Loans loophole to close to defeat student 'gaming'

The Government will soon slam shut the loophole National exposed last week in the plan to offer interest- free student loans.

Last week in Parliament National revealed Wellington sharebroker Thomas Banfield got a refund from Inland Revenue on a $15,000 voluntary student loan repayment and ploughed it into an interest-bearing deposit instead.

The refund was allowed under a clause in the Student Loans Scheme Act 1992 which allows voluntary repayment refunds if the person applies within six months of getting the receipt from Inland Revenue.

Last week Finance Minister Michael Cullen indicated the loophole would be closed.

He said yesterday that an amendment to the bill before Parliament implementing the new policy would retrospectively close the loophole by ensuring refunds relating to the 2004-05 and 2005-06 tax years remained subject to interest and preventing refunds being claimed for previous years unless claims had already been lodged.

Dr Cullen said the aim of the change to the bill - expected to be passed under urgency before Christmas - was to prevent people trying to "game" the system after the report about Mr Banfield.

The bill will be passed under urgency to ensure the interest-free student loans plan can take effect from April 1.

National finance spokesman John Key said the public had National to thank for identifying the loophole, which could have allowed students to profit from the generosity of the taxpayer.

"This proves beyond any doubt that Labour's no-interest loans scheme is rushed and reckless, thrown together in desperation before the election.

"It took National to expose the issue which, until we raised it, had been completely overlooked."

He said the Finance Minister had been shown up by a graduate who had proved he knew more about the law and the value of interest.

Nobody would make voluntary payments under an interest-free system, Mr Key said. That would mean the student loan balance outstanding - $7.5 billion at June 30 - would balloon.

Dr Cullen said the costings for the interest-free policy, to be included in the December Economic and Fiscal Update, assumed the volume of voluntary repayments would fall to 20 per cent of their present value over three years.

But repayments of principal would still be compulsory above a certain income threshold, at present $16,588 a year, and loans would continue to be available only to cover fees, course-related costs and in the case of full-time students, living costs to a maximum of $150 a week.

Asked if National would abolish interest-free student loans, Mr Key said: "We'd have a look at it. Let's just see what conditions they put on it and what impact it has".