We need to change the language of student loans

Paul Woodgates says revising the language of the student finance system could change the nature of the debate about who should pay for higher education.

Paul Woodgates is an independent HE advisor and non-executive director

As the Westminster government ruminates on changes to the student finance system to reduce the cost to the taxpayer, it would do well to consider the language used to describe student finance.

Why do we call it a student loan when it is not in any normal sense a loan? Why do we say tuition fee when it covers so much more than tuition?

Revising the language could bring about a change not just to the perceptions of applicants worried about debt, but also to the nature of the debate about who should pay.

The government is determined that undergraduate education in England must cost the taxpayer less. It seems various options are under consideration to achieve a reduction in the so-called RAB charge – the amount of student debt which is expected never to be repaid. Options include reducing the number of students (through the reintroduction of number controls or the imposition of minimum entry criteria), reducing the amount spent on each student, or moving more of the cost from the public purse to the individual.

There has been much comment, for example from former minister Chris Skidmore, that the high interest rate applied to student loans is unfair – though as Jim Dickinson has pointed out on this site, it actually makes the system more progressive.

Meanwhile, Nick Hillman has convincingly argued in a HEPI Policy Note that lowering the earnings threshold at which graduates start to repay would be the fairest approach if we have to reduce the cost to the exchequer.

What it says on the tin

But all of this debate is clouded by the language embedded in the student finance system.

Fundamentally, the terminology of loans, debt, interest rates and repayment is inappropriate. The size of the payments a graduate makes is based on their income, not the fee their university charged, most people do not repay the full amount (or in some cases any of it), and there are no consequences to an unpaid balance (which is simply written off at the end of 30 years). That feels nothing like debt as most of us would recognise it – just try getting any other kind of loan on similar terms!

Curiously, there is very little disagreement that the language of debt misrepresents the reality. The Augar Review called it “unhelpful and misleading”. And even Lord Willets, architect of the current system, commented in a HEPI webinar in January this year, “I wish it were called a graduate contribution scheme because that is really what it is, and it would be far better as a name.”

Who cares what it’s called?

Language matters – for two reasons. First, there is the impact it has on applicants and students. While launching a donor funded bursary scheme to allow 40 students at a time to study entirely for free at St John’s College Cambridge, the Master of the College commented that “high-potential pupils from low-income families, and young people leaving care, are deciding against university because of the prospect of significant debt”.

While there is actually scant evidence this has had a big impact on admissions (and she didn’t offer any), it is reasonable to assume it has been a concern for some. At the very least, students experience considerable stress from the notion that they will graduate with “the burden of a mountain of debt” – it’s hard to imagine quite the same reaction from the notion of graduating with “the burden of future tax liabilities if I earn enough to pay them”.

Secondly, a change of language could unlock some of the thorny areas of the debate. Let’s dream of a world in which the current student loan is called a “Graduate Contribution”. In this world, talk of interest rates become meaningless – there is no debt against which to apply interest. Instead, the future “Graduate Contribution” could be thought of as an agreement to pay additional future tax, as and when earnings permit, to cover:

  • An amount for the University Fee (currently called the Tuition Fee – quite wrongly because it covers much more than direct teaching time)
  • An amount for Maintenance Support (currently called a Maintenance Loan)
  • An amount we might call a Mutual Support Payment. This would be to fund the costs of allowing students to have their university education now and pay only later, and also to make a contribution towards the costs arising from the fact that not all students will earn enough to cover in full their own Graduate Contribution.

For the individual student, the Mutual Support Payment would be seen as something akin to an insurance premium that allows them to attend university in the knowledge that they only have to pay for it if they one day earn enough to afford to do so – in effect it removes the personal risk that they won’t be able to afford it.

In this scenario, university applicants would be agreeing to pay for their higher education through future tax in addition to what they would otherwise have paid, as and when their earnings allow. While that may not be fundamentally different to the current regime, it creates a very different set of perceptions from the world of loans and interest rates.

Retaining progressivity

Importantly, what I am calling in this scenario the “Mutual Support Payment” would be a fixed amount not a percentage of an outstanding loan that accumulates over time. That removes the unfair advantage currently obtained by the very richest graduates who use early repayment as a means of reducing their interest bill.

Such a system could maintain the link between what a graduate pays and the cost of delivering their education (albeit with the Mutual Support Payment as part of that cost). So, everyone stops paying either when they have paid their total Graduate Contribution or at the end of a defined period.

