Submission to the Finance and Expenditure Committee of the New Zealand Parliament

Transcription

1 Submission to the Finance and Expenditure Committee of the New Zealand Parliament RE: STUDENT LOAN SCHEME AMENDMENT BILL (326 1) Submission name: Chloe Duncan 1. This submission This submission on the Student Loan Scheme Amendment Bill (the Bill) is made from the perspective of an overseas based borrower in the New Zealand Student Loan Scheme (the Scheme). Arguments made in the submission are based on my own experience as an overseas based borrower and the experiences of my family members, friends and acquaintances who are also overseas based borrowers 1. I am making this submission because of concerns that policy and legislation around the student loan scheme has repeatedly been made without taking into account the experience of overseas based borrowers or reflecting the impacts that the student loan scheme has had on their lives. Instead, motives and behaviours are frequently attributed to overseas based borrowers by NZ politicians, media and everyday New Zealanders, and government policy is developed on the basis of these attributions rather than on the actual experience of overseas based borrowers. This submission covers: Preliminary comments on the experience of overseas based borrowers; Discussion on the shortening of the repayment holiday period from three years to one year; Discussion on the requirement to provide a contact person s details; and Conclusion and recommendations. 2. The experience of overseas based borrowers Overseas based borrowers are widely characterised as taking out large student loans and then leaving New Zealand with no intention of paying their loans back 2. As far as there seems to be any basis to this characterisation, it appears to be that 1 Please note I have removed any identifying characteristics of other people whose experience I have used in drafting this submission. 2 See for example comments of Mr Michael Woodhouse at the first reading of the Student Loan Scheme Amendment Bill, accessed at NZ/PB/Debates/Debates/d/4/9/49HansD_ _ Student Loan Scheme Amendment Bill First.htm. See also comments by the Hon Stephen Joyce and the Hon Peter Dunne reported at expats targeted for loan debt; and reader comments at

2 Some borrowers both NZ and overseas based hold outstanding loans for long periods, and some make no progress at all towards repayment; Overseas based borrowers have on average larger loan balances than NZ based borrowers, and are disproportionately represented among borrowers with overdue balances; and The amount of overdue repayments are increasing among overseas based borrowers, but decreasing among NZ based borrowers. 3 However, even taken together these data do not demonstrate that overseas based borrowers are avoiding repaying their loans out of bad faith; they only demonstrate that overseas based borrowers are more likely to have overdue repayments, which could be for any number of reasons. I would suggest that the main reason overseas based borrowers are more likely to have overdue repayments is that their loans are larger, making repayments more difficult to manage. Over time some borrowers loans become so unmanageable that borrowers cannot or will not pay back their loans at all. 2.1 Why overseas based borrowers loans are larger Media reports on overseas based borrowers based on information from the New Zealand Government typically depict overseas based borrowers as people who borrow huge amounts on the loan scheme with no intention of paying them back 4. However, overseas based borrowers may not have large loans because they borrowed large amounts from the loan scheme they may have large loans simply because they live overseas. In order to encourage borrowers to remain in NZ after graduation or to return home, interest has not been charged on NZ based borrowers loans from Overseas based borrowers, on the other hand, are charged compounding interest on their loans at a rate between 6 and 7 percent. This means that if a NZ based borrower and an overseas based borrower had identical loan balances at the beginning of the financial year and made identical repayments, the overseas based borrower s loan balance would be larger at the end of the year than the NZ based borrower s. Further, a NZbased borrower meeting their repayment obligations will in almost all circumstances have a smaller loan balance at the end than at the beginning of the financial year. In contrast, because of the compounding interest on their loan an overseas based borrower s loan balance may remain static or increase over the course of the year even if they meet all their repayment obligations. New Zealand has a deliberate policy to increase the size of overseas based borrowers loans relative to the size of NZ based borrowers loan. But when this policy inevitably results in overseas based borrowers carrying a larger share of the student loan debt burden, they are stigmatised as highborrowing loan dodgers. student loans/ and Crackdown on student loan borrowing. 3 See Student Loan Scheme Annual Report 2010, accessed at three 4 See for example post/news/politics/ /student loan avoiders toldto pay up.

