Forget fees – it’s the payback threshold that matters

For those with a political bent but who are sick to the back teeth of Brexit, the world of HE is surely a good place to find some respite.

With the outcome of the sector-shaping Augar review looming, speculation is rife as to what the long-awaited review will recommend. For those who can’t wait until the final report, there are plenty of leaks (such as the alleged introduction of variable fees), and even a report by the ONS on how to account for student finance. A veritable wonk’s dream.

Unfortunately, despite all of the ink spilled over possible fee changes, one area seems to have been completely overlooked – that of the payback threshold. This is odd, because it is almost certainly the most important determinant of future graduates finances.

Threshold

The payback threshold consists of two things – the point at which you start paying back your student loan and the percentage of that income that you pay back. Currently you only pay 9% of what you earn over£25,000, so a graduate on £24,000 a year will pay nothing and a graduate on £30,000 a year will pay £450. Even the most disillusioned graduate is not going to face destitution because of their degree (although, admittedly, the consequences of being forced to read Hegel may be far worse).

This threshold was initially planned to be £21,000. This was to be frozen until 2020 until the government decided to raise it to £25,000. While this episode was in graduates’ interests, there’s currently no clear information on what happens next. If £25,000 is frozen and we continue to have positive rates of inflation, this could have potentially disastrous results for low income graduates.

Effect sizes

There are two things necessary to understand how bad something is – the impact on individuals and how many people it affects. If the £25,000 was frozen for thirty years – the period for which a graduate is liable to payback their student loan -and inflation was consistently 3%, the threshold would have effectively dropped to £5784, well below the level at which we currently tax people.

If we had levels of inflation as we did in the 1970s, in only ten years the threshold would drop to a meagre £7693. However good or bad you judge this to be, it is certainly impactful. Of course, neither of these scenarios are likely. The government will unlikely completely freeze the threshold forever. However, they may not raise it with inflation, and try and lower it to the original £21,000 level (cutting the RAB by around 10%).

So, how many people would be affected? Well, it is currently estimated that 85% of graduates will never fully repay their loans (with the assumption that the threshold rises). So, whereas any increase in fees is at most going to affect 15% of graduates, changes in payback rates will affect all graduates. Even those who pay them off completely will still payback more earlier on.

Time bomb

Currently, just under 50% of 18 year olds attend university. This means that the electorate of the future will have a much larger constituency of graduates than is currently the case. Graduates are more likely to turn up to the ballot box and a whole new picture of political influence emerges. This will become akin to the pension triple lock (i.e. raising the state pension in line with inflation, average earnings or 2.5% depending on what’s higher). Pensions affect everyone, but only later in life; yet the overwhelming majority of graduates’ yearly budget will be affected by the threshold.

Graduates and prospective students looking at the cost of university need to remember a number of things when the Augar review comes to fruition, not least the possibility of a Corbyn government shredding it or a Brexit-stricken government ignoring it completely. It is essential that they do not get sidetracked by the promises of lower fees, only to find the real cost kicking in later in their careers.

8 responses to “Forget fees – it’s the payback threshold that matters

  1. Excellent article – just a shame that neither government, SLC nor media generally communicate the comparatively modest monthly cost to graduates in favour of language of huge debts

  2. A few points:
    (1) “Currently you only pay 9% of what you earn over £25,000”.
    This comes with the priviso that you needed to have taken out the loan for the first time in September 2012 or later. Earlier students currently pay 9% of what you earn over £18,330.

    (2) “…there’s currently no clear information on what happens next. If £25,000 is frozen…”
    There is clear information. It couldn’t be any clearer than what’s set out in law: http://www.legislation.gov.uk/uksi/2018/284/regulation/6/made
    The post-2012 loan threshold is currently set to an annual increase by average earnings and will rise to £25,725 on 6th April this year.
    https://www.slc.co.uk/media/latest-news/changes-to-interest-rates-and-thresholds.aspx
    The policy is of course subject to change but it would require a change of law.

  3. Also the repayment threshold on postgraduate loans is still frozen at £21,000 (until at least April 2021 when it will be reviewed).

  4. Thanks Brian, you’re right on (1) – I should have flagged that I was talking about plan 2 students. On (2), I should have made it explicit that this is the law, however I don’t think this information is particularly clear – the SLC is much happier talking about what the current payment threshold is than what will happen to it in the future (for example, their news article that you link makes no reference to post-2020 arrangements). Compare that to the information available on finding out what the threshold is currently.

  5. However, we also need to be mindful of Continuing Professional Development study. If a student also has a PG loan, the amount repayable is 9% for the UG loan plus 6% for the PG loan =15%. They run alongside one another and are not merged together. This means that when a graduate starts to earn more, the deductions become more substantial thus reducing the amount of disposable income. This is likely to have an impact on life choices. We have to think of the impact the current loan approach will have on society 20 years from now and not just the short term.

  6. Thanks for Matt Dickinson for catching a mistake here – where I write: ‘…inflation was consistently 3%, the threshold would have effectively dropped to £5784…’ this is the figure for inflation at 5%!

    At 3% for thirty years, it would only drop to £10,229 (still below the income tax threshold).

  7. Michelle Morgan – agreed. The marginal deduction is at its highest for those with both pre-2012 UG loans (9% of income over £18,330) and PG loans (6% of income over £21,000). Those with typical graduate incomes who hold post-2012 UG loans are barely seeing a deduction due to the increased £25,725 threshold that currently applies to those loans.

    When looking at up-skilling and retraining (lifelong learning), it’s also important to note that although pre-2012 UG loans repayments are merged at 9% with post-2012 UG loan repayments if you take out both, the pre-2012 threshold still applies meaning the marginal deduction is very high. Those who take out further post-2012 UG loans after taking out post-2012 UG loans before still only have a 9% deduction above the £25,725 threshold which is nowhere near as big a marginal hit on income.

    It’s also important to look at the amount of time spent having those deductions taken:

    Someone who is repaying a pre-2012 UG loan taken out before 2006 has those deductions taken until age 65 (and remember the marginal hit is bigger as the threshold is low) unless they can repay it before then. If they then take out post-2012 UG loans for further study to up-skill, they still have a big marginal hit (the low threshold still applies) despite being unable to repay the large debt before age 65 because of the post-2012 high debt.

  8. Some analysis on the post-2012 student loan repayment threshold.
    A threshold which was intended to be set at around 75% of average earnings is now at 95% of average earnings! https://t.co/WBSrfitr9C
    (Comparing the £25,000 threshold to 2017-18 average earnings available here https://t.co/HuzQNMXJW8)

    So if the current scheme’s RAB charge is too high as many people including David Willetts think it is https://t.co/FKot0zXa08 then lowering the repayment threshold (which caused the problem) is the solution.

    Extending the loan term (as suggested here https://t.co/KC613eNr8g by Gordon McKenzie) would result in further “backloaded repayments”. That’s fair enough for students who have all their loans under the post-2012 scheme BUT it would be grossly unfair for people like me who also have to endure “frontloaded” repayment on pre-2012 loans in ADDITION to the backloaded repayments on post-2012 loans which we also hold. https://t.co/r78tYkEydX
    Lowering the post-2012 threshold is therefore the only fair way to increase repayments on post-2012 loans.

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