Student Loans 101 – what happens when you leave the country with an unpaid student loan?Categories News & Updates
Congratulations! You’ve just completed your degree and you’re ready to follow in the footsteps of countless Kiwis before you: heading off on your big OE. The best part about this is that you totally deserve it. Getting a degree is a big deal and you’ve earned the right to head off on big adventures overseas. The worst part about this is that you have a pretty massive student loan. You’re not alone in this. And while your loan isn’t going to stop you from heading abroad, you might want to brush up on your obligations so that you don’t get stung by any nasty surprises when you come back to Aotearoa. Read on and we’ll make sure you stay on the right side of the law…
Stuff to Know Before You Go
When you head overseas for longer than 6 months your student loan repayments are based on your balance and not your income – this might sound harsh, but it means you don’t have to worry about making monthly payments while you’re travelling as there are only two annual payments you need to make.
There are two main instalment dates for student loan repayments that you must meet each year: 30 September and 31 March. Each instalment is only 50% of the repayment obligation unless you’ve made other arrangements with the IRD. So, for example if your student loan balance is between 30-45K, you have to make a payment of $1,500 in September and March so as not to default on your loan. Over 60K? Ouch. You’ll have to pay $2,500 twice a year until you can lower that balance. The repayments tend to work out to be about 10% of your loan.
Also, you want to keep in mind that when you leave interest starts being charged immediately to the loan balance owing, which can seriously hinder paying off the balance in the long run. The bigger the loan means your repayments might not be enough to cover the interest as the money gets credited to the interest first and then the remaining funds go towards your student loan balance. If you’re working while you’re overseas, you can make voluntary payments to your loan which will help you pay it off faster of course!
If you know you’ll be sight-seeing rather than working you can always apply for a repayment holiday. A repayment holiday allows you take a break from repaying your student loan for up to 12 months. Keep in mind that interest will still accrue during this time though! You need to apply for the repayment holiday before you go overseas or within 6 months of leaving New Zealand. Best of all: you can do it online through your myIR account, so be sure to set that up before you go.
Uh Oh, Missed Payments
You might be living it up in Ibiza and we don’t blame you, but if you miss a payment you’re going to get charged. It happens to the best of us and because the two payments are so spread out, it can be easy to forget. However, if missing payments suddenly becomes your MO, you’re going to want to get in touch with the IRD to discuss the difficulty you’re having repaying your loan. But repaying your loan from overseas is now easier than ever. You can set up regular payments from your bank accounts or make the payments with your credit cards.
With the IRD, honesty truly is the best policy, and the more transparent you are with them about your financial situation, the more likely they’ll sympathise with you. If you fall behind your repayments without giving the IRD a heads up so to speak, you can and will be arrested when you come back into the country.
Things Fall Apart
Travelling these days is no easy feat, and sometimes, unfortunately, things can go wrong. If an unexpected delay prevents you from returning to New Zealand you can apply for your loan to be interest free.
Some examples of such delays are:
- airline strikes
- personal illness
- death or illness of a family member
- fire, flood, storm, earthquake, landslide or volcanic eruption
- an explosion or nuclear, biological, or chemical contamination
- sabotage, terrorism or an act of war.
To apply you’ll need to be able to show evidence that because of the unexpected delay you weren’t able to return to New Zealand as intended with proof such as airline tickets, medical certificates, and etcetera.
‘Cuff ‘em, Boys
While there are some scenarios that can cause unexpected delays in your student loan repayments, there are some people who are just plain guilty of tax evasion. For many years the IRD cast a blind eye to the many Kiwi’s who traveled freely between New Zealand and Australia without paying their tax bills. In April 2014, they changed their tune and now are able to request an arrest warrant for borrowers who knowingly default on their overseas-based repayment obligation. This actually follows on from four years of extensive restrictions being imposed on the student loans and allowances system, with the latest changes making it a serious criminal offence to fall behind on student loan repayments.
Now borrowers who are in serious default on their student loan repayments can be identified when they enter New Zealand through information matching with New Zealand Customs. While these warrants are part of the Government’s initiative to increase repayments, they have been met with objections. Some call these tactics draconian, but Tertiary Education, Skills and Employment Minister Steven Joyce and Revenue Minister Michael Woodhouse have welcomed a new Bill which will help Inland Revenue contact more student loan borrowers in Australia.
The Taxation Bill includes an information sharing agreement with the Australian Tax Office which will enable an information exchange with Australia, providing Inland Revenue with the contact details of borrowers living in Australia. Currently 70% of overseas-based borrowers are in default on their student loans and the majority of them live in Australia. This new Bill aims to speed up the repayment of the estimated $3.25 billion borrowed by those sun-seeking Kiwis. Looks like the good times are over and the time to pay the piper is nigh!
Do the Right Thing
We know most people don’t intentionally default on their student loans while they’re travelling overseas. It’s easy to get swept up in the excitement of being in a new place and surrounding yourself with new people and experiences. That said, you really want to do the right thing because the last thing you want to worry about on your return is whether or not you’ll be arrested.
If you’re heading back from overseas, the good news is that when you’re back here in New Zealand for at least 6 months your student loan becomes interest-free again. All you need to do is let the IRD know that you’re back in the country.
Even better is that any interest charged during the 6 months you were back will be written off. That’s a saving of hundreds of dollars! But if you’re nervous about your tax status before coming back then get in touch with us.
We can have a look to see if you’ve defaulted and we can help you through the process of setting up a payment plan with the IRD if needed. Remember, being honest is the best way to go forward if you’ve missed your student loan repayments, no matter how long you’ve been avoiding it! Don’t be scared, we’ve totally got your back. Get in touch with us today and give yourself some peace of mind.