Student loan repayments to earn 10pc Govt top-up

The Government will give a 10 per cent top-up to any voluntary student loan repayments which total more than $500 in one year in a bid to get people to pay off their loans quicker.

Prime Minister John Key said yesterday the offer will also apply to loan holders living overseas.

They do not benefit from the interest-free policy and are more likely to be behind in their payments and take much longer to pay off their loans.

The top-up will apply for any repayments made over and above $500 after April 1, 2009, whether as lump sums or in instalments. Inland Revenue will automatically calculate and make the top-up payment.

Mr Key said it would encourage people to pay off their loans earlier.

National has not yet released how much it estimates the 10 per cent offer will cost.

Voluntary repayments totalling $239 million were made in the year ending June 2005 - but dropped to $185 million the next year, which was put down to the start of the interest free loans policy.

One of National's criticisms of the interest-free loans scheme when Labour introduced it in 2006 was that people would stop trying to pay their loans off early. However, despite opposition, National agreed to sign up for the scheme.

The top-up is of particular benefit to those living overseas, who still have to pay interest of about 6.7 per cent on their loans.

Education Minister Anne Tolley said that by including overseas borrowers, the policy goes wider than National initially proposed when it released it in January 2008. Including those living overseas is partly to address the problem of people going overseas for longer or emigrating permanently and taking a three-year holiday from repayments while racking up the interest.

About 77,000 borrowers live overseas - 14.5 per cent of all borrowers but whose loan balances make up about 20 per cent of the total balance, excluding accrued interest. They also made up about one third of those with overdue repayments - about 33,000 had overdue repayments totalling $64.4 million - despite an amnesty ending in 2008.

Last year's student loan annual report showed that nearly half of those took the three-year "holiday" from repayments, which was introduced in 2007.

The numbers using the holiday was expected to increase, especially among those spending longer overseas or emigrating permanently who tended to have worse repayment records.

The interest-free policy is estimated to have knocked about two years off the median repayment time - from about nine years for those who left university in 1999 to about seven years for those leaving in 2005.