Student Loan Scheme Annual Report 2009
The Annual Report for 2009 provides information on the scheme and those who borrowed from it in 2008, as well as the financial schedules for the fiscal year to 30 June 2009.
Key findings in the report are:
- The nominal value of loan balances was $10.259 billion as at 30 June 2009
- 179,000 students borrowed from the loan scheme in 2008 (69% of eligible students)
- As at 30 June 2009 562,000 people had a student loan with Inland Revenue for collection
- The median repayment time for those who left study in 2006 is forecast to be 7 years
Author(s): Ministry of Education.
Date Published: November 2009
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Chapter 5: Student Loan Scheme Financial Statements for the Year Ended 30 June 2009
Financial statements for the year ended 30 June 2009
The financial statements for the Student Loan Scheme comprise schedules of revenue and expenditure, assets and cash flows relating to student loans. The Ministry of Social Development (MSD) and the Inland Revenue Department (IRD) administer student loans on an agency basis within policy parameters set by the Ministry of Education (MoE), on behalf of the Crown.
The financial information represents extracts from the financial statements of Crown activities carried out by the entities administering student loans to provide an overview of the Student Loan Scheme.
The schedule of assets shows a total asset value (carrying value) as at 30 June 2009 of $6,553 million ($6,741 million at 30 June 2008).
Schedule of revenue and expenditure for the year ended 30 June 2009
|Actual 2008 $ million||Actual 2009|
|8.6||Administration fees - MSD||9.6||9.2||9.7|
|486.7||Fair value write-down on new borrowings||532.4||525.5||556.2|
Schedule of assets as at 30 June 2009
|630||Total current assets||761||717||766|
|6,111||Total non-current assets||5,792||5,999||6,392|
Schedule of cash flows for the year ended 30 June 2009
|Cash flows – investing activities|
|Cash was provided from:|
|Cash disbursed for:|
|(571.6)||Net cash inflow/(outflow) from investing activities||(640.3)||(621.3)||(693.4)|
|(571.6)||Net student loan cash inflow/(outflow)||(640.3)||(621.3)||(693.4)|
Statement of accounting policies for the year ended 30 June 2009
The scheme is a Crown activity which forms part of the consolidated Financial Statements of the Government. The scheme has dimensions of revenue, expenditure, assets and cash flows within the overall Financial Statements of the Government.
The Student Loan Scheme is administered jointly by the Ministry of Education, the Inland Revenue Department and the Ministry of Social Development, under the Student Loan Scheme Act 1992. Also relevant to the administration of the scheme are the Credit Contracts and Consumer Finance Act 2003 and the Education Act 1989.
The budget figures are those presented in the Budget Night Estimates (Main Estimates) and those amended by the Supplementary Estimates (Supp. Estimates) and any transfer made by Order in Council under section 26A of the Public Finance Act 1989. The budget figures provided are extracted from the details of the Estimates of Appropriation for Inland Revenue and the Ministry of Social Development, as applicable. The totals shown are the combined totals for the applicable agencies.
Student loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are recognised initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest rate method, plus or minus any impairment movement. Fair value on initial recognition is determined by projecting forward the expected repayments required under the scheme and discounting them back at an appropriate discount rate. The difference between the amount lent and fair value is expensed on initial recognition.
The subsequent measurement at amortised cost is determined using the effective interest rate calculated at initial recognition.
The effective interest rate discounts estimated future cash flows through the expected life of the loan to the net carrying amount of the loan, excluding future credit losses. Interest is recognised on the loan evenly in proportion to the amount outstanding over the period to repayment.
Allowances for impairment are recognised when there is objective evidence that the loan is impaired. Impairment movements are recognised if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan, and that the event (or events) has an impact on the estimated future cash flows of the student loan carrying value that can be reliably measured.
The measurement of impaired value can result in an increase or decrease to the carrying value of the student loan debt.
Interest is calculated on the nominal student loan account balances on a daily basis at a rate determined by the government, currently 6.8 percent per annum. Interest is charged to both New Zealand-based borrowers and overseas-based borrowers; however, there is a concurrent write-off for New Zealand-based borrowers under the interest-free policy.
For the Student Loan Scheme, credit risk is the risk that borrowers will default on their obligation to repay their loans or die before their loan is repaid, causing the scheme to incur a loss.
The Student Loan Scheme policy does not require borrowers to provide any collateral or security to support advances made. As the total sum advanced is widely dispersed over a large number of borrowers, the Student Loan Scheme does not have any material individual concentrations of credit risk.
The credit risk is reduced by the collection of compulsory repayments through the tax system.
Interest rate risk
Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in interest rates. Changes could impact on the return on loans advanced. The interest rate and the interest write-off provisions attached to student loans are set by the government.
Changes in accounting policies
There have been no changes in the student loan accounting policies applicable to the preparation of financial statements of Crown activities administered by the Ministry of Social Development and Inland Revenue for Crown consolidation, from those used in the previous year. All accounting policies have been applied on a basis consistent with the previous year.