The remainder of the cost over and above what graduates pay in aggregate would, as now, be funded by general taxation (through a RAB charge), but that would be seen not as students failing to repay their debts, but rather as a socially desirable element of education policy. And the system would be progressive – since the richest graduates would pay the most and would make a contribution to the costs of educating poorer graduates – while still maintaining a link between what a graduate pays and what they received.

This model would also give government a new policy lever – ministers could change the size of the Mutual Support Payment to make an impact on the RAB charge, all in the knowledge that it would be only richer graduates who would bear the additional cost.

Can the leopard change its spots?

The original reasons for using the language of loans now seem out of date. No doubt there was an intent back in 1990 when loans were introduced to create a sense of personal ownership by the student of their education and to drive a degree of customer-supplier relationship between student and university. But that dynamic is well established now (too well established, some might argue!) and a change to the language would be unlikely to unseat it.

Of course, there is also a political dimension. Lord Willets has said that as far back as 2012 when he increased the fee to £9,000, the language battle had already been lost because the student loan terminology was so well entrenched. He cited the example of Margaret Thatcher in the 1980s doggedly referring to the “Community Charge” in a wholly unsuccessful attempt to stop everyone else from calling it the “poll tax”.

But is that a good analogy? The term poll tax stuck because that is what it was. the opposite is the case here – a change from student loan to Graduate Contribution could justly be portrayed as a better reflection of the actual substance. No doubt a change of language introduced on its own would be derided as a triumph of presentation over substance, but as part of the forthcoming wider package of changes to the system, might it not be managed?

None of this will change the fundamental nature of student finance – to make the system cost less, ministers will still need to make difficult choices about the earnings threshold and the length of the term over which payments are made. But language really does matter. Now is the time for policy makers to grasp the mettle and change the language students, parents, universities and all of us use to discuss student finance. It might just help students to understand what they are signing up for, and help universities keep the funding they need.

13 responses to “We need to change the language of student loans

  1. Please correct me if I have this wrong:

    – Higher education is currently paid for by the creation of debt in the name of the students.

    – 25 years passes before this debt is written off at cost to taxpayers.

    – Some student debt is sold off to external agencies before the taxpayer foots the bill for it, earning the treasury some coin because it never spent any money to start with.

    – All pre-1998 ‘Plan 1’ student debt has been sold by the government.

    – All post-1998 ‘Plan 2’ debt from 1998-2009 has been also sold off by the government.

    – In 2013 the Treasury put the kibosh on this plan and stopped selling student debt. The taxpayer is liable for all write-offs post-2009.

    – Student debt is written off 25 years after the first April following graduation which for most students will be the following year.

    – Therefore the first year the taxpayer will spend any treasury money on writing off student loans is 2035 assuming future governments do not sell off any more debt.

    Why is the government arguing about who foots the bill for higher education in the year 2046?

  2. Joe Jenkins – you have several dates confused.

    “Plan 1” refers to the post-1998 income-contingent loans taken out for courses starting 1998-2011. There are 2 iterations of this scheme. There is the “£1k fees” scheme that ran from 1998-2005. Loans for these courses were maintenance loans only unless continuing students took out tuition fee loans from 2006. Loans taken out for courses starting 1998-2005 are written off when the borrower reaches age 65. There is also the “£3k fees” scheme that ran between 2006-2011. Loans for these courses are written off on the 25th anniversary of the loan becoming liable for repayment.

    “Plan 2” refers to the post-1998 income-contingent loans taken out for courses starting 2012 onwards. Such loans are currently written off on the 30th anniversary of the loan becoming liable for repayment. No plan 2 loans were liable fir repayment before April 2016 (this was an operational decision to allow enough time for payroll implementation of the plan 2 repayment threshold alongside the existing plan 1 repayment threshold). Hence plan 2 loans start to be written off in April 2046.

    Regarding student loan sales, the government completed the sale of the remaining pre-1998 “mortgage-style” debt in 2013. They sold much of the plan 1 debt covering 1998-2005 in 2017-2018. The sale of plan 1 debt was cancelled at the 2020 Budget as the accounting wheeze that allowed write offs to never show up in public sector finance statistics was corrected.

    1. Ed, thank you for clearing that up. Still, it does bode the question of why the current government is debating who funds higher education when the taxpayer will not be liable for another 25 years.

      1. In December 2018, the ONS changed the accounting framework for how and when student loan write-offs appear in public sector finance measures:

        https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/methodologies/studentloansinthepublicsectorfinancesamethodologicalguide

        So now forecast write-offs are counted against public sector net borrowing (the deficit) as soon as the loans are issued, rather than when they are actually written off. In addition, only interest forecast to be repaid reduces the deficit, rather than the entire amount accruing as it did before.

