In New Zealand, the third arrest of a student loan defaulter has recently taken place and a new data matching arrangement to identify defaulters resident in Australia has begun. The UK could learn from these successful initiatives.
Like the UK, New Zealand faces severe challenges in recouping student debt, particularly when it is owed by overseas borrowers. Around 3.25 billion New Zealand dollars are owed by those overseas. Two-thirds of those in default are in Australia, as Australians have access to loans from the New Zealand Government when studying there – just like EU citizens do for tuition fee loans when studying in England, Wales and Northern Ireland. At the end of June, outstanding student loans in default topped $1 billion in New Zealand for the first time and, while borrowers living overseas make up just 15% of the borrowing population, they account for 90% of the amount in default.
Loans are interest-free for borrowers while they reside in New Zealand and repayments are administered through the tax system, usually via employers. There is high domestic compliance and relatively short repayment times. However, as overseas default levels have risen, the Government has brought in policies to stem the growth. As HEPI explained in a recent paper written by Sam Cannicott, this includes tougher repayment obligations, and information sharing between government agencies to obtain the contact details of borrowers renewing their passports.
Perhaps the most controversial initiative has been allowing people in default to be arrested at the New Zealand border.
When first introduced, the Government was strongly criticised for its plans, with opponents labelling them overly harsh. The opposition New Zealand Labour Party said the whole idea was ‘little more than a distasteful gimmick’. Student unions said arresting people at the border would create Kiwi ‘student-loan refugees’, unable to return home for weddings or funerals. However, despite the outrage, the Bill attracted a total of just five submissions. The Government pushed ahead with the plans, and the figures suggest that the measures have been paying off for taxpayers.
The Inland Revenue Department (IRD) first began a pilot of measures in 2010. Initially the scheme focused on traditional and commercial recovery approaches, using private providers to track and trace borrowers, easy-to-use offshore payment mechanisms and online advertising to raise awareness. Within nine months, the pilot had received a return of $5 for every $1 spent on collections.
The arrest at the border provisions did not pass into law until March 2014. By April, the scheme was already returning $11 for every dollar spent. By December, the returns had surged to $16. In January 2016, the first arrest was made. In the first two months of this year, there was a 31% increase in repayments from overseas borrowers, and phone calls on the issue increased by 55% on the previous year. By September, the IRD was collecting $22.20 for every dollar invested. The policy is like a fruit machine that pays out twenty-two times the stake on every spin; I cannot remember coming across any policy that was so efficient during my three-and-a-half years in Whitehall.
The figures look set to improve further. Under a new arrangement, the first data match has just been carried out between the New Zealand and Australian tax agencies. A list of 104,000 names returned contact details for 10,400 borrowers living in Australia.
The overall approach appears to have support from the New Zealand public. Early media coverage portrayed defaulters as hard done by, but public opinion seems to back people paying what they owe. (An opinion piece on Stuff.co.nz by a New Zealander in Germany was recently published under the headline ‘I am scared that if I ever come back I will be arrested’. The article attracted 263 comments on Facebook but two-thirds could be – charitably – described as unsympathetic. Only around one-in-ten comments was supportive or openly critical of Government policy.)
The success of the approach and its popularity has not been achieved in a vacuum. The introduction of tougher sanctions was supported by a smart communication campaign to ensure borrowers offshore knew the provisions, and understood their obligations. It is underpinned by carefully planned service delivery, free telephone numbers and easy repayment options. So there are carrots as well as sticks.
A major advantage of the policy is that it is a precision measure that can be used for the worst cases, while encouraging a wider group to comply. Hardship provisions are available to those who cannot afford to pay, meaning the sanction only applies to those who refuse to do so.
There is no evidence yet to suggest expats are being put off from returning to New Zealand. Indeed, for the first time in 24 years, more people moved from Australia to New Zealand than the other way around. But there have been huge lifts in repayments, with more than $300 million extra coming back to the Government.