Student Loan Scheme Amendment Bill (No 2)

Thank you, Mr Chairman, for the opportunity to speak on Part 1 of this Student Loan Scheme Amendment Bill (No 2). Part 1 is a substantial part of the bill, which the Government has introduced and the National Party is supporting, because it is there to encourage New Zealand students overseas to come home. But I must say, there are some concerns about it.

Clearly, one of the issues of concern is the database issue. I think that everybody is in agreement that the database is worthwhile and that must be done if we are even to identify the number of students with loans. At the end of last year, I understand, the ministry had identified only a few thousand students but it had concerns that something like 40,000 students were studying overseas. Because of the interest-free loans available to students living here, it was not in those students’ interest to declare they were overseas, because they would have lost their interest-free status.

Of course, this brings in the whole dilemma of New Zealand’s having introduced a very expensive interest-free loan scheme, which costs $1.5 billion a year. The savings on bringing in this bill amount to about $9 million in the first year—2007-08—and, I think, $24 million the next year. But that amount is dwarfed in comparison with the $1.5 billion that the scheme is actually costing per year.

I want to spend some time going over the clauses in Part 1 relating to the collection of repayments from overseas-based borrowers and those who are entitled to the 3-year repayment holiday. There are some concerns relating to the signals that such a system sends to the students themselves. These concerns were pointed out by representatives from Business New Zealand, who said that the concept of a repayment holiday raises fundamental questions of fairness. Why should borrowers who have left the country effectively be rewarded, when those who stay home in New Zealand, who are meeting their repayment obligations and making an economic contribution to the country, are not rewarded? [Interruption] I am not too sure what the Green Party member Metiria Turei is saying, but we are talking about fundamental fairness and systems.

I think I mentioned last night the point that we here in New Zealand are sorting out a very complex situation that has been imposed by the Government. We can compare ourselves to Singapore, for instance. The Singapore Government has just invested $1 billion or more into encouraging elite young science graduates to go overseas to places like Harvard, Johns Hopkins University, Cambridge University, and Oxford University. That Government will require the students to be bonded, and if they do not come back to Singapore, then they have to pay back their $1 million each.

The Singapore Government’s reason for doing that is that it is extremely concerned that there be clear rules around whether those students come back. One must be concerned that, here, this has been a policy very much made on the hoof by the Labour Government to win an election. Now it has to put in machinery that is fair to those students who have gone ahead and paid off their loans here in New Zealand, and fair to those students who have gone overseas and been caught up with the problem of repaying the loans. Some of the loans, as everybody admits, are very onerous to young students at a stage in their lives when, hopefully, they would be getting on to having jobs, forming relationships, and maybe later on wanting to save for a house, etc.

So there are a whole lot of conflicting issues here, and I think Business New Zealand is absolutely right in saying that from a fundamental fairness point of view, and in terms of getting the New Zealand economy going, it is very important to be concerned about repayment holiday issues.

Sitting suspended from 6 p.m. to 7.30 p.m.

I have not yet spoken in this debate on the Student Loan Scheme Amendment Bill (No 2), during either its first or its second reading. But I suppose I have more than a passing interest in it, because I was the original architect of the student loan scheme. We have seen that scheme screwed up and manipulated by politicians over the years since it was first established.

It makes me think back to the days when I was Minister of Education. Serious international educationalists used to say to me that one of the great tragedies for education was that preschool children do not vote. A very, very well known educationalist said that is the great tragedy of education. If we wanted to direct resources to improving New Zealand’s education system, directing resources to small children is how we would have by far the most profound impact. The human being, among all mammalian species, is kind of fascinating in that among all vertebrates it is the only one born with an immature brain. We might have all of the brain cells we will ever have, but the connections between them do not exist at that stage. Other vertebrates are born with mature brains. So it is in the early years of a human being’s life that education can have the most profound impact, but small children do not vote. Children of the age of 3 do not vote and they do not get the resources.

Parliament keeps delivering more and more resources to the people on whom education has the least impact—the oldest ones, whose brains have been predetermined long before the resources are delivered to them. But these older people vote. So at the last election we saw this massive bribe from Labour; it offered $1.5 billion to buy the student vote.

