Student loan debtors hiding overseas
Overseas-based student-loan borrowers are in arrears for close to the amount the scheme lends each year. How did this happen? Martin van Beynen reports.
If the Government was a bank and 75,000 of its borrowers were behind on their repayments, pointed questions would be asked.
If much of the debt was more than five years overdue and the bank had no contact details for about a third of those borrowers, panic would be justified.
Essentially this is the situation with overseas-based student loan borrowers (OBB) who, at June 30, were $1.2 billion in arrears. Although they made up about three-quarters of all overdue student-loan borrowers, OBBs were responsible for 91 per cent of all distressed student debt. The scheme lent out $1.57b in the last financial year.
Student loans impose obvious obligations. Holders must notify Inland Revenue, the department responsible for collecting repayments, when they leave New Zealand so a minimum annual repayment can be worked out. A student loan of between $30,000 and $45,000 requires repayment of about $3000 a year.
Borrowers pay interest (currently 4.3 per cent) on their student loans only if they are overseas for more than 183 days and the interest is backdated to the date they left New Zealand.
Inland Revenue (IRD) says it’s making good progress in getting on top of the debt, with payments by OBBs 40 per cent higher than four years ago, increasing from $158 million to $221m, and the rate of default slowed by half.
‘‘The eagerness to do the right thing is slowing the rise of debt in default,’’ it says.
Yet, although the number of overdue OBBs has decreased by about 2 per cent compared with last year, the sum overdue has increased by nearly 10 per cent. IRD says the increase is due to interest being charged on noncompliant loans. Latest figures show that, of the 108,758 OBBs, only 22 per cent made the correct payment by the due date of March 31 this year.
Revenue Minister Stuart Nash says the $1.2b in arrears is a major concern, but he appears happy with the way his department is tackling the issue.
He is worried student-loan holders leave New Zealand not thinking much about their obligations and then ‘‘bury their heads in the sand’’.
‘‘It’s the worst thing people can do. If you have a problem, give Inland Revenue a call.’’
He believes some in arrears want to come home, but are put off by the big debt waiting for them.
The Government will not forgive any of the debt, he says, because that would be unfair to those who pay. A deal might be reached on the penalty interest, but not on the base rate interest.
Non-compliance has been a problem since the student-loan scheme began in 1992.
The situation did not improve after 2005 when the Labour Government stopped charging interest on student loans. Previously, borrowers were charged an interest rate one percentage point above the government’s cost of borrowing.
The deterioration of the arrears figure is reflected in the fact that, in 2002, about 7857 overdue borrowers owed only $34.5m. The debt has not only mushroomed, it has got older. About $500m of the arrears is older than five years and $1b is older than one year.
Some of the $1.2b in arrears is penalty interest (currently charged at 8.3 per cent), but, even if that interest is removed, the debt is still about $800m.
Inland Revenue can’t expect much help from the New Zealand University Students Association.
New president James Ranstead says his association is searching for a ‘‘barrier-free’’ tertiary education system.
Many students leave their courses ‘‘incredibly burdened’’ with loans and daunted by entering a high-cost housing market, he says. ‘‘Students are working more than they ever have. New Zealand needs to take a hard look at what is going on.’’
The focus of Inland Revenue’s recovery effort is contact with defaulters through social media, online advertising and text messaging.
Most of the overdue OBB brigade are in Australia, with about 53,000 borrowers there behind on repayments. Inland Revenue has had an information-sharing deal with the Australian Tax Office since 2016 and, as a result, is developing a better database of contacts.
Slowly, more defaulters are coming on board, but some results are disappointing.
After this year’s March 31 repayment date, when only 22 per cent of 108,758 OBBs made the correct payment on time, Inland Revenue sent three rounds of emails and text messages to the 54,033 OBBs for whom it has valid contacts.
This suggests Inland Revenue has actually lost contact with at least 25,000 borrowers, but it says it cannot determine ‘‘how many details are up to date because it’s up to the borrower to keep their details current’’.
Of the 54,033 Inland Revenue contacted, 43 per cent made a payment. IRD then followed up with 33,892 emails, containing a hardline message to those who had opened one of the March 2018 reminders but had not contacted the department or made a payment.
Despite offering an incentive that late-payment interest would not be charged if the right payment was made before April 30, only 13 per cent responded.
Inland Revenue has also set up a ‘‘preventative assistance team’’, which contacts borrowers who are behind for shorter periods. However, about a third of those contacted do not open their email.
As a last resort, the department can get a warrant to arrest student-loan defaulters at the border. In the year to the end of June, only one warrant was sought but no arrest took place because the borrower made a payment.
The arrest of a Cook Islands maths teacher at Auckland airport in 2016 for failing to repay a $22,000 debt resulted in a spike in OBBs making payments so it’s surprising IRD does not use the tactic more often.
It says so few warrants are sought because the action is reserved for the most serious non-compliant borrowers and ‘‘borrowers will often start talking to us and make payments before an arrest warrant is granted’’.
The department has a datamatch arrangement with Customs that allows it to note all student-loan borrowers, whether in arrears or not, who leave or enter the country. It won’t say how many matches it got for defaulters in the last year.
Court action is another tool in Inland Revenue’s box to recover student loans. In the year to June 30, it began 28 proceedings in Australia and five in the United Kingdom. Seven cases were resolved. It has sent 10,000 cases to overseas collection agencies.
National’s tertiary education spokeswoman, Paula Bennett, does not accept the problem got out of control under National’s watch.
‘‘When we were in government we worked hard to make sure students paid back the money they borrowed, like they would with any other loan.’’
She says her government introduced the informationsharing system with Australia and arrests at the border.
She takes credit for the 40 per cent rise in OBB repayments over the past four years and accuses the Government of going soft on defaulters. ‘‘It’s no wonder students who’ve worked hard to repay their loans feel ripped off.’’
Economist Eric Crampton, who heads the think-tank NZ Initiative, says his organisation’s 2016 study about the student-loan scheme showed the amount OBBs are in arrears is not the main issue.
Each year the value of student loans to the government has to be written down because of the no-interest policy, he says. The write-down in the last financial year was $594m, the lowest since the 2012-13 year.
‘‘If every delinquent overseas borrower paid their debt in full tomorrow, that would cover only the next two years’ worth of subsidies for student borrowers. The real gains would come from reinstating interest on loans.
‘‘We could do better in improving both access to tertiary education and equity by abolishing the subsidy and using the money to improve instruction at secondary school and to provide means-tested scholarships.’’