3 2.2 Why overseas based borrowers may not be paying their loans At the outset of this section I would like to state that I make payments additional to my loan repayment obligations. Many overseas based borrowers do so: although overseas based borrowers represented only 14% of all borrowers in 2010, in the 2009/10 financial year they represented 36% of borrowers receiving bonus repayments, and their bonus repayments constituted 47% of all bonus repayments 5. That means that overseas based borrowers are making voluntary repayments at a higher rate than NZ based borrowers, and they are making much higher extra repayments. Overseas based borrowers do not, therefore, typically refuse to pay off their loans. However, I know many overseas based borrowers who have expressed reluctance at paying back their loans. The reasons they have expressed to me for this are: They cannot afford to pay back their loans. New Zealanders tend to assume that all New Zealanders living overseas have high salaries and can pay back their loans in a flash. However, New Zealand universities perhaps do not enjoy the high prestige overseas that New Zealanders imagine, and a degree from a New Zealand university is no guarantee of a well paying job. Some overseas based borrowers took out student loans but did not finish their degrees, making it more difficult for them to achieve higher salaries. Additionally, there are many circumstances where overseas based borrowers cannot hold down jobs: for instance, if they are taking time off work to look after dependents, or if sickness or disability prevents them from keeping a job. Unfortunately people in these situations will continue to rack up interest on their loans even though they have no ability to pay them back. They resent paying back their loans because so much of the loan is interest. It is fairly typical for overseas based borrowers to have loans which largely comprise interest. This is especially true of people like me who originally borrowed during the 1990s, when interest was charged while borrowers were studying, and who did not receive any benefits from interest write offs. For reasons I will explain later in this submission, I do not know exactly how much money I borrowed in total, nor how much debt has been charged to my account, but I believe I borrowed only between a quarter and a third of my total loan. The rest is interest. I have paid back at least twice what I borrowed from New Zealand even adjusting for CPI but I still owe about $30,000. From conversations with other overseas based borrowers in my age cohort, I believe the ratio of a quarter to a third of principal to twothirds to three quarters interest is typical 6. Many overseas based borrowers who are not paying back their loans have told me that they would if they were just paying back the principal, or the principal adjusted for CPI, or even the principal and some fair amount of interest. But a loan that is two thirds to three quarters interest is not fair. The interest conditions attached to the loans of overseas based borrowers have created these massive loans mostly comprising interest. While I have personally chosen to continue paying back my loan, I agree with these people that the conditions of the loan scheme for overseas based borrowers are unfair and 5 Analysis of data in Table 10, Student Loan Scheme Annual Report 2010, accessed at three. 6 IRD does not publish this information.

4 oppressive. If the loans were issued by a private lender, overseas based borrowers could apply to the Government for relief; but, unfortunately, in this case the Government is the lender. They intended to pay back their loan but were scared off by IRD. Only a few people of my acquaintance cite this as the reason they were or are not paying off their loan. In these cases, the borrower got in touch with IRD after a period overseas to arrange a repayment schedule. On the assumption that the borrower was being paid in a high value currency (usually GBP or USD), IRD would ask them to repay their loan at an extremely high rate that the borrower could not afford given the cost of living in countries such as Great Britain and the United States. Typically IRD would not accept alternative proposed repayment rates, negotiations would break down, and the borrower would break off contact with IRD and cease paying their loan, believing they had no other course of action. They deliberately took out a student loan to abscond overseas with the money. Of all the dozens of overseas based borrowers I know, precisely one person did this. Of course I only have anecdotal evidence that these are the reasons that some overseas based borrowers are not paying back their loans. However, the reasons for not paying back loans attributed to overseas based borrowers by politicians or the media appear to have no evidential basis whatsoever. Developing policy on the baseless assumption that non paying borrowers are just criminal absconders, and that stricter administrative procedures and penalties are therefore needed, will not help overseas based borrowers pay back their loans. 3. New sections 107B, 108 and 108A: Shortening of repayment holiday period Overseas based borrowers may currently apply to the Commissioner of Inland Revenue (the Commissioner) for a three year repayment holiday on their loan while overseas. They are still charged interest on their loans during this period. The Bill aims to shorten the repayment holiday period to one year. If repayments do not start when the holiday ends, the loan will attract repayment penalties. This means that many overseas borrowers will start accruing higher charges on their loans at an earlier date than at present which in turn means that overseas based borrowers loans are likely to get bigger and comprise a larger proportion of interest/penalties. As discussed above, most overseas based borrowers who are not repaying their loans are not doing so because they cannot afford to, or because they object to paying back loans that are mostly interest. Enacting these new sections is therefore likely to increase the number of overseas based borrowers who do not pay back their loan. This is directly counter to the Bill s intention to improve the

