New Zealand has increased the interest rate applied to overseas-based student loan borrowers to 5.6 %, up from 4.9 %, and from 3.3 % the year before that. This change affects billions of dollars of student loan balances owed by borrowers living overseas. Late payment interest increased to 9.6% from 8.9%, from 1 April 2026.
The adjustment falls within the framework used to align overseas student loan interest with the Government’s borrowing costs. Even so, the policy implications deserve closer examination.
The objective of the student loan scheme is ultimately repayment. Policies that weaken engagement with the system should therefore be considered carefully.
The law allows it, but that does not make it sensible
The authority to impose interest on overseas-based student loan borrowers sits primarily under the Student Loan Scheme Act 2011, with earlier foundations in the Student Loan Scheme Act 1992.1
Under the current framework the interest rate applied to overseas borrowers is set through regulation and guided administratively by the Crown’s cost of borrowing, including reference to government bond yields.2
In simple terms, when government borrowing costs rise, the interest rate applied to overseas student loans may increase as well.
That is the legal structure.
But student loans are not commercial loans. They are not mortgages or business overdrafts. They are a public policy instrument designed to support access to education while ensuring repayment over time.
Where legislation provides discretion, the real issue becomes judgment. The question is not whether the law permits interest increases, but whether applying them in this way makes policy sense. In this case raising costs for burrowers risks pushing up rates of non-compliance and thus limiting repayment rather than boosting it.
Overseas work does not always mean higher income
Policy discussions often assume that borrowers working overseas do so primarily for higher pay. In practice the picture is far more varied.
People work overseas for many reasons. Professional opportunities may be limited in New Zealand or a partner’s career may necessitate a change in location. Others take fixed term international contracts, pursue specialist experience, or support family members abroad.
Many operate in labour markets where employment is irregular and income fluctuates. Some are paid in currencies that can be volatile or difficult to convert. Others face banking restrictions, transfer costs or administrative hurdles that make repayments more complicated than domestic systems assume.
In these circumstances, raising interest costs does not necessarily improve repayment outcomes. It can have the opposite effect by weakening engagement with the system.
Penalties already exist
It is also important to recognise that the student loan regime already contains significant consequences for non-compliance.
Where overseas borrowers miss repayment obligations the system can impose a combination of late payment penalties, administrative fees and capitalisation of unpaid amounts onto the loan balance.
Late payment penalties can accumulate rapidly over time, particularly when unpaid amounts are capitalised and begin compounding.
These measures sit alongside Inland Revenue’s enforcement powers and border-based compliance tools.
Given these existing mechanisms, the argument that higher baseline interest and penalties rates are necessary to maintain fairness is difficult to sustain. The system already contains substantial deterrents for borrowers who fail to meet their obligations.
A large overseas debt balance
Data from Inland Revenue Department indicates that a substantial portion of New Zealand’s student loan debt is owed by borrowers living overseas, amounting to several billions of dollars.
Much of that balance already includes accumulated interest and penalties.
In policy terms the real question is not simply how to increase the cost of borrowing, but how to maintain engagement with a repayment system that operates across multiple jurisdictions and banking environments.
From a public finance perspective, the critical issue is not whether interest rates track government borrowing costs, but whether the structure of the scheme maximises long-term repayment.
A comparison with mortgage rates raises questions
A comparison with residential lending also highlights the policy tension.
Over the past year mortgage rates for many owner-occupiers have generally ranged between 5% and 7%, although current competitive rates are now mostly in the mid 4% to mid 5% range depending on lender and loan term.3 These loans are secured against property, commercially negotiated and supported by refinancing options.
Student loans, by contrast, are unsecured obligations created by statute. Repayment conditions are largely fixed, penalties are statutory and enforcement can occur across international borders.
When the interest cost of a government-backed student loan approaches that of secured residential lending, the policy question becomes difficult to ignore.
Student loans do provide limited hardship relief, including remission of penalties and administrative restructuring.4 However, these mechanisms operate within narrower parameters and are less flexible than options typically available in commercial lending.
Compliance depends on engagement
The underlying assumption behind increasing interest rates appears to be that higher costs will encourage stronger repayment behaviour.
Experience in tax administration suggests the relationship is more complex.
Compliance tends to improve when systems are perceived as proportionate, clear and workable. When borrowers believe obligations are fair and manageable, engagement increases. When costs escalate beyond what borrowers consider reasonable, disengagement can follow.
Policies that raise interest during uncertain economic conditions risk pushing some borrowers further away from the system they are expected to participate in.
A more balanced approach
A more balanced policy response could include:
• maintaining relatively stable interest rates for overseas borrowers
• treating student loans as a long-term social investment rather than a short-term fiscal instrument
• relying on existing penalties to address genuine non-compliance
• simplifying overseas repayment mechanisms to reflect modern banking realities
• recognising that international mobility often strengthens New Zealand’s long-term skills base
These options are not about weakening repayment expectations. They are about designing a system that borrowers remain willing to engage with.
Conclusion
Increasing the overseas student loan interest rate to 5.6 percent may be legally permissible, but legality alone does not make a policy wise.
The change risks misreading the realities of international work, overlooking the deterrent effect of existing penalties and weakening borrower engagement over time.
If the objective is stronger repayment outcomes, policy design should focus on maintaining participation in the system rather than increasing the cost of staying connected to it.
At present, the balance may have shifted too far.
Footnotes
- Student Loan Scheme Act 2011, s 4, outlining the purpose of the student loan scheme and repayment obligations. Student Loan Scheme Act 1992, which established the original legislative framework for student loans and interest obligations prior to the 2011 Act.
- Student Loan Scheme Act 2011, s 105 and associated regulations governing interest applied to overseas-based borrowers, with administrative alignment to the Crown’s cost of borrowing.
- Lending rate data published by the Reserve Bank of New Zealand and major New Zealand retail banks during 2024–2025.
- Student Loan Scheme Act 2011, ss 109, 112 and 157, providing discretion for penalty remission and repayment restructuring in hardship situations.
Dave Ananth is a principal at Meridian Partners, specialising in IRD disputes, enforcement, and student loan matter. His background, profile and contact details are here.
2 Comments
If students borrow from the state at 0% interest while here, they accept that being overseas for more that 6months consecutively results in tax being applied. Too many simply don't take this seriously enough and don't consider it as a priority, mostly (from my experience with peers with SL's) due to not caring about it while in NZ as there's no penalty, so they forget about it when making decisions to go overseas.
Perhaps there needs to be more emphasis on IRD advertising the costs of student loans if going overseas so people take it more seriously.
On the flipside I have a friend who went back and forth between NZ and Oz for just the time needed to prevent interest on their SL which helped them pay it down much faster while earning much more in AUS. This IMO is the most informed and sensible approach to knocking the debt down in todays climate.
"Perhaps there needs to be more emphasis on IRD advertising the costs of student loans if going overseas so people take it more seriously."
If they can't work out their personal costs / benefits accurately then they probably are wasting their time at Uni & wasting the net taxpayers money who still subsidise approx half their education.
There's more to be said about the role the Unis themselves play in wasting everyone's time & money on education that has no expectation of meaningful return vs nice to have
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