Never mind the interest rate, feel the repayment threshold

Last week a lot of people got very upset about a quirk in the way that the interest on student loans is calculated.

Jim is an Associate Editor at Wonkhe

When you have an income-contingent repayment scheme and a write off after a fixed period, most graduates just pay the relevant rate for 30 years. All that the interest rate and the “principal” do is determine how many of the country’s richest (usually male) graduates pay for the full 30 years like the rest of us (you/them).

Nevertheless, some called the quirk “brutal”, some said it was “eye-watering”, and the inventor of TV’s This Morning and Loose Women (and former NUS Trustee) Diane Nelmes argued that while the changes affect all students, they will “fall disproportionately on those from underprivileged backgrounds.”

The geniuses at took meaninglessless to a whole new level when they somehow managed to calculate that maths graduates (who evidently aren’t working at will “accumulate” over £800k of student loan debt over the course of their working lives, and then in the next sentence reminds us that that is a figure calculated “at the end of their 30-year repayment term.”

Yes. When it gets written off.

Amazingly, when the system is designed such that most never pay off in full, go on to offer some spectacularly stupid tips on repaying student loans quicker (and so paying more than you need to), including biweekly payments (which translates to 13 monthly payments rather than 12), using cashback sites like Quidco and Topcashback and… asking for a pay rise:

At the end of the day, the more you earn, the more of your student loan debt you can pay off. “

Good grief.

Thank god then for the Lords Secondary Legislation Scrutiny Committee (SLSC), (formerly the Merits of Statutory Instruments Committee), one of whose jobs is to spot when minor or technical changes to the law delivered via secondary legislation have a more significant impact than ministers are readily willing to admit.

When it comes to the Education (Student Loans) (Repayment) (Amendment) Regulations 2022 (which remember is signed both by Michelle Donelan for English borrowers and Jeremy Miles for Welsh borrowers) the issue the Lords have is with the freezing of the repayment threshold.

As a reminder, those on Post-2012 Plan 2 loans are supposed to have the threshold over which they start repaying adjusted for earnings each year. But rather than let the current £27,295 rise by average earnings of 4.6 percent to around £28,550 from April, in January Donelan quietly announced that she was freezing that threshold for a year.

If your eyes are glazing over at this point – unlike the interest rate, this does mean that a greater proportion of a borrower’s earnings will be taken into account in calculating repayment due. This one does hit graduates, especially those on modest incomes, in the pocket.

At the time the IFS argued that “what really matters is how long this threshold freeze will stay in place”. And then lo and behold, DfE quietly buried two more announcements in its command paper on HE reform in February – that it will maintain the repayment threshold at the current level for an additional two years up to and including financial year 2024–25, and then after that it will only go up by inflation rather than earnings, with all of the impacts that you think that will have.

The thing that the Secondary Legislation Scrutiny Committee is particularly upset about is that impact on the pound in graduates’ pockets isn’t spelled out in the accompanying memorandum – which is supposed to alert parliamentarians (and by proxy the public) to such implications:

Explanatory Memorandums are designed to accompany an instrument, so as to provide Parliament and the public who will be affected by any changes in the law with a clear understanding of any such effects and how they will be operated in practice. In this instance, we were particularly concerned that while the Regulations will affect a large portion of the student population and possibly their families, the Explanatory Memorandum, while emphasising the savings Government will make, was silent about the equivalent costs to those who have student loans.”

Because this is a joint statutory instrument of the English and Welsh ministers, the good news is that a much fuller explanation was given to members of the Senedd, who because of the way that the SLC works, only have the illusion of power over things like the repayment threshold.

Wales’ Explanatory Memorandum points out that borrowers earning above the repayment threshold will both repay more during 2022-23 and that their repayments will also be higher in every subsequent year of the loan term; that the PAYE repayments in the 2022-23 financial year will increase by approximately £7 million, and the benefits arising from these additional repayments will accrue to the UK Government rather than to the Welsh Government directly; and that it’s the highest-earning graduates (who go on to repay their student loan in full) that will benefit from the threshold freeze since they will pay off their loans more quickly, while those on middle incomes (who repay some but not all of their student loan) will make higher repayments in each year of their loan term.

It also points out that female graduates will be harder hit by the threshold freeze, and that this is a measure that hits the young – 75% of full-time student loan borrowers entering repayment in April 2022 will be aged 18 to 25, with modelling suggesting that their lifetime repayments will increase as a result of the threshold freeze.

Sadly, despite the memorandum also revealing that Miles wasn’t even consulted by DfE ahead of Donelan’s announcement in February, he’s unlikely to be making a big noise about how powerless he really is over loans terms in Wales. And while I yearn for the sort of simpler times when the Lords Secondary Legislation Scrutiny Committee (SLSC) spotting something like this might have caused a kerfuffle, nobody will notice – they’re too outraged at that figure in the bottom right hand corner of their loan statement, outrage which is allowing the Westminster government to reduce what it spends on students’ higher education, and allows it make the system cheaper for rich men.

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