Student Loans for Sale: killing confidence in the system?

A couple of weeks ago, The Guardian leaked a confidential, Whitehall-commissioned report, written by Rothschild investment bank and piss-takingly dubbed ‘Project Hero’.

‘Project Hero’ proposed redrawing the terms of student loans taken out over the past 15 years to make them more expensive for borrowers and therefore more attractive to potential purchasers.

Danny Alexander (Chief Secretary to the Treasury) later confirmed that the student loan book will indeed be privatised to raise £10bn, but offered no further details about the ‘sweeteners’ involved.

Among the first to respond was Martin Lewis, head of the Independent Student Finance Taskforce. Lewis has succeeded in explaining higher fees to the younger generation better than any politician or university, so it’s interesting that he went off-message and took a strong stand against the suggested fire-sale, tweeting:

“To hike past students loan interest [would] betray every democratic principle and kill confidence in loan system.”

Lewis’s point is a very good one. It’s an act of faith for anybody to attend university in the higher fees era. Trust in the loan system is vital. Any suspicion that graduates will be fleeced by the state is likely to have serious consequences, especially for the most debt-sensitive of young people.

Writing in The New Statesman, Alex Hern has been excellent at explaining the economic ramification of the sell-off, first describing the idea as “terrible financial management” and then noting that:

“Our government is twisting itself in contortions, discussing student loan debt as though it’s a pile of newspapers sat at the back of the treasury, which they mustn’t be “compulsive hoarders” of, in order to sell at a discount an asset which is significantly more valuable in public hands than private. It’s politically driven economic illiteracy.”

Finally, Tim Whitmarsh, a Professor of Ancient Literatures at Oxford University, makes important points about social justice:

“The situation is deeply troubling. Higher education is the primary driver of social mobility in the UK. Huge fees are already a deterrent to many, but at least when they came in we were promised a benevolent, progressive loans structure. The involvement of the private sector in student financing can only damage that. Private companies want profits, and profits have to come from somewhere.”

Professor Whitmarsh has set up an online petition against loans privatisation, which already has over one thousand signatures. It can be found here.

All three of the arguments above are very persuasive. Nothing will undo Lewis’s work in promoting the new system faster than potential university students losing confidence in those from whom they must borrow. Hern is also right to point out the mindless economic short-termism of the proposal. And Whitmarsh’s concerns about interfering with the ‘safety net’ of a relatively progressive clawback mechanism are entirely justified if participation rates, particularly among those from less well off backgrounds, aren’t to be damaged.

As Martin McQuillan says, this is a “trainwreck” of an idea.

For an overview of the counter-arguments to this position, see Andrew McGettigan’s patient summary of a sell-off’s ‘quick wins’. However, note that McGettigan’s conclusion – that selling the loan book “without consent or consultation and without a parliamentary vote” is not on – is entirely consistent with the views expressed above.

The terms of students’ participation ‘bet’ must always be honoured. If you back a winner at 3-1, you don’t expect the bookie to ‘retroactively’ cut your odds to 5-2.

You can’t change the price of a degree once the student has graduated.

Can interest charges double the cost of HE participation?

Those Student Finance Calculator thingies are damn addictive. Hours can fly by when you’re sliding the little pointers up and down, watching how total repayment sums (and periods) change depending on variables like inflation, salary growth and average earnings.

They’re a great idea, but I do wonder how successfully young people manage to negotiate them. Can applicants really predict how RPI will change over the next three decades? How do they estimate their average annual pay rises? All I had to worry about at that age were beer prices in the Students’ Union.

The calculator’s default setting help, of course. Currently, they put average inflation at 3%, salary growth at RPA +2%, and average UK earnings growth at RPI +1%.  Based on those assumptions, a student’s maximum total repayment in today’s money is £90,400 for a 3-year degree (costing £50k, including living costs) and £124,290 for a 4-year degree (costing £66.7k). That’s assuming you’re paying maximum tuition fees and receiving the maximum maintenance loan, with London weighting.

Pay Day Lender extortion? No, far from it. But still huge sums for many students. Interest charges can’t quite double the cost of participation, but they can increase a graduate’s lifetime repayments by over 80%.

What the calculator also shows is that total repayments go up and up with your expected starting salary. Until, that is, they start going down and down. That’s the regressive nature of the system that I’ve mentioned before; it’s also discussed here by Ron Johnston.

Take Ruth, a stay-at-home student who begins a 3-year course at an £8k-a-year university in September 2013. She qualifies for no grants or bursaries, and takes out no maintenance loans. With a starting salary of £16.5k, Ruth’s lifetime repayments will be a mere £30, just one pound per year.

This shows the system is working – Ruth is a low earner so her degree costs are being heavily subsidised.

As Ruth’s hypothetical starting salary goes up, so too do her lifetime repayments. As you’d expect.

That is, until we set Ruth’s starting salary around £36k, at which point total repayments peak, and then begin to fall.

