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Make it make sense – understanding England’s system of student finance

How can lower interest rates and frozen fees lead to graduates paying more? Jim Dickinson worries about public understanding of England's fee system - and needs your help
This article is more than 1 year old

Jim is an Associate Editor at Wonkhe

On the day, the news that Keir Starmer is to drop Labour’s commitment to funding higher education “tuition” through general taxation was accompanied by the usual frustrating spread of ill-informed commentary.

Social media, radio and TV phone-ins and endless comment pieces saw all sorts of people bemoan high interest rates, complain about the levels of debt incurred by graduates, or express anger at their cousin or sister’s seeming inability to shift any of that debt through repayments.

Arguably the debate over whether tuition fees should be “free” at the last two elections took focus away from maintenance – Jeremy Corbyn’s pledges on day to day costs, for example, were impossibly vague.

The other impact has been that the left haven’t really grappled with the issue of terms and conditions – allowing the Conservatives to implement changes that most people either haven’t noticed, or don’t understand.

But with free education off the table, terms matter. So with more days like this to come, let’s see what we can do to improve understanding of the impact of those terms.

Two cathedrals

Some inevitable caveats. I’m talking here about England’s 9k undergraduate fee system – the one that shifted most higher education expenditure to a loan based voucher scheme – and some of the tweaks that have been made to it since 2012.

Postgraduate loans complicate things, and there are obviously aspects of the system that are in use in Wales, and to a more limited extend around the UK.

I’m also simplifying a lot here – not nearly as much as you might see elsewhere, but still.

The first thing to say is that it’s a bit like a tax – graduates pay 9 per cent of their earnings over a threshold, and a bit like a loan – there’s a principal debt amount, and interest accrues.

Crucially, don’t let anyone tell you it’s one or the other. It’s both.

It’s not a normal loan, because of the repayment threshold and because it’s written off after a certain number of years.

And it’s not a normal tax, because you can avoid it by paying fees upfront or overpaying as a graduate to avoid the accrual of interest.

The next thing that most folk fixate on is the headline tuition fee. It does matter – its value determines how much is spent on a student’s education.

But when it comes to how much that means a student will pay, things become more complex. For example in 2014 when a student was issued with a loan for £9,000, on average in real terms they were expected to pay back £4,950.

When Theresa May almost lost her general election, she introduced some tweaks such that graduates would be expected to pay back just 47p of every pound loaned.

Nowadays the fee is £9,250 – but from this September the average that graduates will pay back in real terms is expected to be £7,955.

In other words less will be spent on their education, but they’ll pay more. That’s where your pay restraint, industrial strife and strikes come from.

How can that be?

Lies, damn lies and statistics

The important thing to do is remember that there are four main aspects to the system that can be tweaked. Generally, the first two are ones that I think people think they understand – the the second two, not so much:

  • The principal is the headline amount that we loan to students. As I said above, in a system that assumes that most funding for a provider will come via a student’s loan-based voucher, this matters a lot for how much will be spent on them – although there’s considerable redistribution within an institution. There’s a wedge of principal for maintenance too for most students.
  • The interest rate functions as you would expect. Set it too high and the government as a lender looks usurious. Set it too low, and you lose some of the progressiveness of the system when combined with other features.
  • The repayment threshold determines when people will start paying, and to some extent how much they will pay. Set it too low and already pinched graduates feel the pain of the higher marginal tax rate. Too high, and it costs the Treasury a lot in the long run.
  • The term determines how long people pay for before the loan is written off. Set it too short and you end up writing off too much of the debt, which can look expensive. Too long and you end up weakening the progressive features of the system – the subsidy is, after all, targeted at those who don’t do as well.

There are actually more parameters than that – the IFS has a handy hands-on science museum-style calculator that you can play with here – and of course you can also tweak how many go, the mode they go in (including away from home or not), the split between voucher and central funding, and the funding per subject. But let’s keep this manageable.

