The longer Labour leaves announcing on student finance, the more it could be Quack Quack oops

A year or so ago I had a go at explaining England’s student finance system with a view to persuading people not to overreact over interest rates and “debt”.

Jim is an Associate Editor at Wonkhe

I’m not (and wasn’t) suggesting that a longish blog on a nerdy specialist higher education policy website was going to turn any tides, but there remains an awfully confused debate about university fees and funding.

Anyway, here’s another angle.

I think most people understand the difference between a defined benefit and a defined contribution pension scheme.

A defined benefit scheme promises a specific payout at retirement, based on factors like salary and years worked, ensuring a predetermined retirement income for as long as you live. The payout from a defined benefit scheme is usually a fixed amount or a percentage of the salary.

On the other hand, a defined contribution pension scheme depends on how much money is paid in and how well the investment performs, making retirement income uncertain and variable. The payout from a defined contribution scheme is based on the accumulated contributions and investment returns.

With defined benefit, the employer bears the investment risk, while with defined contribution, the employee carries the risk.

And I think it’s fair to say that most people like the idea of retaining increasingly rare defined benefits schemes.

Now let’s look at the different ways in which people perceive the student loan system.

The thing about the student finance system is that it both quacks like a loan and quacks like a tax. It’s a bit of both. Don’t let anyone ever try to persuade you it’s one or the other.

To the extent to which it quacks like a loan, it also quacks like a defined contribution scheme. You borrow a specific amount of money, and you pay back that money, albeit with interest.

That gives us two of the key variables – the principal (the amount you borrow) and the interest rate.

To the extent to which it quacks like a tax, you pay a percentage of your salary and you don’t pay until you’re earning over a specific amount. That gives two other variables – the repayment threshold, the repayment rate and the term.

These bits are therefore like a defined benefit pension in reverse – some pay more than the cost of their education, some pay less.

There’s also the “term” of the “loan” – which is a naughty one because it straddles the two ducks. Vanishingly few people pay off precisely on time – you either pay off before the term ends, or it gets written off at the end of the “term”.

In coalition, the Conservatives agreed to the hybrid duck because on paper for the Lib Dems it was (on its own terms) progressive. The lowest earners pay very little because they don’t earn over the threshold (or don’t spend long earning over it), and the highest earners pay more than was spent on them via the interest rate.

But as I’ve noted before on here, the Cons clocked that the language of debt is much better “understood” (and feared) – and so the subsidies involved in the threshold and the term (write off) were never understood. There aren’t many graduates of the post-2012 system hailing David Willetts as a hero.

Hence DfE’s revelation a few weeks ago that freezing/lowering the threshold and extending the term (write off) by 10 years – but on average the contribution is almost identical – is something that hardly anyone’s noticed. What they notice (repeatedly) is the interest rate and the extent to which they are getting anywhere with paying off the principal.

That amounts to raising the volume on the loan/defined contribution quack – and has the impact of hitting early career graduates in their twenties, and middling to lower earners in their 50s – all so that high earners can proportionately pay less over their lifetimes.

Despite RPI not helping, we should expect much more of this kind of “it’s a loan, it’s an unfair loan, make it a fairer loan” in the run up to the election given Labour continues to hint that it will return to a real terms interest rate to pay for a mix of maintenance grants, lower early career repayments (and, less likely, a shorter term).

They’ll argue that student loans have always paid for higher education in an hypothecated/individualised way – and that if you want more redistribution, you should play with income tax, NI, council tax and so on.

Maybe. With the available bandwidth and the dramatic impacts, I’m not sure we’ll be getting a “pure” (pay it all off proper debt) loan (defined contribution) system any time soon, and I’m not sure we’ll be getting a “pure” graduate tax (pay a levy on your salary), (defined benefit) scheme any time soon. We’re stuck with a hybrid duck for a while.

So in the meantime, if the envelope is neutral, you can:

  1. Make the world more or less expensive in graduates’ twenties (threshold)
  2. Make it easier or harder to save for retirement in graduates’ fifties (term)
  3. Make a notional “debt” look bigger or smaller (principal)
  4. Make that notional “debt” look like it’s getting bigger or smaller (interest)
  5. Reduce people’s outgoings every month (repayment rate)
  6. Fiddle with any of the above to find some money to give students a maintenance grant

The longer Labour leaves not making an announcement, the less time it gives itself to explain why tackling 1, 2 and 6 are perfectly legit political choices, leaving the Conservatives more time to watch anger build over 3 and 4. Quack Quack oops.

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