Could you please explain the new student loan repayment bonus scheme in your business column?

As I understand it, if you can pay $500 extra towards your student loan per year, the government will cancel a further 10 per cent ($50) of your loan. I assume that, since student loans are interest-free, it would be best to do this at the end of the financial year.

You're right on all scores - except that the scheme isn't limited to $500 repayments.

To catch everyone else up with the play, the Government has announced a scheme to encourage people to repay their student loans faster.

Presumably this is because - given that the loans are interest-free for those living in New Zealand - some people have been repaying them as slowly as possible.

Student loan borrowers do have to make some repayments if they live in New Zealand and earn more than a threshold amount, which has just risen to $19,084 a year. Compulsory repayments are 10 per cent of every dollar earned above the threshold.

(There's a different formula for those who live overseas.)

Beyond that, though, some borrowers have figured that if they have any spare money, they will end up better off by putting it in a savings account, where it earns interest, rather than paying extra off their student loan.

The Government has now said that if you make voluntary repayments - above the compulsory amount - of $500 or more in an April 1 to March 31 year, they will reduce your loan balance by 10 per cent of the voluntary repayment. If you repay an extra $700, your loan will be reduced by a total of $770. If you repay an extra $20,000, your loan will be reduced by $22,000.

The bonus scheme - which is expected to be passed into law later this year - will apply to payments from April 1, 2009, made by anyone living in New Zealand or overseas. After April 1 each year from 2010 on, the Government will check if you have made voluntary payments of more than $500 during the previous year - in a lump sum or many payments - and will credit your account for the extra 10 per cent.

To be eligible, you have to be up to date with your repayment obligations. Also, your loan has to have been transferred from StudyLink, which manages student loans while you are studying, to Inland Revenue. So anyone planning to make repayments should wait until that transfer has taken place.

You're correct in saying that - as long as you live in New Zealand - it's a good idea to make the voluntary repayments in March, so you can earn interest on the money in the meantime.