Loophole gives cash back to students

The Government has threatened to close a loophole in the tertiary loan scheme that lets students who have repaid the debt exploit Labour's election promise of interest-free money.

A clause in the Student Loans Scheme Act 1992 lets those making voluntary repayments get a refund from Inland Revenue if they apply within six months of getting the receipt.

National leader Don Brash told Parliament yesterday of one student, Thomas Banfield, who got a refund from Inland Revenue on a $15,000 voluntary repayment and ploughed it into an interest-bearing deposit.

Students do not have to start repaying loans until they are earning a minimum of $16,588 a year before tax, but voluntary repayments can be made at any time.

Labour's policy to axe interest from April 1 next year was welcomed by students but criticised by National for encouraging them to borrow as much as possible and repay only the minimum.

Inland Revenue could not provide figures yesterday on how many students had sought refunds of voluntary payments since the start of 2004, but Finance Minister Michael Cullen told the House the department received an estimated $167.4 million in such payments last year.

Dr Cullen indicated he would consider a law change and would discuss the issue with Inland Revenue.

University Students Association co-president Andrew Kirton said the loophole would be shortlived and only those capable of making big lump-sum voluntary payments would benefit.

"It really is unfortunate that a small, probably quite wealthy minority ... aren't using it for what it's intended for."

The refund clause had been designed to help people who got into financial difficulties after making a big voluntary repayment.

Mr Banfield, a Wellington sharebroker, was given $15,000 by his father to make a voluntary payment on his $25,000 loan this year.

However, after Labour announced its interest-free policy on loans, he decided to exploit the clause, get a refund and put the money in an interest-bearing account.

"Since it was going to be interest-free, I thought that I may as well get on board and maximise that borrowing.

"I can earn the 7 per cent myself instead of paying the Government.

"I don't see that there's too much risk involved if you don't do anything silly with the money."

Mr Banfield said he thought the Government never envisaged the loophole, and he predicted other students would take advantage of it.

The National Party's finance spokesman, John Key, said many people who had made a voluntary payment in the past six to nine months were likely to ask for a refund and put the money in a bank.

"Thomas Banfield is just the tip of the iceberg because clearly they can earn in a risk-free investment. That is the logical thing to do."

Mr Key said nearly half of all student-loan payments were voluntary, and the number of such payments would dwindle dramatically as there was no gain in making them.

He also questioned Dr Cullen's most recent estimate of the cost of interest-free student loans, which was put at $200 million - $100 million less than Labour's pre-election estimate.

The estimate Labour used during the election was based on the assumption voluntary repayments would remain at the same level.

Mr Key said there were now serious questions about that assumption, given that the incentive to make voluntary repayments was being removed.


How one student took advantage


Wellington sharebroker Thomas Banfield made a $15,000 voluntary payment on his $25,000 student loan this year.


After Labour announced its no-interest student loans policy he used section 56 of the student loan legislation to get Inland Revenue to refund the payment.


He then put the money in an interest-bearing bank account.