How low will the graduate repayment threshold go?

On Saturday the Telegraph splashed with “Graduates must start paying back loan sooner”.

Jim is an Associate Editor at Wonkhe

It looks like a classic bit of pitch-rolling, which as Jonathan Simons notes, is timed perfectly for an end-of-November announcement and publication.

There’s been some understandable disquiet at the idea that the change would be imposed on current borrowers, not least from Martin “Money Saving Expert” Lewis who’s been roaming around calling the idea a “breach of natural justice”. Notably Ben Riley-Smith’s piece says that “the latest thinking” is that the change would only apply to new students.

The problem for DfE is that if you only impose on future borrowers, you don’t save much money – so if the department is keen to save a bit of cash to fund other things within the envelope given to it from the spending review, we’d have to be looking at (harsher) number controls too to limit the exposure as demand increases.

The prospect of lower interest rates is in there too – reducing the interest rate paid on student loan debt would be a popular move because it passes the Clapham Omnibus test, despite the reality that it would only really benefit the highest-earning males. See also swapping some maintenance loan for grant, which barely benefits anyone given those who would get a grant tend to have labour market outcomes that don’t see them paying back in full anyway.

We get a pilot-run at the framing too, with the article noting that the Treasury is expected to argue that the current system is unfair because billions of pounds in university debt is never repaid, and all taxpayers underwrite the cost of those who choose higher education. A Whitehall insider is quoted as saying:

It is a fairness argument. Normal working people, a lot of whom do not go to university and benefit from student loans, are paying for this.”

Of course if you did want to raise more from graduates, you have choices – you could also get more from those who either pay off in full on time, those who pay off early, or those who avoid the system entirely and pay upfront. Those options would hit rich old men, while lowering the threshold mainly hits the young and women. The former pushes the system to be (even more) like a graduate tax, and the latter pushes the system to be (even more) like a traditional loan. It reminds us that these aren’t just issues of language, they are real political choices.

More than one version of “fairness” is available, in other words.

But back to the threshold. If you do lower it, what level would you lower it to?

There are five options being floated about:

  1. The current system, announced by Theresa May in 2017, in recognition that graduates in their twenties were struggling
  2. £22,000, one of the options floated in the piece
  3. £25,000, another of the options floated in the piece
  4. What Augar proposed
  5. The system proposed and implemented by Cable, Willetts and Osbourne in 2010.

As it stands, this coming April the repayment threshold was due to go up to £28,555. For some reason when DfE set the regs implementing the political promise of “in line with earnings”, the relevant regulations pegged the increase at the average year-on-year increase in regular pay (excluding bonuses) for the whole GB economy for the Jan/Feb/Mar period noted the year beforehand – which partly because of the pandemic and partly because of the wider issues in the economy, stands at an eye-watering 4.6%.

No wonder the government has avoided confirming that rate for next April thus far (it would normally have done so by now).

Now clearly if you compare £28,555 with the two options being proposed in the Telegraph, we would be looking at a big change which would hits lower earning grads the most (not the very lowest, as there will always be some still under the threshold wherever it’s set).

But there are two other comparisons to make. First, remember the Augar review? It proposed pegging the threshold at median non-graduate earnings (working-age population). That would have seen the threshold at about £26,500 next April – a much more modest reduction. Both of the options being floated are harsher.

Then there is what Willetts and Cable promised – £21,000 in 2016, rising in line with average earnings. That would have meant a threshold of £24,980 next April – a more modest reduction than one of those floated in the Telegraph.

A newly qualified nurse on Band 5 who did a UG nursing degree on the current system doesn’t pay anything back in student loans. Under Augar’s proposals they’d pay nothing back either. Under Willetts/Cable 2010 (or the more modest of the two options in the Telegraph), they’d pay about £60 a year back.

The £22k threshold option would cost them over £300 more – and if they qualified via the MSc/PG Diploma, once you add in the NI hike and the PG loan repayments they’re looking at paying approx £1,000 more pa in “tax” (or “repayments”) than those without a degree. Ouch.

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