Note 9: Advances
| Forecast | Actual | |||
|---|---|---|---|---|
| Original Budget $m | Estimated Actual $m | 30 June 2005 $m | 30 June 2004 $m | |
| 6,864 | 6,476 | Student loans (see analysis below) | 6,465 | 5,995 |
| 1,581 | 1,851 | Kiwibank mortgages | 1,575 | 1,038 |
| 73 | 77 | Residential care loans | 77 | 72 |
| 48 | 51 | Māori development rural lending | 51 | 48 |
| 28 | 28 | Forestry encouragement loans | 25 | 25 |
| 5 | 6 | Catchment authorities | 6 | 6 |
| 322 | 370 | Other | 337 | 261 |
| 8,921 | 8,859 | Total Advances | 8,536 | 7,445 |
| Analysis of Student Loans | ||||
| Outstanding balance | ||||
| 7,775 | 7,499 | Total loans outstanding (including interest) | 7,499 | 6,821 |
| (911) | (1,023) | Total provisions (capital and interest) | (1,034) | (826) |
| 6,864 | 6,476 | Total Student Loans | 6,465 | 5,995 |
| Movement during the year | ||||
| 6,095 | 5,995 | Opening balance | 5,995 | 5,370 |
| 1,100 | 971 | Amount advanced in current year | 971 | 999 |
| 503 | 498 | Interest accrued on outstanding loan balances | 498 | 447 |
| (334) | (313) | Repayment of base capital | (313) | (294) |
| (204) | (259) | Repayment of accrued interest | (259) | (216) |
| (304) | (424) | Interest written off and movement in provision for interest write-offs and doubtful debts | (435) | (319) |
| 8 | 8 | Other movements | 8 | 8 |
| 6,864 | 6,476 | Closing Balance | 6,465 | 5,995 |
Provision for student loans
The book value of student loans represents outstanding loan balances as at 30 June 2005 after provision for expected doubtful debts. The book value does not discount the repayments.
The methodology used to provide for student loans contains a capital and an interest component. These provisions are periodically reviewed for appropriateness and the methodologies updated where necessary.
Capital provision
The provision on the outstanding capital issued is 12.8% (2004:11.4%). The key variables that impact on the expected level of write-off relate to death and bankruptcy write-offs as well as debt that will not be collected because of retirement, child-rearing or disability because these borrowers do not meet the repayment threshold obligation. The underlying assumptions regarding the borrowing characteristics and income growth profiles of borrowers and the expected level of defaulters are based on the most current information. The provision is sensitive to the assumptions on borrowing characteristics and income growth profiles, and so is regularly reassessed as new information becomes available. A 1% shift will impact on the provision level by around $75 million.
Interest write-off provision
The provision for interest write-offs on interest accrued after 31 December 1999 was reviewed in light of changes to Government policy, resulting in a substantial increase in the provision level to 70% (from 17%). This reflected changes to the student loan scheme allowing the full write-off of interest while students continue to study along with the increased income thresholds used to determine repayments through the income tax system. The effective provision for interest write-offs from 1 January 2004 was around 50% and from 1 January 2005 it was approximately 55%. The interest rate provision is reviewed annually.
Estimated fair value
The estimated fair value of the student loan debt as at 30 June 2005 has been determined to be approximately $5,994 million ($5,734 million at 30 June 2004). The fair value is less than the book value by $471 million, but this is not considered to indicate the need to impair the book value, largely as the two approaches to determining a value are not directly comparable. The fair value has been determined by projecting forward the expected cash flows from the Student Loan Scheme and discounting them back at an appropriate after-tax discount rate. The fair value has been calculated using a model constructed for the Ministry of Education in 2003 which integrates students’ educational and demographic information with data on loans and income that is held securely by Statistics New Zealand. The model is dependent on a number of assumptions on future income levels, repayment behaviour, in addition to economic assumptions (the discount rate, inflation and so on). As such the estimated fair value is sensitive to changes in those underlying assumptions. For example a 1% shift in the discount rate alters the value by approximately $350 million, whereas a 1% shift in salary inflation alters the value by approximately $120 million. The accuracy of the fair value determination is expected to continue to improve as the fair value model is further developed. The 2005 Student Loan Annual Report will contain more information on the student loan scheme.