Today we work on this legislation to try to make sure that it does not have too many anomalies in it. National supports this bill because we believe that it is important to try to make sure there are no barriers preventing educated New Zealanders from coming back to our country.

I want to ask the Minister of Revenue a couple of serious things about Part 1, and particularly about new sections 89 through to 91 in Part 8—the “fresh start for certain borrowers”. Why was it decided to treat those who are honest about the fact they were overseas in exactly the same way as those who are dishonest about that fact? As I look at the examples given following new section 91 of Lenore and Keith, it seems that one of those people was honest about being off overseas, and the other one was not. Yet with this legislation we are treating them in exactly the same way. I am interested in why we would choose to treat those who are honest about being overseas in the same way as those who are dishonest.

More important, perhaps, is the latest information I have on the borrowers who registered under the amnesty to take advantage of some of these provisions. As of 27 November last year, of the 40,000 New Zealand graduates believed to be offshore, 765 had taken advantage of the amnesty. Presumably there is an update on that figure. Each year we are losing to Australia over 22,000 New Zealand residents, many of whom are graduates. That massive exodus of New Zealanders to Australia is something that should be troubling us, as well. Although we hope this legislation will have significant impact, as of the end of last year it appeared that only a few hundred New Zealand graduates offshore were registering to take advantage of that amnesty.

National members are supporting the legislation, but it would be interesting for the Committee to know from the Minister in the chair the answers to those questions. Why was it decided to treat the honest and the dishonest in the same way? Even more important than that, what is the latest update on the 40,000 graduates believed to be offshore at the moment? We were advised that 765 people had taken advantage of the amnesty as at 27 November last year. Now, about 4 months later, presumably there is an updated figure on that. It would help us to know how effective this legislation will be. I understand that the legislation now extends the amnesty for a further 12 months to try to give the chance for it to be more effective. It would be worthwhile hearing from the Minister just how effective it is proving to be, because 765 is less than 1 percent of the total opportunity out there.

It is an honour to follow such a learned member as the Hon Lockwood Smith, the architect of the student loan scheme, who gave us those expressions of experience.

In dealing with Part 1 of the Student Loan Scheme Amendment Bill (No 2) I will concentrate on a range of things: the repayment obligations from the point of view of an overseas-based borrower; the clarification of what the term “charities” refers to; the extension of exemptions as far as overseas education goes; the reduction in the penalty rates, which were 2 percent and have now been reduced to 1.5 percent; the adjustments in respect of the collection of small amounts of money, or “trivial” amounts as they are referred to; the circumstances for appealing to the Commissioner of Inland Revenue on the grounds of hardship; the responsibility of someone who has received exemption because of hardship to report when those circumstances change; and the situation where one sets up an arrangement but breaches the amnesty, and the effects of that.

What will probably draw most people’s attention to Part 1 is the holiday provision. From a pretty basic point of view, this provision was required to allow the organisations involved to get the process into order. In actual fact, the process has been running for some period of time. Now there will be an extension, which will no doubt allow more people to try to get their house in order and set about repaying their student loan.

I take this opportunity while we are referring to Part 1 to say to the member from the Green Party who constantly refers to people having their educations paid for them that, from my position in life, many, many thousands of people in New Zealand left school and started working for a living, paid a lot of money to do that, and did not have the benefit of being able to access a student loan to get higher-level training.

I strongly urge members of the public, if they are listening at the moment, to think very seriously about just which stream of education they take, so that they do not end up having spent enormous amounts of money—which absolutely shocks me, at times—for very little value. If there is one step that I would like us to take in terms of student loans, it is to get better information to parents and children so that they can make better decisions.

There are a lot of technical changes in Part 1, which I have referred to. Probably the most important change would be the repayment obligations of an overseas-based borrower. We see in new section 34(4), in Part 1, that if $15,000 is owed, the repayment obligation is $1,000 “for each full tax year during which the borrower is overseas”. It goes up from there. There is no perfect model; as soon as someone is a bit over that $15,000 the sum is $2,000, and as soon as someone is over $30,000 the sum goes up to $3,000. I have no argument with that. I think it is clear and understandable; it needs just to be picked up and run with.

I believe that it is very, very important in the whole context of things that there is information sharing, and that the Inland Revenue Department can receive information from the Customs Service, because, as has been pointed out, a lot of people have been overseas.

