Half a million Kiwis with student loans face a cut to their take-home pay in the Budget as the Government looks at ways to raise income to help balance its books.

Prime Minister John Key said yesterday the May 24 Budget would increase the current repayment rate, which is set at 10 per cent of income over $19,084, to force students to pay off their loans more quickly.

He also signalled that the Budget would put up the excise tax on cigarettes, to raise revenue and cut the numbers smoking.

The Government is also looking at cuts to the amount it spends on student allowances.

Mr Key said the change to the repayment regime would be "modest", but it would have an impact on the 500,000-odd people who have a student loan and were earning above the threshold that required them to repay.

The savings would be reinvested in the research capabilities of universities to help raise their world rankings. The Government had reduced the writeoff on loans to 45 per cent of student borrowers and aimed to reduce it to nearer 40 per cent by continuing to chase overseas borrowers and through faster repayments.

Mr Key would not be drawn on the new rate, but said it would raise "tens of millions of dollars".

Figures supplied by Inland Revenue show that at the 10 per cent rate that applies now, $690.6million was received in student loan repayments in the year till June 30, 2011.

New Zealand Union of Students Associations president Pete Hodkinson said a lift in the repayment rate was a tax increase because it was taken straight out of pay, like PAYE.

"It's outrageous that graduates should have to pay higher taxes to pay for a budget shortfall that has been caused by the tax cuts that the National Government gave to high-income earners."

Labour deputy leader Grant Robertson said the change would put more financial pressure on graduates. The rate should balance the need for loans to be paid off quickly with the need for graduates to meet their costs and be able to take out a mortgage. The increase put that at risk.

Tertiary Education Minister Steven Joyce has also said changes would be made to student allowances. "We're really looking to make sure that we target the allowances to those in the early years of study and those families that can least afford it."

The change would not be dramatic, he said. The cost of allowances had risen to $600m a year, and the Government needed to curb that.

The parental income threshold for allowances was frozen this year and would probably be frozen for another three or four years. Loopholes in the definition of income would also be tightened.

In his speech previewing the Budget, Mr Key said forecasts showed there was enough "headroom" to ensure a surplus in 2014-15.

"It might not be the world's biggest surplus, on current forecasts." But it was achievable "without any great dramas".

- © Fairfax NZ News

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