"Mr Fraher said he contacted the Inland Revenue Department (IRD) when he first left NZ in 2000 with a student loan of about $70,000. The requirement for him was to pay 15 per cent of the principal and all of the interest in a year, he said - about $15,000, though Mr Fraher recalled the amount was $23,000. The income from his first job would not have covered it, even if he had lived homeless and ate at soup kitchens, he said. Mr Fraher said IRD at the time would not consider any other payment plan despite the circumstances"
Was this a requirement at the time and has it changed? From this it looks like the herald assessed this at 15K and Fraher's recollection was 23K. Even at the lower level he was still looking at a minimum payment of NZ$300 per week overseas without earning anything. Is the article actually correct in this?
His penalties date from when he could not pay it and that is the pivot of the whole thing.
Kyanar: I think one of the biggest problems with student loans is the - technically illegal - penalties. [...]
Why do you think they are technically illegal? I thought that the penalty regime was set out in legislation which means that it is, definitionally, legal?
Because the penalties are significantly higher than what any private lender is permitted to charge. If Instant Finance charged 1.5% per month penalties on overdue payments, they'd be found in violation of the Credit Contracts and Consumer Finance Act, which dictates that penalties must reflect the real cost of the default - but the IRD is allowed to ignore that.
Kyanar: I think one of the biggest problems with student loans is the - technically illegal - penalties. [...]
Why do you think they are technically illegal? I thought that the penalty regime was set out in legislation which means that it is, definitionally, legal?
Because the penalties are significantly higher than what any private lender is permitted to charge. If Instant Finance charged 1.5% per month penalties on overdue payments, they'd be found in violation of the Credit Contracts and Consumer Finance Act, which dictates that penalties must reflect the real cost of the default - but the IRD is allowed to ignore that.
You are wrong. The CCCFA dictates that fees must reflect real costs. Interest rates are not regulated in New Zealand other than that they must not be "oppressive".
You are wrong. The CCCFA dictates that fees must reflect real costs. Interest rates are not regulated in New Zealand other than that they must not be "oppressive".
I am not. The penalty on a student loan is not interest, it is a penalty, which they have decided to call interest in order to confuse people. Which means they meet the definition and legally must be reflective of the IRD's real cost of the default.
Oh, except for that wonderful clause they added to the Student Loan Schemes Act two years back exempting it from the Credit Contracts and Consumer Finance Act so that they could do stuff which is technically illegal - such as raise the rate to an unlawfully high level.
OK, well I think penalty interest is not legal, but default interest is. And the only difference that I am aware of between the two is that default interest must be expressed in terms of the difference from the standard base interest rate.
Part 40 of the CCCFA deals with default interest:
Default interest charges (1)A consumer credit contract must not provide that an annual interest rate applicable under the contract to any part of the unpaid balance will differ according to whether the debtor has breached the contract.
(2)However, a consumer credit contract may provide for a differential rate if the higher rate is imposed only: (a)in the event of a default in payment and while the default continues; or (b)in the event of the debtor causing the credit limit under the contract to be exceeded and while the credit limit is exceeded. (3)This section does not limit Part 5 or any other rule of law that limits the amount of a default interest charge that may be imposed.
What most people call "penalty interest" is probably in fact "default interest" under the law (depending on the wording of the contract), and there is no requirement I am aware of to relate default interest rates back to costs for IRD or anyone else.
itxtme: If you take out the emotion from your responses, what is more important is that the money is paid back. In my view there should be less of a push on penalties and more incentive to pay it back. I dont have the answers, but a system with repayment compliance of 90%+ is a better system than this one.
Absolutely - I have no problem with a borrower leaving the country - as long as they make the repayments that they are supposed to do from wherever they are.
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I'm considering making a lump sum payment in March this year as I think that is the last month that the 10% repayment bonus applies before it's removed. I wonder if that's good financial advice or if I should be putting my money to better use...
mudguard: I wish I could pay off my student loan using my Kiwisaver. It would be a 10% pay rise!
That is precisely the shortsighted mindset Kiwisaver was designed to combat.
I'm still unclear about why this man was only making the minimum repayments. The only time you pay back a loan at the minimum is if you're not paying interest on it. Any other time it is to your advantage to make more than minimum repayments.
Kyanar: I think one of the biggest problems with student loans is the - technically illegal - penalties. The government goes and whines about South Auckland loan sharks a lot, but if for any reason your loan starts incurring penalties (and it's not necessarily intentional!) then suddenly the government becomes no better than a South Auckland loan shark, charging you something in the order of 1.5% penalty interest a month - compounding. They've even got handy charts showing you how much they will rip you off if you don't pay the entire amount.
Comparing this to the likes of lending companies that are represented by ex-league players is a tad extremist. Most main stream lenders will charge a penalty interest (or whatever you'd like to call it) when an unsecured loan falls into arrears. And in any case it has been reduced to 0.843% per month. Perhaps they believe that if you fall into arrears then you'll be out of it in a couple of months, and in which having a per annum rate may be confused.
Kyanar: The argument in that article is quite valid - the IRD is ridiculously stubborn on what form a repayment plan may take, and in all cases, it's simply not viable for a middle to lower class individual to meet the IRD's requirements.
I'd agree that IRD can be (to put it mildly) over zealous at times, especially when it comes to collecting money and perhaps student loans and their collections needs to be put into a different ministry to administer, but the point remains that people are entering into a loan agreement, similar to what you would at any lending institution, but without any of the checks that go into place to ensure that people are capable of repaying. Too many people lose sight of this and don't take responsibility.
I really hope this plonker isn't looking for any sympathy. To me he just comes across as someone who wants to justify his actions of ripping of the NZ taxpayer. And for his SL to double to $140k whilst he was in Aus, he can't have been making any repayments to it at all.
Kyanar: I think one of the biggest problems with student loans is the - technically illegal - penalties. [...]
Why do you think they are technically illegal? I thought that the penalty regime was set out in legislation which means that it is, definitionally, legal?
Because the penalties are significantly higher than what any private lender is permitted to charge. If Instant Finance charged 1.5% per month penalties on overdue payments, they'd be found in violation of the Credit Contracts and Consumer Finance Act, which dictates that penalties must reflect the real cost of the default - but the IRD is allowed to ignore that.
Which means that what the IRD does isn't illegal - technically or otherwise then. The law says certain types of loans (private-sector ones) have one set of rules, while other loans (student loans) have another. Some of the student loan differences are a bit tougher (eg penalties for missed payments), while others are more generous (interest free while the borrower is in NZ, no repayments before a persons' income is below a prescribed level etc). This was the deliberate intent of law clearly passed by Parliament, and it is completely above board for the IRD to comply with the rules.
Your argument seems a bit like saying that a private care is technically illegal/unsafe to drive on the because it only has a valid warrant of fitness, but wouldn't passed a (tougher) inspection for a certificate of fitness required for commercial vehicles. In reality the law clearly sets different rules for different use regimes, and it's isn't technically illegal for you to drive a care with a WoF that wouldn't have passed a CoF - as long as you aren't carrying passengers commercially.
GeoffisPure: I'm considering making a lump sum payment in March this year as I think that is the last month that the 10% repayment bonus applies before it's removed. I wonder if that's good financial advice or if I should be putting my money to better use...
Mary Holm had a calculation a while back in the herald about when to pay the minimum and when to repay as fast as possible and take advantage of the repayment bonus. It requires a bit of fudging because it was based on higher interest rates.
I'm repaying mine in full in February to get the repayment bonus. A few people a know are, might be worth looking into?
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