No easy answers as the Treasury opts for the easiest answer on student loans savings

Faced with a need to save money on the English student loans system, it should probably come as no surprise that the FT is reporting that graduates will stump up the bulk of the cash.

Jim is an Associate Editor at Wonkhe

The report suggests that of the three ways to save money on the loans system – reduce the numbers of students that go, reduce the unit of per student or increase the amount that graduates pay “back” – the Treasury seems to be opting for the latter by lowering the graduate repayment threshold to circa £23,000, with former universities minister Chris Skidmore in the Times reminding us why:

It certainly is the easiest, least complicated and fastest means by which to reduce additional costs on the taxpayer and ensure that the reform can be easily communicated to the public…I expect the threshold will be set at median national earnings. After all, it would be hard to argue why someone earning that wage should not start to pay back their fees.”

That’s not to say that the other options are off the table, of course. It’s just that it’s always looked hard in practice to reduce the numbers going substantially, and inflation means the Treasury has its unit of resource cut just by freezing the fee at £9,250.

The policy framing here is the graduate contribution system as a loan – where it sounds reasonable for students to pay more of that loan back. But as we’ve noted before, the system can be framed as a tax too – and if you go down that route you start to look particularly mean as a government.

A generation that sacrificed the most – who lost a year of face to face teaching, practical experiences, extra curricular activity and suffered mental health declines as a result – are now rewarded for it not with a tuition fee cut as they’d asked for in that petition they’d signed, but a marginal tax rate in their twenties of 42.25% for those with an undergraduate degree, and 48.25% for those with a PG loan too.

Add in that NI hike from a few weeks ago, and if the threshold went to £20k, a graduate with a PG and UG loan on £25,000 would pay almost £1,000 a year more in “tax”. No wonder NUS’ Hillary Gyebi-Ababio is quoted in the FT as saying that “the injustice is simply astounding” – it would signal a significant ditching of Theresa May’s attempts to woo back young voters by “putting money back into the pockets of graduates with high levels of debt”.

What we can predict is that a fresh clash is coming – between Martin “Money Saving Expert” Lewis on the one hand, and the architects of the current system, former universities minister David Willetts and his special advisor at the time, Nick “HEPI” Hillman. Nick’s view has long been that taxes change each year, and if a student loan is a “capped graduate tax” then it is unwise to assume that all its features will be fixed for evermore.

Meanwhile Martin Lewis spent a few years in the mid 2010s rallying against the freezing of the repayment threshold on the basis that the government had promised it would rise with inflation, complaining that a failure to raise it represented a broken promise. Hillman argued that retrospective changes to terms are fine. Lewis argued that only retrospective changes that are good for the borrower are fine. Expect those hostilities to be resumed.

Part of the problem with any reduction of the threshold is that it would be regressive – IFS’ calculator shows that middle earners would see the largest absolute increase, while lower earners would see the largest relative increase. And it’s a change that would hit women significantly more than men. But does the government have any other choices? In other words, if we accepted that it needed to save money on the loans system and claw back more of the money “loaned” out, does it really have to hit young graduates, or are there other ways (and indeed other graduates) that it could soak?

Overnight, London Economics has undertaken some modelling, calculating the resource impact on the Exchequer of a change in the repayment threshold for graduates to £23,000 and confirming the regressive distributional impact of the proposed change. But they’ve also modelled another scenario – an increase in real interest rates (from 3% to 4.6% and remaining at 4.6% for earnings in excess of £47,835) and a 5 year freeze in the repayment threshold.

And here’s the thing. Although graduates in general contribute more under either scenario than currently the case, there are very important distributional effects. In the alternative scenario 2, a greater share of the burden falls on the highest earning (predominantly male) graduates. Compared to the threshold drop, male graduates would make an additional £2,500 in lifetime repayments, while female graduates make £1,800 less – and the highest earning (predominantly male) graduates would make the greatest additional contributions.

There is one minor problem with the idea. Legally student the loans need to be on better than commercial terms under the Education Act 2011, and part of ensuring the scheme can take retrospective changes is an interest rate cap at market rates. The Treasury uses a Bank of England dataset that compares the student loan rate against a reference period in the dataset and temporarily reduces the student loan rate accordingly if the latter is lower. The government could Zane the law, of course – but the less parliamentary shenanigans the better.

All of which returns us to where we’ve been for some time – that we have a system that is both a graduate tax and a student loan. It becomes convenient for decision makers to frame it as the former when it wants to stress how fair it is, and as the latter when it wants to raise the revenue from it. Whether it’s morally or politically acceptable to do so is where the debate will move to next.

3 responses to “No easy answers as the Treasury opts for the easiest answer on student loans savings

  1. We should not assume that, if retrospective changes become acceptable, they will be confined to changes in repayment

    thresholds or interest rates. How about extending the repayment period from 30 to 40 years, or longer?

    Advice to prospective students, in almost every case, ignores the risks that the possibility of retrospective changes

    introduce. Most advice is best described as miss-selling.

  2. “How about extending the repayment period from 30 to 40 years, or longer?”

    That’s a possible change too.

    Ultimately the situation is that Parliament has delegated powers through primary legislation (the Teaching and Higher Education Act 1998 as amended by the Education Act 2011) to set the terms of loans to ministers. The only proviso for post-2012 loans is that the loans continue to be on better terms than commercial loans for everyone (that is to say the interest rate cannot exceed market rates for unsecured personal loans for anyone). As long as the repayment regulations meet this condition mending, ministers can amend the terms of repayment as often as they want by amending the repayment regulations (secondary legislation subject to negative resolution, i.e. no vote needed).

    So it becomes like taxes, policed by politics and kicked around like a political football. There are plenty of people though that think a threshold of around £23k is not only fair but entirely reasonable. All students agree to such changes in advance when they sign the agreement to participate in the graduate contribution scheme “you agree to repay your loan in line with the regulations that apply AT THE TIME THE REPAYMENTS ARE DUE AND AS THEY ARE AMENDED. THE REGULATIONS [that apply now] MAY BE REPLACED BY FUTURE REGULATIONS.

  3. Devils advocate – even £23k is a lot more than the repayment threshold for those on plan 1 – a good number of whom will be earning at or below £23k and paying back from about £19k. It’s not just graduates and non graduates, whilst fees have of course gone up, there’s always been a baked in benefit for younger grads from the new system relative to their slightly older peers.

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