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KiwiSaver can’t be used to repay student loans
 
Q.        Our son is living and working in the UK. He has paid off half his student loan but still owes $15,000. Currently he is paying just the minimum yearly payments, until he has more money, but of course he is being charged interest. At the same time, he has almost $14,000 in his KiwiSaver account! I don’t suppose he could somehow use his KiwiSaver to pay off his student loan?
 
A.         No, KiwiSaver cannot be used to repay student loans. KiwiSaver is locked in to age 65 except in cases of first home purchase, permanent emigration, significant hardship, serious illness or death. As student loans are interest-free while the borrower lives in New Zealand, there is no urgency to repay the loans at more than the required pace and there would be no advantage in using KiwiSaver funds for this purpose. Your son has done well to pay off half his student loan so far.
 
Once the student leaves New Zealand for more than 184 days, interest is charged on their student loan (except in certain situations such as volunteer work, studying or working for the Government overseas). They should notify Inland Revenue as soon as they leave. They then become an overseas-based borrower and interest applies from the day after they leave New Zealand. The interest rate is re-set annually, and is currently 5.5% - down from 5.9% last year. They can apply for a repayment holiday for up to one year, but interest will still accumulate. All overseas borrowers not on a repayment holiday are required to make two minimum repayments (based on the size of their student loan) on or before 30 September and 31 March each year. These payments can be made online through the student’s IR login on the Inland Revenue website.
 
If your son plans to stay overseas, after a year he can apply to cash up his KiwiSaver (if he can provide proof that he has left permanently). However, he will lose all the Member Tax Credits. On a balance of $14,000 this could be 20% to 30% of his total funds so that would be an expensive option. 
 
You can see that the Government is providing incentives for students who have had the benefits of a taxpayer-subsidised tertiary education to stay in New Zealand and become tax payers themselves. They may gain valuable working experience overseas, but they do not contribute to the tax coffers while they are away. That is why Member Tax Credits are not credited to KiwiSavers while they are living overseas, even if they continue paying into their accounts. 
 
Like many young people your son may return to New Zealand within a few years, in which case he could apply to withdraw his own and his employer contributions from his KiwiSaver account for his First Home.    He should let Inland Revenue know as soon as he returns to New Zealand. In order for his student loan to be interest-free again, he will need to live in New Zealand for at least 183 consecutive days to become a New Zealand-based borrower. Then all the interest applied to the loan since his return will be written off. 
 
Even if your son stays overseas for many years, he is not obliged to close his KiwiSaver account. Under current rules if an overseas member leaves their fund to age 65 they can then withdraw all funds (including all Government contributions) as long as they have an active New Zealand bank account. 
 
 
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838. The information contained in this article is of a general nature and is not intended to provide personalised advice. Send your KiwiSaver questions to shelley.hanna@peak.net.nz