Student finance? It’s the interest rate, stupid

Everyone thinks the interest rate on student loans should come down. Except Jim Dickinson.

Jim is an Associate Editor at Wonkhe

Elsewhere on the site Nottingham Trent VC Edward Peck argues that much of the government’s response to the Augar review of Post-18 Education and Funding is effectively already known.

That’s true in relation to several aspects – modularisation, minimum outcomes, the lifelong learning loan and so on. Bits like that have been lifted out, put into the Skills Bill and retrofitted both as a response to the pandemic and as an answer to the question “what is levelling up”.

But there are lots of bits we don’t know. As well as potentially reducing the number of students going into higher education (through minimum entry criteria or minimum exit outcomes, or both) and as well as potentially reducing the unit of resource (which can also help you influence the courses that are put on if you end up with differential prices) there’s the loan scheme itself and its repayment terms (what Augar calls the “contribution scheme”).

If we think of this as some kind of Bermuda triangle with student numbers, the unit of resource and the contribution scheme all in play, it’s clear that the latter will have to contribute its fair share to whatever goal is being set by the Treasury. I’d add that the more that the first two are shown to be difficult in practice, the more chance we end up with the contribution scheme carrying more of the weight.

Consensus statements

In the piece Peck points out two “consensus” aspects of the panel’s proposals – the lowering of the threshold for starting repayments, and the reintroduction of maintenance grants for poorer students.

In doing so he suggests that that would represent a package that “all interests” could get behind – but in a graduate jobs market that is this difficult, a housing market this expensive and longer term trends towards a “middle stage” of “delayed adulthood”, taking more out of the pockets of those in their twenties and early thirties is hardly something graduates will be carrying him through the streets of Nottingham over – especially if implemented on current borrowers too. “Pay more than you expected for the year you’ve just had” will be a stretch.

Similarly, the maintenance grants proposal is pretty much a con-trick, because poorer students get worse jobs and aren’t likely to pay back the amount that a grant would come to anyway. And the failure of the panel to properly look at maintenance costs means the headline amount of support in the pocket is becoming unacceptably inadequate – not in a way that stops people wanting to better themselves but in a way that increases the level of private commercial debt they hold on graduation.

As I said on the site back in 2019, either you think that being a student at university day to day is affordable now, and the change will convince more that it is (you’re wrong) – or you don’t think that being a student is day to day affordable now, and the change will trick people into thinking it is when it isn’t. Either way, “look we’ve got a grant for you” is a fairly unpleasant con being played on poorer students with educational ambitions unless the cash value is increased.

When I’m sixty-two

Peck doesn’t mention the Panel’s proposed switch from 30 years’ write off to 40 years’ write off, which would make the system more Treasury-affordable but less progressive than it is now. It won’t (or at least shouldn’t) take opposition actors to point out that a headline fee cut in exchange for paying back over 40 years isn’t the deal it looks – again, especially if the 40-year term thing is retrospectively applied to current borrowers too.

And it doesn’t really work in conjunction with a policy that says “Government should nudge people to save more into a pension when student loan payments come to an end” as the IFS has said this week.

But there is another option. It would be progressive, it would allow for increased funding to go into student maintenance, it would allow at the very least a long smoothing of the impact of changes to the demand incentives about to be slapped onto the sector, could also allow the unit of resource to be protected.

It’s the interest rate, stupid

You may have seen the other day former universities minister Chris Skidmore arguing on ConservativeHome that the interest rate on student loans should fall in the coming response to the Augar review. It’s a compelling set of arguments on the surface – the rate looks usurious in the context of rock bottom interest rates and does appear to result in the principal growing to the extent to which few can pay back in full. It’s even an argument that in outline was being proposed as a way out of the “refunds and rebates” conundrum a couple of months ago by a bunch of VCs and SU Presidents here on the site, all in the name of intergenerational fairness.

Skidmore is wrong in many ways – the 15 per cent highest-earning (predominantly male) graduates benefit and everyone else would be worse off. And as system expert Andrew McGettigan points out, he erroneously seems to think that cutting interest rates saves the government money because the outstanding balances will be smaller – but if nothing else the episode shows how “through the looking glass” the whole system is given Skidmore used to be the actual universities minister.

What’s interesting is the first comment underneath the blog:

This should never have been badged as a loan with the attendant political tripwire cliché of “crippling £50,000 debt”. It should have been presented as a graduate tax which is levied only according to ability to pay, based on the earnings above the average the degree has theoretically enabled. A tax is what it is. Were it to have been labelled that, with people understanding their capped liability only came when their income went above a certain level the political controversy would have been much reduced. Perhaps the government could scrap this scheme and reintroduce it as a graduate tax – even if Jeremy Corbyn, friend of Jew-haters, once put forward the idea.

I’ve seen this argument a million times on social media, at events, on our site, in the Augar review and elsewhere. Delete the Corbyn dig and I even have some sympathy with it – presenting the student contribution system as straightforward “debt” is ridiculous for all sorts of reasons.

So the proposal would be to take that comment above and run with the ball. I see your graduate tax, and raise you a real one. Dead simply, the interest rate on student loans should rise to one million per cent. That would make the “loan” impossible to ever pay off – and all graduates would have to pay the advertised repayment rate for the full thirty years.

I’ve looked at the original Business, Innovation and Skills RAB charge calculator online and played with the assumptions it had at the time. Doing this would mean telling everyone on Twitter that it’s a graduate tax that it is now a graduate tax; you could raise, not lower the repayment threshold; you could increase the principal to deal with student hardship; and you could still have some change for the bus fare home.

You could also deliver some proper justice for what’s gone on this year.

Clever economists will be able to indicate if this variant of a “laffer curve” (Bueller, Bueller) impact would have an impact on people’s motivation to get better jobs and earn more – but I doubt it.

And although it’s not exactly “free education”, I still like the idea of taxing the rich to fund it – particularly if they’ve benefitted quite a bit from it. Not enough to make them pay for 40 years when they should be saving for retirement, but enough to make people who end up paying off in full 23 years in to still chip in for another 7.

4 responses to “Student finance? It’s the interest rate, stupid

  1. Well, it is a graduate tax if you have graduated from a UK university that participates in the government scheme. People with real money will send their children to universities in other countries or to totally private universities in the UK, which would start to pop up if the scheme were amended as suggested. It is just like the private school system in that respect. The desire to “tax the rich” could be expressed more simply in the structure of income and capital gains taxes without all the mess. Higher education continues to confer both collective and individual benefits. We have to work out a reasonable balance of personal and collective funding. This suggestion doesn’t focus on this, real question.

  2. “Skidmore is wrong in many ways – the 15 per cent highest-earning (predominantly male) graduates benefit and everyone else would be worse off. ”

    Perhaps I’ve missed something, but can someone put me straight here? Why is ‘everyone else worse off’? Is the argument that the remaining 85% don’t notice a change in their personal finances, but may be affected by the treasury having less money to play with?

  3. The problem with any form of graduate tax is that it would not be a tax on “the rich” but a tax on “the rich who went to university”. If we accept the argument that at least some of the benefit of higher education accrues to society as a whole not just to the individual who attended, why should that cost fall only on rich graduates rather than also on rich non-graduates?

    It is surely fairer to say that to the extent that the value of HE accrues to the individual, the individual should bear the cost, subject to their ability to pay. To the extent that the value of HE accrues to us all collectively (a large part of it, in my view), we should all contribute, subject to our ability to pay but regardless of whether we went to university or not.

  4. Has any research been done on how graduates might feel about not having paid off their loan after thirty years?

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