Student Loans

A ‘progressive’ system means, broadly speaking, that some people pay more than others for the same benefit, on the grounds that they can afford to, just as some pay more taxes, both absolutely and proportionally, to fund government services. There can be no doubt that the Coalition policy on student debt is ‘progressive’ in the sense that some will pay (back) more than others depending on how much they earn after graduation. But how progressive?

The repayment scheme seems to be the brainchild of the dancing Dr Vince Cable, so we might expect the website of his Department for Business, Innovation and Skills to spell out the detail. You’ll find information there, but packaged in a tissue of silences, concealments and half-truths. We’re told that the new threshold for making any repayment at all is to be an income above £21k (payments will be levied at a rate of 9 per cent of earnings above that figure). This is billed as progressive, a serious improvement on the current £15k threshold, excusing large numbers of graduates from any immediate repayment at a stroke. We’re also told that the threshold will be raised ‘in line with earnings’ after April 2016. What we’re not told, however, is what £21k will be worth by 2016 in today’s values; according to the excellent Exquisite Life website, it’s about £15,900. This is little more than the current threshold, and with the huge difference that, because of the rise in fees, graduates will owe two or three times more than they do now.

And then there is the interest. On incomes below £21k interest will be charged according to the Retail Price Index (elsewhere a different standard holds: for index-linked pensions, for example, it’s the lower Consumer Price Index). The interest goes on being added to the debt until the graduate starts to earn above the threshold, at which point he or she will start paying back the amount borrowed plus the accrued interest. Once above the threshold, interest will be levied at a ‘real’ rate (RPI plus a sliding scale of additional interest up to a maximum of 3 per cent on salaries above £41k). This means that someone earning £42k and someone earning £200k will pay the same 3 per cent; though the £200k earner will pay less by having settled the debt faster, thus saving on interest. So the scope for paying ‘more’ is firmly capped at an income of £41k. If Daddy hasn’t already paid up-front, which he’s allowed to, high earners could see a debt of £27k (three years at £9k a year) plus interest disposed of in no time. But for all the bleating about ‘progressivity’, the website makes no mention of this.

The only illustrative example it provides of a repayment scenario under these new arrangements is that of a graduate earning £25k. He/she will pay 9 per cent of £4k (his/ her earnings above the threshold). The website reckons that, at £6.92 a week, this is the bargain of a lifetime. But the website refrains from telling the prospective graduate that in 2016 that salary will be worth nothing like its value today. Nor does it point out that there is a trade-off between paying less per month and the fact that the graduate will be paying for longer (up from 25 to 30 years). Nor does it take into account the question of how much of the weekly payment will go towards paying off the interest. What if the graduate has attended a university charging the maximum of £9k per annum? Assume that the RPI is at 4 per cent (it’s currently 4.7) plus, say, an additional 1 per cent (the website doesn’t tell us where a £25k earner would be on the sliding scale). That’s £360 a year being paid back on a debt that is accumulating at a rate of £1350 a year. In short, the way the workings of the scheme are illustrated on the government website is tendentious verging on mendacious: you double or triple your debt but pay unimaginably less than under the current arrangement.

So by paying off the debt more quickly, the higher earner pays less interest – the low or static earner will always pay more. Cable and David Willetts have made noises about preventing higher earners benefiting in this way, but there is no clarity, and certainly no decision, on what measures might be taken, and it’s pretty clear that any number (whether a minimum number of years during which the graduate has to pay, however large his income, or a levy on ‘early’ repayments) will be perceived as arbitrary and difficult to impose.

In the interests of ‘fairness’ the proposal is to (partly) exempt students from the poorest families. This appears to involve giving help to students who had qualified for free school meals (broadly, one year’s free tuition will be funded from the National Scholarship Fund and, if the student is at a university charging more than £6k, an additional free year will be funded by the university out of its increased fees). It’s suggested there might be between 18,000 and 20,000 such beneficiaries, almost certainly an inflated number (among last year’s graduates there were 11,000 who had had free school meals, and Coalition cuts to the budget for these will push the future number even lower). Moreover, the think tank million+ has pointed out that the Scholarship Fund has not been allocated enough money to fund the commitment (depending on the level of fees, it could cover between 5500 and 8300 students). Whatever the number, it would represent only a fraction of the total student population: there are now more than two million university students, a number that is widely expected to increase. Is this to be the great contribution to re-energising ‘social mobility’? It is, if implemented in full (extremely doubtful), a marginal adjustment, crumbs from the table. There has been a lot of bluster about the strict access conditions to be imposed on the universities charging the higher fees, so as to counteract the perverse incentive built into the proposed scheme which the IFS has pointed out: it will be in the interest of the more expensive universities to minimise the intake of the ‘disadvantaged’, and so reduce the bill for their tuition fees. But short of actual quotas, it’s hard to see how the government can enforce these ‘conditions’.