Since the siege of Millbank, some little changes have been made. The principal has been raised a tiny bit (£250 a year on tuition), maintenance has has gone up by a bit less than inflation (a quirk based on how many are entitled to the full whack) and the repayment threshold was yanked up to put money in the pockets of those struggling in their twenties, then frozen when the Treasury realised how expensive doing so was (and will be dropped for new borrowers).

And it’s surely to their credit

Over the past couple of years, and as of September in particular, the Conservatives have introduced all sorts of stealth changes to terms to tilt the system so that it’s much more like a loan.

The headline change is that for new graduates, they are going to reduce interest rates down to inflation only.

That means that a bang average graduate in 2027 is likely to look at their loan statement from SLC and see that they “owe” less than a someone on a modest salary who graduated in 2026 that has been repaying the loan for a year.

That will make the current system look bad, and the Conservatives will hail the reduction in student debt.

But in the current system, most students don’t pay off in full. So to pay for that interest rate pledge (which was almost but not quire in the manifesto) they’re extending the write off term from 30 to 40 years – so more on modest salaries will pay more.

And that means that when the government says “we are freezing fees” and “we are reducing interest” they’re really making more graduates pay more for less to be invested in their education.

So remember the elements. The fee is mainly about how much is invested in the student. The repayment threshold, interest rate and write off determine the subsidy from government and how that subsidy is distributed.

And of course I’ve not mentioned here that a) forcing universities to over-recruit international students by keeping fees low pushes up rent and associated commercial debt uptake/liability, and b) maintenance loans are going up by less than inflation.

But crucially, try not to let friends fall into the trap of thinking lower or frozen fees is automatically good, or that lower interest is automatically good. It’s always about how the four levers work together.

Fees could double, and interest could triple, but as long as you set the other parameters correctly, most graduates could pay less.

The fall’s gonna kill you

Does any of this matter? From a public finance point of view, I have a modicum of sympathy with Starmer’s position – even if I’m not convinced that he realises the reason that I have sympathy.

When the Corbyn pledge was dreamed up, the total outlay (fees plus maintenance) on a cohort was just over £20bn. The government expected back about £12bn in real terms, with the rest written off in a progressive way.

But those Michelle Donelan stealth changes now mean that for loans issued from September, the government expects 86p back for every pound loaned. In other words, free education has become much much more expensive than 3 or 4 years ago.

Astonishingly, what almost nobody seems to have noticed is that in 2014 David Willets was expecting the state subsidy to be about 45p in the pound. They’re now expecting to put in just 14p in the pound. That’s a hell of a lot more money for Labour to find.

But it also reminds us that the Conservatives have taken a long run real terms three year tuition cost of £14,850 in 2014 and moved that to £23,865 – with more students now in commercial debt too because maintenance isn’t keeping up with inflation, and the distribution of the changes resulting in rich men paying less!

I can certainly make the argument – as I have done here – that cancelling the bung to rich men (the interest rate cut) would ease up all sorts of other options. But that involves Starmer and you – yes you – getting involved in the explanation game.

Process stories

I would love a bolder debate about HE finance. But we are where we are. Terms matter. To get the right ones requires proper debate and some understanding of this topsy turvy system.

But I know that explaining all of this really is hard work.

Lots of us, for example, know people with Plan 2 student loans, and see them staring at their annual statement in misery and bewilderment.

For most of them, looking at the principal is a waste of time. They should assume they’ll pay 9 per cent above the threshold for 30 years. At this point, the only purpose of the balance/interest confection is to work out which lucky (largely rich men) folk will get to stop paying the graduate tax in their late 40s.

Those with astronomic debt should celebrate. The state will end up giving them more money in write off! Trebles all round!

That’s why tripling tuition fees and quadrupling interest would be fairer (as long as you ignore that many would pay upfront). Because more would be spent on students’ education, and the rich would pay in for longer.

The whole point of the 30 year write off was that it represented a subsidy for those who didn’t do as well. It was a progressive feature that most would never pay off – not a bug.

Over time, the Conservatives have realised that it’s a badly designed subsidy – because nobody is grateful for it. Hence they’re now largely scrapping it for new students by extending the term to 40 years – making them feel better about their debt despite the fact that most will pay more.

But 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.

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