My word is my bond? Freezing the student loan repayment threshold

Just over a year ago the government proposed a retrospective change to the terms of student loans. Rather than annually uprating the repayment thresholds in line with average earnings, thresholds are to be frozen for five years for existing as well as new borrowers. This measure was justified as being the only way to contribute to government’s objective to bring down debt by 2020, in this Parliament.

At first many saw this change as an obscure, technical issue, less important, say, than the abolition of maintenance grants or increasing fee levels. More recently, an appreciation of what is at stake has emerged. 84% of the respondents to the government’s consultation rejected the proposal. Then a student, Alex True, started a petition to “stop retrospective changes to student loan agreements”. It soon reached the required 100,000 signatures for a debate in Parliament, which took place on 18th July.

Even for those with low expectations, the response in the Parliamentary petition debate from the Minister, Jo Johnson, was disappointing. He wandered off the petition issue, repeated already discredited arguments and even said that there had not been a change in the terms and conditions. Just what did he mean?

A response to HEPI

In a recent blog Nick Hillman, Director of HEPI, and former Special Adviser to David Willetts, though not comfortable with retrospective changes, was prepared to defend them. He focussed his argument on the position taken by Martin Lewis of MoneySavingExpert.com. Here I respond and suggest how Hillman’s views may underpin the government’s self-justification of their student loan policy.

 “we are told the ‘Retrospective changes haven’t happened before’. This is not true” –  Hillman

However, it is true that retrospective changes in loan terms, unfavourable to the borrowers, have not previously been made to the specific borrowers in question: English and EU domiciled students at UK HE providers.

Hillman refers to the increase in the repayment threshold from £10,000 to £15,000 as an example of a retrospective change. With this change, borrowers could decrease their repayment rate at the risk of repaying more in total. Crucially, they were not required to reduce their repayment rate; the SLC would accept higher payments and they could continue to repay on the old terms. The change gave borrowers more repayment options, and was not unfavourable to them.

He also cites unfavourable retrospective changes to student loans in New Zealand. Hillman does not recommend that the UK follows New Zealand, but he fails to acknowledge that once retrospective changes are introduced, governments might get hooked on them. This will undermine trust and weaken the impact of future policy initiatives.

“Martin Lewis has been saying for years that ‘a student loan isn’t really a debt like any other, in fact it acts far more like a tax than a loan.’ Quite right. But taxes change each year . . .” – Hillman

Student loans, with the conditions as originally set out for the 2012 scheme, do have a tax-like feature: the rate of repayments depends on the individuals’ earnings and not on the size of their loans. The loans are still tax-like, but now that retrospective changes have been established there can be no certainty that they will remain that way in future.

Hillman goes on to say that “if a student loan is a capped graduate tax, as many people claim, then it is unwise to assume that all its features will be fixed for evermore”. ‘Graduate tax’ has always been more of a slogan than a policy, but let us suppose it meant that if you are a graduate you have to pay income tax at two pence in the pound more than an otherwise identical non-graduate. Graduates would expect their tax rate to go up and down, but if the government had promised that the graduate tax would be an extra two pence in the pound, then the students would have a reasonable expectation that two pence it would continue to be.

 “Hitting future students even harder than past and present ones could be more likely to affect future demand than sharing the pain.” – Hillman

Suppose this was correct. Would it justify making retrospective changes? It certainly ignores the costs of the loss of trust. Nonetheless it is more likely that retrospective changes will indeed impact demand, and, just as importantly, impact students’ higher education experience. Secure knowledge about how much one will have to actually pay towards going to university, given future earnings, is arguably at least as important as the nominal total debt for maintenance and fees.

Again and again students have been reassured that they won’t have to pay if they are on a low income. Imposing a retrospective change on past and current students leaves future students with no idea as to what the cost of higher education may be for any given future earnings. I suspect that most potential future students have yet to grasp this point, given the misinformation that passes for advice in the media. In particular, Lord Willetts continues to go on the airwaves to reassure potential borrowers that they would only pay if they have a well paid job and only then at a marginal rate of 9% of their income, without any warning that this could now easily change once the loans have been taken out.

Sooner or later the penny will drop, and students could become much more reluctant to take on debt. In the petition debate, Jo Johnson repeated the mantra that increased fees had not deterred students from applying to university. This is correct, at least for young full-time applicants, but it fails to appreciate why they were not deterred: because of reassurances that retrospective changes will undermine.

My Sutton Trust report, ‘Unfair Deal’, has explored how increased concerns about debt have impacted students’ higher education experiences and achievements. Whilst headline participation rates may hold up as long as there is no alternative to higher education for those aiming for many careers, there is a risk that the quality of students’ HE experience will be adversely affected.

“the annual increases to the repayment threshold that were promised were the hobbyhorse of the minor party in the Coalition Government” – Hillman

Increases in the repayment threshold were not the invention of the Liberal Democrats. The Browne Review recommended that the threshold be “reviewed regularly to bring it into line with growth in earnings”. Given that many borrowers would be repaying over thirty years, this was essential if they were not to be obliged to repay loans while on low incomes. Conservatives, as well as Liberal Democrats, reassured students that they would only have to repay if they could afford it.

No recommendations were made about the frequency of reviews, though Vince Cable referred to an “original” proposal for uprates “every five years”.  It may be that annual versus quinquennial updates were debated within the Coalition along party lines, but unless average earnings rose very rapidly, there would not be a huge difference between these options.

The current policy is not a reversal to “uprating in line with average earnings every five years”. Although there is now a review promised for 2021, it involves no commitment to bring the threshold into line with the £21,000 threshold at 2016 earning levels. The projected savings in the threshold freezing consultation imply that such an uprating is not planned.

This change in policy with a change in government is not in itself remarkable; the issue is that it is being applied to existing borrowers. But it seems that the promise of annual uprates, as a Liberal Democrat “hobby horse”, was a promise subsequent governments have no obligation to keep, even to the students who were taking out loans shortly after the promise was first made. There is just one further step to say there was no agreement for uprating repayment thresholds, and therefore no retrospective changes.

“the increases to the threshold were never more than a verbal commitment” – Hillman

It is untrue to say that the promise to increase the threshold was only a verbal commitment. A ministerial statement was published, as was a ‘student finance myth buster’, directed to potential students and their advisers. Both stated that the repayment threshold would increase annually in line with average earnings. Such official publications led to the policy being disseminated more widely, by universities, school teachers . . . and by Martin Lewis.

In 2012 I asked BIS whether any significance should be attached to the lack of legislative action on the threshold uprating, and why it had not been included in the then current SLC literature. BIS replied:-

“we intend to uprate the £21,000 threshold annually in line with earnings from 2017.  No decision has been taken to depart from our stated policy . . . the first threshold uprating would be due in 5 years time – April 2017; so it has not been necessary to legislate for the threshold increase this year.”

Since then there has been no official announcement of a change in the “stated policy” until the launch of the consultation on July 22nd last year. Indeed just three months earlier on April 23rd, in the run up to the general election, the previous minister, Greg Clark, confirmed that no change in terms was required.

Student loan doublethink

In the petition debate Jo Johnson effectively denied there was ever an uprating policy:

“the threshold freeze did not actually change the terms and conditions; it merely left them unchanged”

If threshold uprating was not part of the package of loan terms, why was there a consultation to freeze it? What might be brought to defend the idea that there never was a commitment to uprate the repayment threshold? That it was only a Liberal Democrat policy; that it was only a verbal commitment; that it was not incorporated into the SLC documentation. None of these arguments stand up to examination.