Notes to the Financial Statements (continued)

The maximum loss due to default on advances is the carrying value reported in the statement of financial position.

1. The nominal loan balance for 2008 excludes accrued interest whereas in the prior year the nominal balance included accrued interest of $493 million. Accrued interest is written off each year when certain criteria are met. On review of the nominal balance it was concluded that it was more appropriate to exclude the accrued interest from the disclosure of the nominal balance as this will be written off for New Zealand based borrowers.

The carrying value of student loans reflects current student loans policy. It is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macro economic factors such as inflation and the discount rates used to determine the effective interest on new borrowers. The data for student loans has been integrated from files provided by the Inland Revenue Department, Ministry of Social Development and the Ministry of Education. The current data used for the valuation model is up to 31 March 2007, and contains information on borrowings, repayments, income, educational factors and socio-economic factors. This 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 integrated data, it is expected that there is a lag between the availability of this data set and balance date.

Fair value is the amount for which the loan book value could be exchanged between knowledgeable, willing parties in an arm's-length transaction as at 30 June 2008. It is determined by discounting the cash flows at an appropriate discount rate.

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 on a discount rate that was current at 30 June 2008. At that date the fair value was calculated on a discount rate of 9.19% whereas a weighted average discount rate of 6.56% was used for the carrying value. Therefore, the difference between fair value and carrying value does not represent an impairment of the asset.

Through the everyday operations of the student loan scheme the Government is exposed to the risk that borrowers will default on their obligation to repay their loans or die before their loan is repaid. The student loan scheme does not require borrowers to provide any collateral or security to support their borrowings. As the total sum advanced is widely dispersed over a large number of borrowers, the scheme does not have any material individual concentrations of credit risk. The credit risk is reduced by collection of repayments through the tax system.

The Student Loan Scheme Annual Report contains more information on the student loan scheme.