Notes to the financial schedules for the year ended 30 June 2009
Note 1: Consolidated movements schedule for the year ended 30 June 2009
|Actual Consolidated 2008 $ million||Actual Consolidated 2009 $ million||IRD* 2009 |
|MSD* 2009 |
|(2,831.9)||Adjustment due to initial fair value recognition and impairment||(3,706.6)||(3,282.8)||(423.8)|
|6,741.3||Total student loans||6,552.7||5,825.7||727.0|
|6,011.0||Student loans opening balance||6,741.3||6,040.3||701.0|
|0.0||Borrowings transferred from Ministry of Social Development to Inland Revenue||0.0||1,138.8||(1,138.8)|
|0.0||Fair value write-down on borrowings transferred||0.0||(360.5)||360.5|
|1,200.5||Amount borrowed in current year||1,350.3||0.0||1,350.3|
|(486.7)||Fair value write-down on new borrowings||(532.4)||0.0||(532.4)|
|8.6||Administration fees on loans made in current year||9.6||0.0||9.6|
|(628.9)||Repayments made in current year||(710.0)||(619.1)||(90.9)|
|407.3||Interest on impaired student loans||473.1||409.0||64.1|
|(1.1)||Small balance write-offs||0.0||0.0||0.0|
|406.2||Net increase/(decrease) in interest receivable||473.1||409.0||64.1|
|230.6||Impairment losses reversed||3.6||0.0||3.6|
|230.6||Net increase/(decrease) other movements||(779.2)||(782.8)||3.6|
|6,741.3||Student loans closing balance||6,552.7||5,825.7||727.0|
Note 2: Recognition
Student loan nominal value
The nominal balance is the total obligations that borrowers have including loan principal, interest and penalties. The change in nominal value from year to year reflects the net growth of the portfolio through new lending less repayments and other adjustments such as write-offs due to deaths and bankruptcies. The nominal balance is the basis for other values such as the carrying value and fair value.
Student loan carrying value
Student loans are initially recognised at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest rate method less any impairment loss.
The main factors relating to the $779 million impairment of student loans are: $215 million of changes to macroeconomic assumptions including lower projected salary inflation which reduces future borrower repayments; and $437 million of actuarial modelling changes associated with refinements to the model used this year to project underpayments for New Zealand-based and overseas-based borrowers. These factors account for 84 percent of the impairment.
Fair value on initial recognition of student loans is determined by projecting forward expected repayments required under the scheme and discounting them back at an appropriate discount rate. The subsequent measurement at amortised cost is determined using the effective interest rate calculated at initial recognition. This rate is used to spread the interest income across the life of the loan and determines the loan's carrying value at each reporting date.
The valuation model has been adapted to reflect current student loan policy. The carrying value is also sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation. The significant assumptions are shown below.
|30 June 2009||30 June 2008|
|Effective interest rate||9.43%||8.44%|
|Interest rate applied to loans for overseas borrowers||6.7%-6.8%||6.7%-6.8%|
|Consumers Price Index||1.5%-2.5%||2.5%-4.0%|
|Future salary inflation||1.5%-3.5%||3.5%-4.7%|
|Fair value ($000)||5,464,200||5,520,600|
|Impact on fair value of a 1% increase in discount rate ($000)||(275,800)||(321,000)|
|Impact on fair value of a 1% decrease in discount rate ($000)||308,000||366,000|
The data for the valuation of student loans has been integrated from files provided by Inland Revenue, the Ministry of Social Development and the Ministry of Education. The current data is up to 31 March 2008 and contains information on borrowings, repayments, income, educational factors, and socio-economic factors amongst others and has been analysed and incorporated into the valuation model. The integrated data has been supplemented by less detailed, but more recent, data to value student loans at balance date.
Given the lead time required to compile and analyse the detailed integrated data and its availability for use in the valuation model, it is expected that there will always be a 15-month lag between the integrated dataset and the valuation reported in the annual financial statements.
Student loan fair value
Fair value is the amount for which the loan book could be exchanged between knowledgeable, willing parties in an arm's length transaction as at 30 June 2009. It is determined by discounting the estimated cash flows at an appropriate discount rate. The estimated fair value of the student loan debt at 30 June 2009 has been determined to be $5,464 million ($5,521 million at 30 June 2008).
Fair values will differ from carrying values due to changes in market interest rates, as the carrying value is not adjusted for such changes, whereas the fair value was calculated using a discount rate that was current at 30 June 2009. At that date the fair value was calculated on a discount rate of 9.18 percent (9.19 percent at 30 June 2008) whereas a weighted average discount rate of 6.73 percent (6.56 percent at 30 June 2008) was used for the carrying value. The difference between fair value and carrying value does not represent an impairment of the asset.
Note 3: Reconciliation of impairment allowance account
Impairment allowance account
|30 June 2009|
|30 June 2008|
|Balance at beginning of year||303||533|
|Impairment losses recognised on receivables||779||–|
|Impairment losses reversed||–||(230)|
|Balance at end of year||1,082||303|
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