I do not think that we want to spend a great deal of time going over all the detail in this legislation; it has been traversed. But I think it is an opportunity to explain some of the issues that this bill brings to bear.

I start off by talking about the charities part of the legislation in the new section 38AEA inserted by clause 12, which the previous speaker, Mr Colin King, talked about. What the bill does—in fact, this was inserted through the select committee process—is to actually apply the criteria that were adopted in 1978 by Cabinet about what charitable donee status is. So, in other words, if somebody goes overseas the interest-free loan still applies to that person if he or she is working in a charitable organisation. But, unfortunately, that included, for example, people working as proselytisers or preachers going out and trying to get adherents for a particular religion—as distinct from somebody who, for example, was working as a teacher in a Seventh-Day Adventist school overseas, or working on a project to build a hall or classrooms, etc. So this bill clarifies that if someone is doing one of the latter then he or she falls into the charitable donee status, and, therefore, he or she has an interest-free loan while he or she is overseas doing those things. But people donning a white shirt and tie, running around the roads, and knocking on doors with a Bible under their arms unfortunately do not fall into that status. The Education and Science Committee, and certainly New Zealand First, totally agree with that.

This part brings in the 3-year repayment holiday. That really is the crux of the whole issue, because even prior to the interest-free loans there was a real problem with people going overseas and not understanding their obligations. They go to come back and, whoops-a-daisy, find that not only interest but a whole lot of penalty payments have been put on top of their loans as well. With the interest-free loans, that applies only to people who stay in New Zealand, not to people who go off overseas, with the exception of the charitable donees. So people believe that they can go off overseas and they do not have to pay interest. The problem is that not only do they have to pay interest—I think it was one-fifteenth, but it has now changed to the figures mentioned before—but they then get clobbered with the penalties. So when it comes time to come back their loans are much, much larger because of that, and there is a disincentive to return to New Zealand.

So this says that people can go off overseas and that there will be interest on their loans, but they will not be required to make any repayments. People picking fruit in North Viet Nam, for example, and earning 1,000 dong per day will not be able to make repayments as was required under the past system—however, they are getting a great deal of experience, etc. They will not have to make repayments but the interest will be accruing. That really is the crux of it, because, as New Zealand First has said time and time again, the best immigrant is a New Zealander returning home. We want those young people to come back home with the experience that they have gained while they were overseas.

Paul Hutchison talked about Business New Zealand. It asked why we made it different—the changes really create an incentive to go off overseas. I think it failed to understand the difference between those who go off overseas, who still have to pay some sort of interest rate, and those who stay behind, who do not. So, in fact, the incentives are really to stay in New Zealand under the system that exists. Also, there was another proposal that we should have an income-related formula that depends upon where people work. I ask members whether they can imagine 140 or 150 different countries trying to gain information as to what people earned in those countries and then relating them to income limits back here in New Zealand. It would be completely and utterly unworkable, so New Zealand First does not support that.

The only other issue was really the interest-free loans for borrowers studying full-time overseas at an undergraduate level. A number of the submitters to the bill got the idea that if they went across and did postgraduate level study, they could utilise the New Zealand loan scheme. In fact, they were wrong. Last night I praised the officials, because the officials, I believe, went out of their way and made the effort to go out and meet up with those people and groups in order to ensure that they actually fully understood. So I take my hat off to the officials because I think they went beyond the call of duty.

Finally, the last thing is that the application of care and management is a fundamental Inland Revenue Department principle; it does not apply to students. When the Inland Revenue Department has mucked up and got the thing wrong, there should not be a penalty against the student who carries a loan. That principle is now to be applied to students under student loans, and that is a good thing.

National is supporting this bill, the Student Loan Scheme Amendment Bill (No 2), but that is not to say that National members do not have some reservations about it, or points that we would like to make. It is very important that the incentive is there for our young graduates to return to New Zealand—that is a point that has been made by speaker after speaker—but let us be very, very clear about what this legislation is all about.

