The change will affect about 370,000 New Zealand-based borrowers, costing them an additional $1.20 a week on average in repayments than had thethreshold been adjusted for inflation.
Revenue Minister Simon Watts said the change would have an estimated five-year operating saving of $7.674 million and an additional one-off increase in the value of the student loan asset of $13.017 in 2024/25.
He said ministers were “awaiting updated advice on the fiscal impact of a continued freeze”.
Currently, the student loan repayment threshold is set at $24,128. That means that for every dollar someone earns above $24,128, they pay 12 cents to the IRD to repay their loan.
The Key Government froze the threshold in the 2010/11 tax year, lifting it only in the 2017/28 tax year. The Ardern Government lifted the threshold each year, adjusting it upwards to account for most inflation (the formula used is not the exact inflation rate, but the inflation rate minus the increased cost of tobacco products, whose cost inflates faster than other goods thanks to regular excise tax hikes).
If the threshold had not been frozen in 2010/11 and had risen with inflation each year since, it would be about $27,499, saving borrowers about $404.50 a year.
The threshold works exactly like a tax threshold. If it is not lifted with inflation, someone will pay more and more in repayments as their income increases, despite that person not necessarily being better off in real terms.
Revenue Minister Simon Watts. Photo / Alex Burton
Anti-poverty campaigners have often raised concerns that when combined with New Zealand’s relatively high income tax rates and punitive abatement thresholds for welfare such as Working For Families, the student loan repayment thresholds and repayment rate act as an effective tax, and punishes people on low incomes.
Watts said the change would “have only a small effect on borrowers”.
He said it “takes into account the currently tight fiscal environment and the cost of the student loan scheme to the Crown”.
“The Government’s contribution towards the cost of study is significant, at 82% in 2023 — as well as providing student allowances for eligible students.
“New Zealand-based borrowers facing hardship meeting repayment obligations will be able to apply for a reduced deduction rate from their salary and wages,’ he said.
Labour’s revenue spokeswoman Deborah Russell said the change would erode the Government’s tax package announced last year.
“With the cost of living so high, every extra dollar adds up, and this is another $62 a year out of Kiwis’ back pockets.
“What’s the point of Nicola Willis’ measly tax cuts if she’s just taking the money back elsewhere? Labour wouldn’t have prioritised tax cuts over properly funding essential services, meaning we would have had more options, including keeping student loan costs down for Kiwis,” Russell said.
Green tertiary education spokesman Francisco Hernandez said freezing the threshold meant “more people on lower incomes will have to start repaying their loans, when they need every cent to pay the rising rent and ballooning bills under this Government”.
“For someone earning $24,500, losing $1.20 eats up more than half of the $2.16 they were pocketing under National’s income tax cuts. From sub-inflation increases to the minimum wage, to tax cuts that benefit the rich and comfortable — working people keep finding it harder to get ahead under this Government,” he said.
New Zealand’s student borrowers are relatively hard done by on the issue of repayment, relative to other countries. While they enjoy interest-free loans, New Zealand borrowers begin to repay their student loans at a much lower level of income than their international peers — and the gap is widening.
As of July this year, Australian borrowers under the main student loan scheme repay nothing for the first AU$67,000 (NZ$73,800) in income, and 15 cents per dollar earned above that threshold (with a higher rate of 17c over AU$125,000 ($NZ137,850).
In the UK, borrowers only repay loans when their income is over £24,990 ($56,630) a year, for the main plan. The repayment rate is just 9%.
New Zealand governments have long been warned about New Zealand’s low repayment threshold. A 2011 Regulatory Impact Statement given to the Key Government warned that even before the freeze, the threshold was “low compared with other countries with income contingent student loan schemes, for example Australia and the UK, and is significantly below the income of a borrower working full-time for the minimum wage”.
The problem has continued to worsen, with the threshold now set at nearly half the annual salary of a minimum wage worker. Someone on the minimum wage would pay $2982 a year in repayments.
If you consider the repayment amount an effective tax, it would mean the marginal tax rate for a full-time (and many part-time) minimum wage workers is 29.5%.
Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
