How to fix student loans

There’s an old rule in here somewhere – positioning of an issue in relation to an outlet’s imagined readers helps (NUS’ focus on parents this week is very shrewd), but what really helps is when the journalists themselves are impacted.

Ollie Dugmore – formerly of youth(ish) and leftish website Joe and now Executive Editor, Digital at the New Statesman, was on the famous NUS Demo of 2010. Hence this whole podcast on the issue.

As ever in an industry, the more you know about an issue, the more you get frustrated by the detail in the mainstream coverage (and we’ve seen plenty of Principal Skinner syndrome around the sector this week) – but with the broadsheets and the political press piling in, it wouldn’t be a bad bet to assume that what has been a dropped priority (ie reforming the student loans system) will now need to move further up the Department for Education’s to-do list.

But what do you do? On the assumption that a pure graduate tax will just never happen, it’s really about the levers.

Lever 1: The principal

Universities would love the maximum UG fee to go up, students would love the maximum UG maintenance loan to go up, and everyone would love PG loans (which go nowhere near covering both) to go up.

But the more you lend in a system with a write off and an income-contingent payment system, the more you need to either subsidise, or collect from graduates. Dodgily-index linked fees and maintenance may well be all anyone gets (apart from those pretend maintenance grants for 3 students doing something something industrial strategy at some stage in the future), and the big danger now is that a head of steam on repayment puts pressure on reducing how much is loaned in the first place.

The other way to reduce the principal is have less students at university, but let’s not go there shall we.

Lever 2: The interest rate

People hate interest. Yet one of the ironies of Michelle Donelan’s stealth reforms that resulted in Plan 5 only levying RPI interest on student loans is that most people don’t know that happened – and we don’t have many Plan 5 grads yet.

And anyway, the Plan 2 cohort is large and influential and they are still paying much more. Technically, because most of them were always going to have their loan written off after 30 years, both the principal and the interest rate are irrelevant – they’ll pay their graduate tax for 30 years. As such the only function of the calculation is to work out who will be let off paying graduate tax in their 50s.

The problem – and this underpins the “we were mis-sold” – is that nobody said to Plan 2 students “for most of you, assume you’ll be paying 9 per cent over the threshold for 30 full years”.

Plan 1 – with a lower repayment threshold and a lower principal to pay – really did behave like a loan insofar as people expected to pay it off. Brothers and sisters, what most of us understand by the word “loan”, and no particular desire by policymakers to explain the complexities means that many are now surprised that they’ll not be able to pay off in full.

I’ve said it before and and I’ll say it again. If you’re designing a subsidy that you want people to be grateful for, don’t only have it manifest at the end of their career, and don’t only have it manifest when they’re relatively economically unsuccessful. It’s a bad look.

The wider problem is this. Back when I worked at NUS in 2010, we knew that fees weren’t really going up to £9k – they were going up to about £6k. But to make it progressive over a lifetime, we wanted less successful grads to pay less than £6k (via the repayment threshold and the write off), and more successful ones to fund that by paying more via inflation on their principal. Vince Cable agreed, and that was how Plan 2 panned out.

And then we ran a big demo about it. Hahahahaha.

As I say, the problem is that if you’re struggling via all the other costs you have in your late 20s and early 30s, you won’t be grateful. And every time that threshold is frozen, of course you’ll be less grateful, because you really are paying more.

The most progressive way to make Plan 2 fairer is to whack interest to 9 million per cent and prevent early repayment. It’ll only impact the rich, and then you can ease all the other levers. But it doesn’t feel like that will fly.

Lever 3: The write off

The “time bomb” that the broadsheets talk about isn’t real – these days the government does actually account for its expected losses on loans.

I often muse that the miserly fees and maintenance rates in Northern Ireland could be eased if its loan system accepted that student loans would be written off after more than 25 years. Who cares? That’s ages away!

Maybe the government could offer Plan 2 loan holders the chance to switch to a version of Plan 5 where the term goes from 30 to 40 years and in exchange they pay less now. It’s not clear whether the Treasury would love or hate that.

