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News from New Zealand – changing repayment terms

June 27, 2012

News from New Zealand has provided a concrete illustration of my concerns about student loans and the lack of protection for borrowers.

Over the last year, I have been trying to draw attention to the terms and conditions attached to individual loan agreements.  Those signing up are informed:

“You must agree to repay your loan in line with the regulations that apply at the time the repayments are due and as they are amended. The regulations may be replaced by later regulations.”

Loans are therefore future policy contingent.

Without fixed contractual terms and with limited statutory protection, borrowers (who now take on loans with lifetimes of over thirty years) face potential uncertainty. Future governments have the ability to vary the regulations governing repayment so as to extract more money from borrowers. This can be done using statutory instruments, a form of secondary legislation used for administrative matters: these instruments pass into law without the need for a vote or a debate with only limited opportunity for MPs to intervene. I do not believe this is satisfactory, especially given the higher debts that borrowers will now face.

Those concerns were set out in detail in my report False Accounting?

But that was written before I heard about the Budget announced in New Zealand at the end of May. 

New Zealand has a very similar loan scheme with monthly repayments determined by income.  The repayment threshold there is 19 084 NZ dollars (roughly £9 700) and the ‘tax rate’ over that threshold is 10%. (That is, a graduate pays 10% of all earnings over that threshold back to the government until the loan is repaid).

In England, graduates taking out the new loans will be expected to repay 9% on gross earnings over £21 000 (in 2016).  The New Zealand scheme is therefore much less generous, though they pay a zero rate of real interest on outstanding balances (so long as certain conditions are met) and tuition fees are lower.

What is striking is that the New Zealand Budget confirmed an earlier announcement to increase the ‘tax rate’ from 10% to 12% for all existing borrowers, not just new cohorts. Because they were included in a package of budgetary measures, no separate legislation was needed to effect this change.

The New Zealand loan contract allows terms to be varied with no ability of the borrowers to challenge these changes.

This is exactly the situation here in England.

The Coalition government has repeatedly emphasized the generosity of its new funding regime.  But once you have saddled yourself with debts in excess of £30 000 you have little defence against a future government deciding it needs to be more miserly. If one were to call for faster and higher repayment, there would be little opportunity to resist.

You would not accept this situation on a commercial loan.

You should not accept it on one provided by the Student Loan Company.

 

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