DfE is making a fat profit on Master’s loans

The Chancellor stands up and discusses tax and benefits, and the Treasury goes to the trouble of publishing a (faulty, when it comes to students) distributional impact on households analysis to go alongside.

It means that we hear about the impact on those on working age benefits, those in receipt of the minimum wage, pensioners, carers and so on – but never students.

Because in the silos, for these purposes maintenance loans are a loan whose rates are to be fronted out by the Department for Education.

(Except when there’s good news like the year that George Osbourne took the cap off places and whacked up maintenance loans. He reserved that for himself).

That means, for example, that the headline and marginal rates of what is taken as a tax are never debated in the Budget debate – because MPs tend to wang on about the things put under their nose.

But this stuff very much matters to graduates – especially younger ones, and especially especially especially those who’ve taken out a postgraduate loan.

I’m old enough to remember when politicians used to brag that the income contingent system meant that grads would only start paying back once they had a decent job.

But as we noted here a week or so ago (and as the Economist picks up here), the frozen (and lowered since Theresa May’s giveaway) £25,000 threshold will now be lower than someone on minimum wage on a 40 hour week.

That’s in sharp contrast to Scotland – whose threshold we now know will be £32,745 as of April 1st, and maintains a 30 year term rather than England’s new(ish) 40 year term.

Of course, Scotland can afford to give relief to people in their 20s and 50s because it’s loaning students less money. Nevertheless, the difference is now quite stark – a graduate on £35,000 from Scotland will lose £203 a year from their pay on top of other tax, the same graduate from England, £900.

Given these young age and old age generosities, someone in lifetime earnings decile 8 will only pay about £10k less in Scotland for their degree than the same person in England. It “taxes” the “rich”.

When the Westminster government made changes in 2022 and 2023, the Conservatives paid for its interest rate cut to inflation – which benefits richer grads – by soaking lower earning young and old graduates. Turning that around will be tricky given the negative totem of interest – but it doesn’t seem to have hurt Wales.

But all of the above is to ignore the growing scandal over the master’s loan scheme. We’ve discussed at length its headline value inadequacy – but we should look at the marginal tax rates and repayment threshold issue too.

For 2025/26, the repayment threshold will again be fixed at £21,000 – where it’s been since it was announced in 2016.

It was originally supposed to be £21,000 until 2021 – but has been repeatedly re-frozen ever since.

One of the impacts of that “dump it on DfE” thing is that we can’t easily see what these sorts of announcements do to the overall “viability” of student loans – at least not until DfE publishes its annual thing on that in July every year.

What we know from that report is that the “RAB” – the subsidy that the government puts into the master’s loan scheme – has pretty much always been 0 per cent.

So I and others have in the past wondered why on earth the government doesn’t let the headline value of it rise properly to help cover maintenance and tuition costs.

And I also instinctively would say something similar about the repayment threshold. That graduate on £35,000 with a master’s now loses 6 per cent of their income over the PG threshold (£840 a year) and 9 per cent of their income over the UG threshold (£900) – and while £1,740 a year isn’t legally “tax”, if it quacks and so on.

But what I’d not thought properly about until today was why, other than inertia, no relief comes in the amount loaned or the threshold. And it’s that that 0 per cent RAB hides a fat profit that is contributing to the “overall viability of the system”.

Buried underneath some drop down footnotes on that webpage, DfE explains why there can’t be a “negative RAB”:

RAB charges cannot be negative as they measure the level of government subsidy to the student loan system. If the future repayments are forecast to have a higher net present value than the initial loan outlay or the face value of the outstanding loans using the HM Treasury (HMT) discount rate then the RAB charge is required to use a discount rate equal to the rate intrinsic to the loan product, which is the rate that sets the RAB charge to 0%.

That’s a long-winded civil servanty way of saying “the RAB charge is a charge, and if we make a profit, there’s no charge, so we usually just say 0 per cent so people like you Jim can’t see the profit we’re making”.

But this summer for the first time DfE has actually revealed the scale of the profit it thinks it’ll be making from PG loans with a fiscally draggy £21k threshold, a 3 per cent plus RPI inflation rate, and by estimating the value of money in the future:

Without this rule, the figure produced by the student loan repayment model using the HMT discount rate is –23.7% for the masters RAB charge in 2023-24.

That’s right folks. Every time DfE loans out £1 on a Master’s loan, right now it reckons it’ll be making 23.7 per cent on it. And if you think about it, that must have been going up for every year that threshold has been fixed.

Because we have to wait now until next July, we can’t see the extent to which growing profits on Master’s loans are being traded off against any larger loss on UG maintenance and fees going up next year.

We do need to know this stuff. For all I know that increase in tuition fee loans and maintenance for UGs is being (maybe partly) paid for by soaking the suckers who dare to do a Master’s.

And whether deliberately or not, that “get DfE to announce” thing means it’s all being hidden.

One other thing while I’m on fiscal drag. Regular readers will know my rant about the household income threshold dragging down the headline maintenance grant increase. DfE’s figures in the summer modelled on consistent student numbers and the OBR’s March projection for RPI in Q1 2026 – which at the time was 2.3 per cent.

But it said the average FT maintenance loan would be £7,920 in 2025/26, up from £7,760 this year. £160 is less than 2.3 per cent – at least in part, DfE is paying for its headline maintenance loan increase by depressing the entitlement based on that fixed household income threshold. 3.1 per cent my eye.