CEO Blog: Student loans - are the halcyon days behind us?

10 Jul 2015

So Martin Lewis is apparently on the rampage about the proposal to freeze the threshold at which graduates have to start repaying their loans. In the general scheme of the announcements in the Summer budget this may not be the highest priority.

After all part-time students have to start repaying when they are still studying. It is disappointing that nothing further was said in the budget about supporting part-time and flexible study routes. These are surely the key to higher qualifications and improved skills for those already in the workforce and deserve more attention as the government rolls out its  productivity plan.

Annual uprating of the threshold was a Liberal Democrat demand designed to make the 2012 fees and funding scheme appear more progressive. In reality very few countries with a student loan system opt for annual uprating of the repayment threshold – and with good reason. Annual adjustments make a complex system even more complex. Strangely in all of the angst about the fees and funding system in England very little attention has ever been paid to a system which is already highly complex for students and graduates and which potentially leaks like a sieve.

Whatever the merits of a freeze on the threshold at least there will be a public consultation in which we might expect more information about the deal. Freezing the threshold will make the loan scheme appear more affordable by requiring more graduates to start re-paying their loans earlier. But is there a quid pro quo for students and universities? It would be nice to know.  

Far more radical is the decision to switch maintenance grants into loans. This has been on the Treasury’s cards for some time although many people including some, but by no means all, Vice-Chancellors and University UK's Student Funding Panel which supported the principle, may have been surprised that all maintenance grants will be swept away in one swoop.

The restoration of grants in 2004 has long been regarded as the pill which sweetened the decision by the Blair government to introduce fees of £3000. Looking back students might regard these as halcyon days. Tuition fee income was additional to teaching grant and the return of grants for full-time students was widely recognised as making the whole deal more palatable.

Eleven years on, students and their families have had to make huge adjustments. While the national message is that the country needs to balance its books and reduce the deficit, individuals are now expected to fund their higher education by taking out a loan. With the demise of maintenance grants England has also turned its back on some of the more imaginative student loan schemes, including the option of encouraging progression with a promise that an element of a loan will be turned into a grant and therefore not liable for repayment on completion of a course within a specified period.

Freezing of the earnings threshold and the equally significant review of the discount rates applied to all government liabilities will see, at least on paper, the costs of the fee and student support loan system fall like a stone. The Department of Business, Innovation and Skills has a long-term aim to reduce the write-off (or RAB) to 36p in the pound. They are likely to do better than that. This will disguise the marginal costs of an increased write-off that will be incurred by those students who will leave university with the largest debts and will, inevitably, be those from the lowest income households. This is an issue of fairness which should rightly be the subject of continued debate.

However, claims that the system is unsustainable will look less robust in the future even though behind the scenes the government will continue to borrow the money to lend to students rather than provide direct grant to universities. The smoke and mirror of government accounting rules will therefore continue to cloud the debate about higher education funding in England.

The straight abolition of grants would be likely to result in a 10% reduction in applications. Replacement of grants with loans will minimise the impact. In any case it is hardly a surprise that students continue to access loans and enter university: after all very few of them have access to other financial support.

There is one aspect of the abolition of grants that has received far too little attention. An interest rate of 3% is applied to fee and maintenance loans while they are studying. Students taking out the maximum maintenance and fee loan of £8,200 and £9,000 respectively will see their student loan bill rise to nearly £18,000 by the end of year one.

Since repayments are deferred until graduates are earning £21,000 this is a ‘paper transaction’ for many students. For others taking out a loan which is interest-bearing is much more significant. For 5 years the Department of Business Innovation and Skills has been promising a version of the loan system which is sharia compliant. If Martin Lewis wants to get worked up about anything, this surely is it.