Student loan repayment loophole closes
Students eligible for a 10 per cent return on voluntary repayments on their student loans have only a couple of days to claim before the Government closes the loophole.
The change is one of several April 1 changes to the tax system, including lifting the minimum contribution amount for KiwiSaver.
The 10 per cent student loan "bonus" for repayments beyond the compulsory amount was aimed at speeding up slow payers and reducing the Crown's borrowing costs.
But it backfired when it became evident that students were "gaming the system" by claiming the bonus while they were still studying.
Rather than changing the rules so current students could not receive the bonus, the Government has opted to axe it and tighten the scheme's criteria.
Because the 10 per cent bonus offers a much higher rate of interest than banks, students who have money to spare are being advised to act quickly.
Jeff Matthews, a financial adviser for Spicers, said a friend had paid off his daughter's $54,000 loan to take advantage of the discount before it disappeared.
"To wipe $5400 off [the loan] with a 10 per cent discount, it's a no-brainer," he said.
Money columnist Mary Holm cautioned that this was only worthwhile if the borrower would have repaid the loan with compulsory payments within a relatively short time, such as the next three years.
Otherwise, it was financially better to put the savings in the bank and receive interest.
"It depends on how long the student loan's running. If you've got a long-term student loan, you are generally better not to pay it off any faster than you have to because it's interest-free, and if you've got spare money you should be putting it in the bank earning interest," she said.
Holm said she spoke from a purely financial perspective and was not advocating people drag their loans out.
"Psychologically, lots of people just want to get rid of their student loans, and I always think that's totally legitimate," she said.
The Government's decision to axe the bonus follows advice to the Treasury last year.
Of $13 million paid out in bonuses in 2011, $1.8m was paid to students who were borrowing and fully repaying their loans in the same year.
"The bonus is also encouraging some students to borrow when they do not need to do so," the advice noted.
The bonus applies only to balances of more than $550, to extra repayments of over $500, is limited to one-11th of the loan balance, and applies only to repayments made to Inland Revenue.
The Government has instead decided to lower the cost of the student loan scheme in other ways. These include increasing its contact and tracking of overseas-based borrowers.
It will also freeze the repayment threshold, but raise the amount students must repay from 10 cents to 12c in the dollar.
Other changes to the tax system include lifting the minimum KiwiSaver contribution rate, which rises for employers and employers from 2 per cent of gross salary or wages to 3 per cent.
Individual taxpayers will also no longer be able to claim the childcare and housekeeper tax credit or a credit for income under $9880 from the 2012-13 tax year onwards.