How might ministers make student loans cheaper?

If it wasn’t for those pesky Europeans, we could have got away with kidding ourselves about the sustainability of the English higher education loan system for a long time yet.

As it is, a Post-18 review of fees and funding that was supposed to both tackle the popularity of Corbyn’s free fees amongst the young, and funnel some support across to the further education sector, had a crucial new objective slapped on it back in late 2018 – bring the cost of the system down.

This is important because March 2021’s OBR forecasts tell us that the Resource Accounting and Budgeting (RAB) charge (the estimated cost to government of borrowing, based on future loan write-offs and interest subsidies in net present value terms) is now a whopping 53.6 per cent.

That actually means that according to London Economics, the Treasury would save £770m if Augar’s recommendations were implemented in full. The huge shift is because the RAB charge has increased by 10 percentage points in 2 years – from 44 per cent to 54 per cent – and means shifts to grants (for both maintenance and teaching) would be a lot cheaper than they were in Augar’s report.

You gots to keep it real

Of course, other ways to make the system cheaper are available. You could reduce the number of people going into higher education altogether via number controls on “quality”, by tackling “low value courses”, or by restricting the numbers going in via minimum entry criteria either at level 3 (the so-called three Ds proposal) or even at level 2 (the points-based equivalent of the old Maths/English A-C at GCSE) – where fewer would say out loud that they’re trying to tackle “low value students”.

All of those options remain on the table, and will continue to be debated over the summer as we hurtle towards the Autumn’s Spending Review. But some options remain relatively undiscussed – and they’re all about how much and when graduates contribute to the system.

Free education isn’t progressive, right is left, night is day and nothing is quite as it seems through the looking glass of student finance. Take the principal. Home undergraduates have been told all year that partial refunds on the total amount they are loaned won’t make much difference in a system where most of them will never pay off the balance in full. That’s true, but we’re now in a position where the easiest place to look for savings from the Treasury’s perspective is outlay – hence the continued freeze on headline fees and a real prospect of the fees cut without T grant top up that DK looks again at elsewhere on the site.

There are other ways to make outlay smaller. You could reduce maintenance loans, but they look dangerously undercooked as it is, and this isn’t going to be a government that takes meaningful action on the rental costs that make them look increasingly unfit for purpose. You could implement number controls on “away from home” places (maintenance loans are cheaper if students stay at home) but that makes you sound like an enemy of opportunity. You could try to squeeze some savings from shorter degrees, but nobody seems to want them.

What you have left are levers of student loan repayment.

Five will make you get down now

The five levers get little scrutiny and almost no attention in public debate, but they matter quite a bit in a system where the subsidy is our acceptance that not everybody will pay off in full. So let’s have a think about each in turn.

1. The principal is the well understood figure in the bottom right hand corner of the student loan statement. It’s increasingly difficult to politically justify a system that regularly reminds people of how much they have to pay off when most will never pay it all off – a sort of annual nudge towards disliking the government that was in power when you were a student. Some would like to obscure it, but unless they’re prepared to get rid of the ability to avoid loans altogether by paying upfront/paying off early, it sort of has to be there.
2. The repayment threshold matters quite a bit to those in their mid-20s to mid-30s, but whether raising it brings political dividends that justify the cost very much depends on whether you believe nobody noticed Theresa May raising it in 2017 because it’s not interesting, or because she lost her voice and was ambushed by a comedian. Either way, there’s pressure on that threshold to come down (Augar wanted it back down to £23k, for example) when you can make a decent case that the recession graduates are being spat into means it ought to go up.
3. The contribution period is the 30-year limit on repayments (raised from 25 years in 2012) that results in a substantial portion of a borrower’s lifetime earnings being ineligible for repayments – earnings data shows that the median graduate continues to earn more in their 50s than early in their working life. You could remove this altogether, extend it to 35 years (Augar said 40), or even do that and give people a period in which they were allowed to pause for say 5 years. The aim in any case would be to have more of the repayment happening when people were earning more – which might end up being popular with the wrong kind (age) of voter.
4. Hardly anyone talks about the repayment or contribution rate – but this matters quite a bit. 9 per cent of earnings above the repayment threshold are collected as loan repayments, but borrowers with an undergraduate and a postgraduate loan pay that plus 6 per cent of earnings towards their PG loan, totalling 15 per cent of earnings above the threshold. It would help if Augar had attempted to understand the costs and pressures faced by graduates to determine if this should be reduced, rather than barely mentioning it – but we do need a debate about whether grads on a salary of 27k should end up on a marginal tax rate of 41%, and we really really need to ask whether women working in legal, financial or medical professions should face a marginal taxation rate of up to 51 per cent which lasts for between 16 and 22 years.
5. And then there’s the interest rate. One of the less impressive interventions of the pandemic came from a group of VCs arguing that it should be reduced as a cost-free gesture of goodwill – a classic puff of smoke into the hall of mirrors of the system given how few graduates pay off in full. I can make a decent case for the opposite – changing it to two gazillion per cent, so that rich graduates never stop paying what I would hope would be a lower overall repayment rate for the whole of the contribution period.

There are other tweaks you could make. Augar bizarrely recommended a repayment cap of 1.2 times the initial loan amount in real terms to “increase the fairness of the system” but nobody thought it would then and few will think it will this Autumn. Notwithstanding the need to fix the Sharia-compliant finance issue, I could make a decent case for “fairness” by forcing people to enter the system that currently don’t. And of course, there’s still the question as to whether we should be operating a paid-for model overall, and in particular a paid-for model for tuition in the first place.

In any event, student campaigners calling for moderate reductions to the principal as a little souvenir of a terrible year need to remember this – changes to loan terms can be made to existing, as well as new, borrowers. It’s entirely possible that they’ll end up paying more than they expected rather than less, which would very much make their eyes feel sore.