Dave Ananth makes the case for some basic 'reasonable' flexibility in the way interest is charged on student loans while the borrower is overseas

By Dave Ananth*

New Zealand’s student loan system changes the rules the moment a borrower leaves the country. Six months after departure, interest automatically switches on. At present, that means 4.9% annual interest, compounded daily, and up to around 8.9% in late payment interest on overdue amounts.

This is not a policy decision made case-by-case. It is a statutory requirement under the Student Loan Scheme Act 2011 (No 62). Once a borrower becomes overseas-based, section 189 requires interest to be charged. Inland Revenue has no discretion to adjust that rate — even if a borrower faces illness, unemployment, or economic hardship.

That rigidity was deliberate when the law was written. But it is increasingly out of step with how modern public-sector lending systems operate.

A system without flexibility

The Act sets out exactly when and how interest applies.

• Section 189 — interest must be charged on overseas-based loans.
• Section 195 — late payment interest applies to overdue amounts.
• Sections 146, 146A and 147 — allow Inland Revenue to remit penalties or late-payment interest where it is “fair and equitable”.

What the Act does not allow is any relief from the core interest itself. Inland Revenue cannot pause or reduce it — not even temporarily.

In most areas of tax and debt management, the Commissioner has flexibility to reach reasonable outcomes. Student loans are the exception. Enforcement is mechanical.

Debt that grows while you’re away

For many overseas borrowers, compounding interest and penalties can cause balances to double or triple, even without deliberate non-payment. The Office of the Ombudsman has confirmed that even if contact with a borrower is lost, interest continues to accrue and cannot be reversed later.

This creates a vicious cycle. Borrowers disengage. They stop opening correspondence. They delay re-engagement because the debt feels unmanageable. Some decide they will never return to New Zealand, fearing enforcement action they cannot afford.

From a compliance perspective, that is a policy failure — not a moral one.

A design problem, not a moral one

Overseas borrowers are often portrayed as having “chosen” to leave and therefore deserving tougher treatment. That is misleading. People go abroad for work, family, health, or opportunity — often temporarily, sometimes involuntarily.

Public law recognises that rigid rules without discretion can produce unfair results. Proportionality and equity are core to fair administration. Yet the student loan regime removes any ability to apply those principles to interest itself.

This is not a call to make overseas loans interest-free. It is about limited, reviewable discretion — allowing Inland Revenue, in exceptional cases, to pause or adjust interest for a defined period, subject to a statutory floor rate.

That would preserve fiscal discipline while making the system more realistic — encouraging compliance instead of avoidance.

Lessons from Australia

Australia’s Higher Education Loan Program (HELP) takes a fundamentally different approach to student debt growth. HELP balances do not accrue interest in the conventional sense. Instead, they are indexed annually to inflation to preserve their real value, meaning balances rise only with the cost of living rather than compounding like commercial debt.

In recent years, when inflation rose sharply, Australia amended its legislation to cap indexation at the lower of CPI or wage growth. That change did not forgive debt — it simply prevented balances from escalating faster than borrowers’ ability to repay. The lesson for New Zealand is not that overseas borrowers should avoid repayment, but that Parliament can design student-loan systems that preserve value without allowing debt to spiral beyond reach.

A pragmatic reform

Allowing limited discretion would not weaken the system — it would strengthen it.

Borrowers who can see a fair pathway back to compliance are more likely to re-engage. Inland Revenue would spend less on enforcement and more on recovery. And public trust in the student loan system would improve.

This is not leniency. It is responsive governance.

The question for policymakers is not whether overseas borrowers should repay. It is whether a system designed without flexibility is still fit for purpose in a globalised workforce.

A small, targeted amendment to the Student Loan Scheme Act 2011 could make a big difference — restoring proportionality, fairness, and credibility.

^References

• ^{Student Loan Scheme Act 2011 (No 62) — ss 146, 146A, 147, 189, 195}
• ^{Student Loan Scheme (Interest Rate for Overseas-Based Borrowers) Regulations 2024 — sets 4.9% base interest rate}
• ^{Office of the Ombudsman Case W53310 (2018) — confirms interest accrual cannot be reversed}

Dave Ananth is Special Counsel at Stace Hammond Lawyers. His background, profile and contact details are here.