5 repayment levels of overseas based borrowers 7. Accordingly I recommend that the amendments shortening the duration of the repayment holiday period are not passed into legislation. 4. New section 107A: Nomination of contact person If enacted the Bill will require borrowers applying for a repayment holiday to nominate a contact person who can supply the Commissioner with the borrower s contact details overseas. In principle I support this requirement as it will make administration of the loan scheme easier, although the drafting of section 107A makes it unclear what obligation will be on contact people actually to provide the Commissioner with borrowers contact details. However, I have a broad objection to this amendment in that it increases the abilities of the New Zealand Government and specifically IRD to gather information about overseas based borrowers when borrowers are at present unable to get basic information about their loans from IRD. As mentioned above, I am unaware of the exact amount of money I borrowed under the student loan scheme, how much interest I have been charged on my loan, and the amount my loan has reached in total. I started borrowing on the Student Loan Scheme when I was 17, and I did not have the maturity or foresight to keep all my records on my loan. In recent years I have wanted to ascertain the details of what I borrowed and how much interest I have been charged particularly as some friends have found major errors in IRD s calculations of interest on their loan accounts. Over the past year I have repeatedly contacted IRD requesting information about my account. In reply, IRD has repeatedly refused to give me this information, on the basis that it is not their policy to release this information by . I have requested this information by post, and they have told me to use their online services. However, this historical information is not available through their online services, and I have advised that I will not join up for online services if it does not give me the information I need. I have authorised IRD to release the information to me by , advising that I will personally accept all risk for any leaks about my account. However, IRD again refused to release the information to me, telling me in their last correspondence not to reply to their s. I have no other option now but to apply to the Privacy Commissioner to obtain release of my information. It is absolutely unacceptable that the New Zealand Government expects borrowers to pay back their loans, but will not release basic information about loans to borrowers. If a private lender requested payments on loans without providing evidence about how the loan accrued, they would pretty quickly find the loan subject to legal challenge. It is amazing that borrowers have not yet legally challenged IRD s accounts of their loan balances and have to date taken IRD s calculations on faith. If the intention of the Student Loan Scheme Amendment Bill really is to improve the administration of the Scheme, then I recommend that amendments be added to the Bill requiring IRD to respond to all reasonable requests from borrowers for information about their loan accounts. 5. Conclusion and recommendations 7 See comments of the Hon Peter Dunne at NZ/PB/Debates/Debates/d/4/9/49HansD_ _ Student Loan Scheme Amendment Bill First.htm.

6 In 2010 there were over 85,000 overseas based student loan borrowers, and in 2009 student loan borrowers comprised a quarter of New Zealanders over When these people s immediate family members are taken into account, it can be seen that a huge proportion of New Zealanders are directly affected by the Student Loan Scheme. Student loan debt is also massive, standing at $11.15 billion in mid 2010, and has been described by the Prime Minister as a disaster 9. Unfortunately the major amendments in the Bill will do very little to help fix the Scheme, and some will be actually counter productive. The New Zealand Government appears to consider the student loan debt as an item on its loan book 10 that it can manipulate in the Budget to provide funding for Government initiatives in the case of the Student Loan Scheme Amendment Bill, to address current funding shortfalls in the health and education sectors 11. The interest on student loans is entered on the Government s balance sheets and is effectively subsidising services delivered to other New Zealanders while, ironically, student loan borrowers are commonly believed to be bludgers stealing money from the country. In this political context, it is not surprising that the Bill will not actually help reduce the student loan debt burden. Instead of manipulating student loan debt as a Budget asset, the New Zealand Government needs to understand that the more interest borrowers are charged, and the larger their loans are, the less likely they are to be able to pay their loans back. This means that New Zealand will end up with a huge hole in its budget and a large, educated, income earning group who will not return to the country as it faces an ageing population. The Government needs to take serious action to stabilise student loan debt as a first step to reducing it, before it cripples New Zealand s economy. In conclusion, this submission recommends that: the amendments shortening the duration of the repayment holiday period are not passed into legislation; and amendments be added to the Bill requiring IRD and/or the Commissioner to respond to all reasonable requests from borrowers for information about their loan accounts. 8 Student Loan Scheme Annual Report 2010, accessed at three. 9 See student loan debt a disaster says Key. 10 See student loan debt a disaster says Key. 11 See loans targeted for Budget savings.