I must say that it is better legislation for the work that was done in the select committee under Mr Donnelly’s leadership. The legislation is quite complex, and the work that the select committee did has improved this bill considerably. Let us be very clear that what we are dealing with is a tidying-up of a bit of a mess, which came about not because the policy of interest-free student loans was carefully considered and thought through—and a judgment was reached that this was actually something that New Zealand would want to do, should do, and needed to do—but because it was a policy rushed out 2 weeks or 10 days before an election, in order to buy votes.

💬 Hon Brian Donnelly: Just before your tax cuts.

I listened to the interjection from the member of New Zealand First Brian Donnelly, and I will reflect for a moment on a meeting I had the other day in my electorate of Tamaki with half a dozen mums and dads, who between them—each family—are working three or four low-paid jobs just to keep their heads above water, get their children to school, get them school uniforms, and that sort of thing. The point that these people made to me was very simple; they said they were taxpayers and they did not wish to be dependants of the State, but they were finding that the more they worked and took on extra jobs to help their kids—yet they knew they were not, because it meant they were away from them so much more—the more heavily they were penalised by tax. Their plea to me was to advocate for a flat tax rate—and these are some of the lowest-paid workers in New Zealand!

I want to express the wish that those borrowers who benefit now from the holiday on repayment, and that sort of thing, will actually take a moment to respect that this comes at a cost, and that other New Zealanders—many of them who are not in a position to do so, and many of them who would like to take more responsibility for their families than they can—are actually paying taxes so that this can work. I come to the repayment holiday period for people who are overseas, and if I could send a message to those graduates, it would be that they should respect what this House is doing to assist them and realise that it is in their best interests to pay back the money. If they borrow money then they should pay it back; they do not earn a lot of respect from their fellow New Zealanders by taking the money and then seeking ways of avoiding paying it back. I would urge those young New Zealanders who are considering taking the holiday to contemplate whether it would not be better for them, and better for their fellow New Zealanders, if they made every effort to continue paying back their loans.

We hear a lot from young people today about the hardships of loans and of going to university. I have four young adult children, all of whom are either at university or have gone through university and graduated, so I understand as well as anybody the challenges and the difficulties. But it was actually no easier in my time. In actual fact, I would have had more options available to me had a student loan – type scheme been operating. So it is important to keep this sort of thing in context.

National supports this bill, but National members are a little bit uncomfortable about having to tidy up what we think is untidy legislation. We want young New Zealanders to come back, but we also want borrowers to respect the contribution that their fellow New Zealanders—taxpayers—are making. Borrowers should bear in mind that there is a group of New Zealanders out there who really struggle to make ends meet, who pay their taxes honestly, who do not want to live off the State, and who want to get a fair break for their children. The taxes that those New Zealanders are paying—some of which will contribute towards this measure—will actually mitigate against their ability to do that.

I take this opportunity to speak again on Part 1, which is the major part of the Student Loan Scheme Amendment Bill (No 2). I certainly reiterate the point made by Allan Peachey. It is very important to make sure that young people understand the basic signals and disciplines required to get on in life. It was interesting to hear Brian Donnelly say that a lot of students went off overseas and did not understand their obligations. The technical term for that is denial—selective denial. Certainly, I was aware of friends and relatives of mine and my children who slipped off overseas and had a great old time, but they were in denial of the very serious obligations they had.

When we think about what the student loan scheme was initiated for, it was all about giving more New Zealanders the opportunity of a university or tertiary education. That is a great privilege and it carries with it a variety of obligations. Of course, during the decade from the 1990s until now, we have more than doubled the number of New Zealanders who participate in tertiary education. That is a great and wonderful thing and it has been right across the board in terms of all socio-economic areas and ethnicities. I think that is tremendous.

When I was at Otago University I was told that fewer than 0.05 percent of the students down there were Māori. As I understand it, the figure is now about 7 to 8 percent, which is a wonderful thing. Hopefully that will be doubled in the next 10 or 15 years, which will bring it up to about proportion, and it may treble over the next 10 years. If we could have afforded, as a country, to allow a completely free tertiary education system that would be great, but this is one of the ways we have got there.

The thing we have to balance, of course, is the very point that in Australia, where many of our young students go to work, the average wage was 22 percent greater than New Zealand’s in 1999, and now, 7 years later, after a Labour Government, the average wage in Australia is 35 percent higher than it is in New Zealand. The quid pro quo of this bill, as pointed out by some of my colleagues and by Business New Zealand, is that we have to inculcate disciplines and appropriate realisations that there are obligations to go with this wonderful privilege of access to tertiary education.

