have a job which pays less than the current repayment threshold of $19,084 a year. Under the proposed changes, if they take a second job, there would be an option to apply the “unused” threshold left from their first job (the difference between their income from the first job and the repayment threshold) to their second job. If the borrower does not make use of this option, loan repayments would be made from the first dollar of income from that second job.
Example: Income from a second job
Peter has two jobs. He receives $326 a week from his main job and $77 a week from his second job.
Under the new proposals, the weekly repayment threshold is $367. Peter has $41 of “unused” repayment threshold per week from his main job ($367 minus $326 = $41).
He applies this unused repayment threshold to his second job.
He pays $3.60, or 10% of $36 ($36 being his secondary income in excess of the repayment threshold), each week, rather than $7.70, or 10% of $77 ($77 being his total secondary weekly salary).
If he didn’t apply his unused repayment threshold from his main job to his second job, the extra $4.10 ($7.70 minus $3.60) would be applied to his loan balance each week.
3.8 If the borrower receives interest and dividend income below a combined threshold (say $1,500 a year), that income would be ignored when calculating repayments. This will allow wage and salary earners to remain with the simpler system of pay-period deductions rather than being required to complete a return of income. Currently, any amount of such income is counted towards the income used to calculate repayment obligations.
3.9 Borrowers in hardship would continue to be able to apply to Inland Revenue to have their repayment obligation capitalised or reduced.
3.10 The 10 percent voluntary repayment discount would continue to apply to any repayments of $500 or more above the compulsory repayment obligation, if there were no arrears.
We welcome submissions on:
- The idea of disregarding minor overpayments and underpayments during the year and making corrections against future repayments only. In effect this means that Inland Revenue would not worry too much about small errors.
- The impact on students who work in their holidays or borrowers who work part of the year having to make repayments.
- Doing away with the year-end square-up to free-up resources for other things, like better online services.
- Overpayments being applied to the balance of the loan. This would mean that the loan could be paid off quicker. A refund would be allowed if an employer error leads to a major overpayment.
- The idea that major underpayments are recovered through increased deductions each pay-period. Currently overpayments are paid back in a lump sum after an end-of-year square-up
- Do you think that $1,500 (of combined interest and dividends) is an appropriate threshold for making extra payments?
- Any other changes you think we should consider.