  3. Its a strange article suggesting changing the language, but not changing the system, then mistakenly thinking Graduate Contribution would be a clearer term.

    Do all graduates pay this? No
    Do you have to graduate to pay this? No
    Contribution suggests only part is repayable, where that is far from the truth for the mid to well paid ex-student

    Surely this further confuses & as you say language is important.

    This goes down the Martin Lewis route of convincing prospective students incorrectly that loans are always low cost, the amount borrowed & interest rate don’t matter, that writing off equates to low cost and fair in terms of pay, ignoring that the best paid ex-students don’t pay the most in total and those from well off backgrounds won’t enter this expensive tax system.

    It is important to understand this is a loan, it can be paid off (not always a good idea) and the amount borrowed can change the amount repaid (not just at the highest earnings).

    Revise the system, not the language and break the link between borrowing & repayment

    1. Thanks for your thoughts Claire. I was making the assumption here that the present Government is not intending to change the principles of the current system but that it will introduce changes that reduce the cost to the taxpayer – through one or all of lower funding per student, fewer students, or passing more of the cost to the graduate. Personally, I would not want any of those, but some combination of them is, I fear, inevitable.

      It’s in that context that I am arguing that a change in the language would help students understand what they are taking on – this is in no real sense a loan, but actually an agreement to pay a higher marginal rate of income tax later in life if and when earnings allow, to cover the cost of a graduate’s education (plus, in my argument, an extra amount that permits the scheme to work in spite of that fact that not everyone will repay).

      It’s a “contribution” in the sense that not all of the costs of higher education teaching will be repaid by graduates – there will still be some public subsidy (in the form of a RAB charge and grants for higher cost subjects). Or anyway, I sincerely hope that will be the case!

      1. It’s actually technically speaking an agreement to pay a higher marginal rate of National Insurance. Student loan repayments are calculated based on NICable income. So you don’t pay it on income you take from a pension. You can avoid it (or reduce it) by participating in salary sacrifice schemes (as you can with National Insurance). You can avoid it (or reduce it) by taking on more than one job as unlike income tax, National Insurance (and therefore student loan contributions) aren’t calculated on total marginal income over the annual threshold during the tax year (unless you’re in self-assessment) but rather on marginal income over a pay period threshold. So you could earn below the marginal threshold in more than one job while still having total income above it and not have to pay it.

        1. Thanks for that Ed – must admit I had not previously understood the nuances of that. Do you know why the system was designed like that – was that a deliberate intent or an unintended consequence?

          1. The system was originally designed to be an affordable contribution to the costs of higher education and where loans would in the main be repaid in full over time.

            9% was chosen as it was deemed an affordable rate of repayment and as a contribution system it followed the rules of National Insurance which is also a contribution system. I guess the issue was deemed minor in the past due to the system being set up when loans were ordinarily expected to be paid back in full. It makes a much bigger difference now loans are larger.

            It has been discussed at official meetings in the past, see:

            “Borrowers with more than one employment”

            https://webarchive.nationalarchives.gov.uk/20100203003409/http://www.hmrc.gov.uk/consultations/esl-mins150909.htm

      2. You’ve used the term graduate again there a few times, which is incorrect in terms of student loans – maybe you could explain where this term is relevant and how using it aids understanding.

        Lost count of the times I’ve had to explain to prospective students & their parents that they are liable to this increased tax whether they graduate/complete or not. Martin Lewis wrongly uses Graduate tax & it misleads. They also believe incorrectly that all graduates pay this.

        There will be some public subsidy on these costs on an overall ex-students basis, but on an individual basis contribution is a poor term. For some they may pay little, for others they may pay very highly – much more than borrowed.

        Prospective students are expected to understand this system at 18 and sign onto something that they have little idea of how much it will cost, simplifying the language like this doesn’t aid understanding and technically is incorrect.

        They do need to understand this is a loan and borrowing different amounts MAY make a huge difference to their repayments, as MAY making increased repayments. Again they are making possibly costly decisions at a very young age.

    2. I agree that the system needs changing, but these objections can be met in a way that fits the underlying philosophy Paul outlines (making contributions fairer and more transparent).

      Why not require all graduates to pay it? If you want to benefit from a university education you commit to helping pay for availability of university education as a national benefit.

      There probably would need to be a system for non-graduating students to pay some sort of pro rata contribution – presumably for a briefer period.

      1. Agree – all graduates & all non-graduating students should pay something, but my point was calling the present system graduate anything is totally misleading as that is not currently true

  4. A great article Paul. Two further questions – how do Postgraduate Loans fit into this mix and how do you see it changing in light of the Lifelong Learning Entitlement proposals?

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