But the longer we leave it until we write off, the less progressive the system is. And it creates a real time bomb – people not saving enough towards the end of their career for their retirement. Even if you set aside the ridiculum of the Treasury having to estimate the profile of repayments and the value of money in 2066 to book the expected losses to the books, it’s not ideal to have a 25 year old student paying back their student loan when they’re 65. It’ll sink the cruise industry, for a start.

Lever 4: The repayment threshold

When Theresa May was in her “squeezed middle” phase, she raised the threshold so that grads early on in their career were let off paying for a bit.

By common consent she got little political credit for it, and it cost a fortune. The Treasury has clearly been hankering after reversal ever since – and got its way first with Sunak and then with Reeves last November with a double set of freezes.

Raising the repayment threshold is pretty progressive – but assuming the eventual recovery envelope is fixed, you can’t really make the money back off Plan 2 grads, so you’d have to soak new students even more with some kind of Plan 6. That feels unlikely.

Of course a lower repayment threshold, albeit not a progressive move, could be softened with a lower repayment rate. So…

Lever 5: The repayment rate

London Economics had a run at “stepped” repayments a while ago, and for a time Brifget Phillipson was interested. Maybe she still is and there’s no bandwidth, maybe she still is and can’t win the argument with Rachel Reeves, but either way she’s gone awfully quiet.

There remains, though, a good case for lowering the repayment rate at least in the early part of someone’s career – especially since the impacts of fiscal drag in this system, the PG loan system and wider tax system, coupled with the intergenerational unfairness of wider issues (home ownership and housing costs are the big one) are all conspiring together.

But again, that would be expensive on Plan 2 – and would therefore need more money from Plan 5 or even a new Plan 6. Economic circumstances, etc etc

One other tweak would be to introduce repayment holidays – a feature of many European systems, something floated by Labour in the 00s. Being able to pause mortgage repayments during the pandemic was very welcome for many. I’d do that tomorrow if I was Rachel Reeves.

Lever 6: The subsidy

There’s loads of other things you could do. I’m not covering here getting the cost of university down, sorting housing and so on. But we should pick the subsidy up again.

As I noted earlier in the week, the system is supposed to be one where costs are shared between taxpayers and graduates. You can have four debates about that:

1. How much the cohort subsidy should be in percentage terms
2. How much to vary it for less successful grads and more successful grads to make it lifetime progressive
3. Whether to allow yourself to make terms worse if your forecasts are wrong later (by fiddling with thresholds)
4. Whether to allow yourself to make terms worse to reduce the subsidy in general because you want the money and hope nobody will notice they were promised cost-sharing

My view is that wherever you get to on 1 and 2, you shouldn’t really be allowed to pull later levers under 3 and 4. It’s not fair on graduates that their loan terms – even if some were never actually fixed in what they signed – can be later varied, at least not to their detriment.

And it’s certainly not fair on 2022 entrants that their subsidy will be minus! See also postgrad loans.

But most important of all is that without a debate about the taxpayer/graduate share, all the other debates become irrelevant. It’s the lever that matters most, and the lever nobody talks about. So help me out, readers! Let’s get that debate going again!

Impossipzzle

So there’s my Friday run around of the levers you can pull. It’s a messy set of options, the actual implications are very difficult, and when you pick who you’re “relieving”, you do need an eye on who you’re soaking.

The meta point for me is that while it is complicated, the lack of transparency around it all makes it very difficult for anyone to influence, even if they are familiar with the IFS loans calculator. Hence the behaviour of every policy maker ever – to point at one lever and say “look! It’s good fees are frozen” or whatever and then hide the impact on the others.

As I said back in 2023 – when the Conservatives realised that the 30 year write off was a badly designed subsidy and so scrapped it for new students (making them feel better about their debt despite the fact that most will pay more), this is Wonkhe.

We’re not gonna be threatened by issues – we’re gonna put them front and centre. With your help – yes you – we’re gonna raise the level of public debate over student finance in this country. Let that be our legacy.