One of the points that Lockwood Smith made was the difficulty of the signal between someone who declared themselves as non-resident and someone who said: “Oh well, I’ll just nip over there and hope the hang that the IRD don’t find me.” One of the unfortunate realities of the amnesty situation is that, in the end, the person who is honest does not get any greater benefit than the person who is dishonest. Hopefully the Government will go to a great deal of effort to make sure that from when this legislation comes into place, people are much more aware of their obligations and the extent to which their loans can build up so rapidly once they get on to penalties.

I note again that the Government is changing the penalty rate from 2 percent down to 1.5 percent. Indeed, 2 percent is a pretty hefty amount but it is what those out there in the commercial world have to pay—for example, it is what the young sharemilker who was being talked about earlier on has to pay for his herd if he gets behind in his repayments. It is pretty hefty. One would think that a university student would hopefully have the nous to be able to find out what the consequences are of not paying back a penalty regime.

First, I thank the members who have contributed to the debate so far. They have raised a number of interesting points and I want to respond to as many of them as I can in the time available to me.

The first point of substance raised related to the question of why the bill penalises the honest. I think Dr Hutchison answered that question in his last contribution when he referred to the “unfortunate realities” of this bill. That is the truth. Wherever we draw the line, there will be people who fall either side of it.

The reality we face, and what drove this legislation, was the recognition that significant numbers of young New Zealanders were living overseas, for a variety of reasons. Some were on their classic OE, some had a fear of returning, and some had no intention of returning. But for a number of them the meter was ticking in regard to their student loan indebtedness. The reality they all faced was a very massive debt upon their return to New Zealand, which in some cases would be enough for them to make the decision not to come home at all, and our country would be the loser.

We needed to take a pragmatic way through this, and, being someone who places great virtue on pragmatism, it struck me that the logical course of action was to derive the solution that we have: to extend the holiday period for 3 years, recognising the fact that young New Zealanders take that extended period overseas; to have better tracking at the border of where people actually are, through the procedures contained in the bill to match immigration data and student loan data; and to rule that in that 3-year period, when interest will accrue to their accounts, the penalties that hitherto have applied will not apply, so that when they come back to New Zealand they start paying their loan plus accumulated interest.

A question was raised earlier about how many people we are talking about. It has certainly been estimated that potentially around 40,000 students are living overseas at the moment. Reference was made to the fact that some 765 people had entered into voluntary arrangements. That figure was given at the end of last year. I am not in a position to update that figure, for this simple reason: we never actively pursued those people. So the people who declared themselves in this category did it out of the goodness of their own hearts and their own sense of integrity and conscience.

Through the mechanisms contained in this bill we will now be in a position to pursue much more actively those students who are overseas. We will certainly be making contact with their parents and with their flatmates at their last known points of abode in New Zealand, to make sure that we can send information to these students about what this bill means for them and the responsibilities it imposes upon them.

One or two speakers have referred to the issue of students working overseas for charitable organisations. We have applied the same definition of charitable organisation and charitable status as applies generally in regard to donee status. It is quite a tight test, and I should tell the Committee that whenever an organisation is recommended, it is actually considered by the Inland Revenue Department, and a formal process that goes right through to Cabinet approval of those organisations ensues. We are always trying to make sure that the genuine get through. Once the registration process of charities under the Charities Act is completed—which is a separate issue—the process will be all that much more rigorous.

The final point that a number of speakers have commented on is the issue of obligations. There are obligations here. I think it is absolutely correct to say to students that this is not a free lunch, that although they are being given the opportunity to have that traditional overseas experience for a New Zealander for up to 3 years, they will still be incurring some obligations. They need to know what those obligations are, and that we expect them to meet them.

This bill is designed to strike a fair balance between the obligations and the overseas experience. The situation we have at the moment of students simply finding it easier to escape and become refugees is clearly unacceptable. This bill strikes a reasonable balance, and I am grateful for the support that members have shown on that point this evening.

Part 1 agreed to.

Part 2 Amendments to other enactments