If Ruth is lucky enough to have a starting salary of £50k, she’ll pay three grand less in interest charges. If she starts on £60k, she’ll avoid paying a further £1.3k.

This is where ‘it’s a tax, not a debt’ line of argument begins to collapse. What kind of tax hits middle earners harder than higher earners? And don’t forget that the very wealthy have the option to repay the debt immediately upon graduation, thereby avoiding interest entirely.

Of course, to call it a ‘debt’ is also misleading. Debt collectors aren’t known for being generous towards those on low incomes, nor do they tend to ‘forgive’ after 30 years. In fact, any starting salary under £25.5k will mean that Ruth’s total lifetime repayments are actually lower than the loans she took out. And any starting salary under £21.5k means that she’ll get her degree for under ‘half price’.

According to some reports, the concessions to low-earners make the student loan repayment structure hugely expensive. For Nicholas Barr, professor of public economics at the London School of Economics, the solution is a “no-brainer“: drop the repayment threshold from £21k to £18k so that low-earners pay back more of their loan (“the purpose of student loans isn’t to help the poor,” Professor Barr says, “there are much better ways of doing that”).

But why not first remove the concessions for very high earning graduates?

The fairness case certainly seems much stronger. After all, you can (just about) understand why the City hotshot may feel the price of her degree shouldn’t be higher than the middle-earning schoolteacher’s. It’s essentially the same product. But is there really an argument that the price of her degree should be lower?

The Regressive Nature of UK Student Loans

Earlier this year, the LSE blogged a guest post by Ron Johnston, a geographer at Bristol University. Johnston, along with his colleague Tony Hoare, is the author of an important 2010 paper which found that “students with high A-level scores are more likely to get first-class degrees, but students from state schools with such high scores are more likely to achieve the highest degree grade than are students with similar scores who attended independent schools“.

Here, Johnston is talking about the new student loan structure, and his post is framed in terms of falling recruitment to postgraduate courses. Will Hutton had previously written about student fees leaving graduates too skint to consider a taught masters, and Johnston notes the picture is actually much grimmer than Hutton painted.

While I fully agree that the new undergraduate fee structure could hurt postgraduate recruitment further (at least on those courses leading to public sector professions), I was more intrigued by the figures put forward by Johnston about the regressive nature of the fee repayment system.

Naturally, I knew that the more a graduate earned, the quicker s/he would pay off the debt and the less interest s/he would therefore be charged. I was also aware of the coalition horse-trading that foreshadowed the decision to allow wealthier graduates to repay all of their  fees immediately after graduation. But what I hadn’t fully understood was just how much difference the power of compound interest made to total repayment. On this issue, the numbers really are quite staggering. Just look at the how a graduate’s starting salary affects their total repayment (figures based on fees-only borrowers of £27,000):

If your starting salary is £25k, total repayments are £57,526.

If your starting salary is £30k, total repayments are £50,943.

If your starting salary is £40k, total repayments are £44,354.

All projections about future graduate repayments are, of course, subject to assumptions about inflation and annual pay rises. However, according to Johnston, “the conclusion is clear: the less well-paid you are when you enter the labour market, the more your degree costs, both relatively and absolutely.”

Incidentally, for students who take out a full maintenance loan (£7,675 per year) on top of the £27,000 fee loan, it’s a similar story. If your starting salary is £30k, your total repayments are £135,914. But if your starting salary is £40k, total repayments are only £104,105.

It should be noted that the regressive nature of these repayment totals are partly the result of assumed starting salaries being relatively generous. For ‘fees + maintenance’ borrowers on lower starting salaries, the debt-wipe concession kicks in after 30 years.

It is this concession, of course, that allows the BIS website to brag that “under our new more progressive repayment system, around a quarter of graduates, those with the lowest lifetime earnings, will pay less [than under the previous system]”. The 2010 Institute of Fiscal Studies report, Higher Education Reforms: Progressive but Complicated with an Unwelcome Incentive, makes similar claims, and Vince Cable even argues that the new system is a “progressive graduate tax in all but name.”

But how progressive is a repayment system that squeezes much more from middle-earning graduates than it does from high-earning graduates? Martin Lewis’s Independent Student Funding Taskforce  reckons that fee levels are “irrelevant to most people – they’ll just keep paying the same proportion each month and if they don’t earn enough, they won’t come close to paying back what was borrowed (never mind the interest).” But once real graduates find themselves repaying different levels of debt over different lengths of time, I wonder whether they’ll be quite so blasé?

Johnston’s excellent blog (and startling graph, reproduced above) warns that unprecedented levels of debt will put further study beyond the means of most graduates. However, once the unfairness within the repayment structure begins to bite, it may not only be aspiring postgrads who feel aggrieved.

Thousands of graduates may wonder why their bill is so much greater than fatter-salaried friends who took the same degree at the same time.