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Some tips on writing about student loans

Student loans are complex and confusing. The design is now flawed as a result of a series of piecemeal decisions and the cost is too high for many and is too opaque.

But those pronouncing on loans need to avoid adding to the confusion and in particular need to avoid leaving listeners and readers with the impression that alternative options or early repayment are necessarily cheaper. For a small minority, they might be (but see below). But if you have money to spare, then look to pay rent, before tuition fees.

Some tips for writing about post-2012 student loans:

  1. Don’t talk about interest rates in isolation. They interact with repayment thresholds and write-off policies.
  2. Explain the interest rate taper. The top rate of 5.4% from September will only apply to those earning over £47,835pa (it’s not £41,000). Those earning below £26,576 face interest of 2.4%.
  3. Don’t compare student loans with commercial loans without giving full detail. Include reference to the built-in insurance for death and disability. In the case of a bad accident to a former student, student loans can be written off; a new mortgage that paid the tuition fees upfront won’t be.
  4. Always write:  “Interest accrues”. Whether it will be repaid is a different matter and depends on lifetime earnings of the borrower.
  5. Explain the design behind the real rate of interest (even though it is flawed). The real rate of interest is there to keep higher earners repaying for longer. But only high earners will repay any of that interest. This is a design feature.
  6. Be clear on what a high earner is likely to earn – give an example. How many recent graduates earn over £26,576? What professions are they in?
  7. Emphasise that the “debt burden” from student loans is primarily repayments. Repeat that interest accruing is unlikely to be repaid.
  8.  Always set out the differences facing men and women. Use a chart like this one from London Economics.
    London Economics 2019 baselineOver 70% of women are projected to repay significantly less than they borrowed and almost 40% are expected to repay nothing. Paying upfront is a big gamble for women and making additional voluntary repayments make simply mean repaying more, if you are not likely to clear your balance.
  9. Bear in mind that your listener or reader is very unlikely to have an idea of where they might sit in the deciles for estimated lifetime earnings. They are likely to overestimate their expected position.
  10. Use figures that adjust for the time value of money. Use government figures or figures from a respected outfit like London Economics or Institute for Fiscal Studies.
  11. Don’t use out of date figures or research. The repayment threshold was raised from £21,000 to £25,000pa two years ago and has increased annually since (it will be £26,575pa from April 2020). This reduces everyone’s mandatory repayments and gives more protection to low earners. It also made the scheme more expensive for government.
  12. Explain how it is that the government expects to lose money — almost 50p per £1 lent — even though the interest rates are what they are.
  13. If you must use the government figures for interest accruing, explain that this is a “fiscal illusion” (OBR). The government has been booking interest as income even though it may never be paid.
    These figures will change shortly when the new ONS conventions come in.
  14. Think carefully about what you’ve written. You don’t want to lead people into making bad financial decisions; for example, you don’t want to leave them with the impression that commercial borrowing is cheaper.
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About this blog

I am not posting to this blog as regularly as I would like.

This is largely because I am a bit bogged down with consultancy work (primarily working with UCU branches on their institution’s finances and strategy). Although that sometimes generates things to post on here, I generally agree to treat that work as confidential.

I will use the next month or so to consider how best to continue on here, but it’s likely to mutate away from the journalism to more of an advice repository. Other suggestions are welcome!

If you want to talk to me about working with you, please use the email at the bottom of the About page. I offer discounted rates for union branches.

December loan sale lost £1.15billion

The £1.1billion figures was confirmed in the DfE accounts published last week.

Critical Education

£1.15billion was lost on the second loan sale in December according to the annual Supplementary Estimates, which itemise the additional budget given to government departments.

The sale raised just under £2billion, but this price was below the valuation of the loans sold in the Department for Education’s accounts. DfE has previously received assurances that the losses on the sale of pre-2012 income contingent loans would not impact on its budget and here we can see that it has been given additional resource AME to cover the sum.

loan lossA first sale, in December 2017, lost £900million. That means the sale programme has lost over £2billion already, with three planned sales still to go. Current national accounting conventions mean these losses are not recorded against the deficit, but that seems likely to change after Eurostat advised ONS that it’s new accounting treatment should see loan sales dealt with as “capital…

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Real interest rates – submission to Treasury Committee report

I’m posting this again as it connects to yesterday’s post on reducing interest rates. The pdf included at the bottom has more detail and the reminder that the Browne review recommended a real interest rebate (for those whose monthly repayment was less than any above-inflation interest accruing).

But, in general, ICR loans cannot be understood by looking at the interest rate – because payments are not made in a way that is comparable to fixed term repayment loans where the level of cash payments is fixed (and where the first payment is the most valuable!).

That a real interest rate encourages people to do so is a design problem.

Critical Education

I recommend reading the Treasury Committee’s report into Student Loans. It was published last month and is based on a series of hearings held from October to December.

I prepared a couple of private submissions before my appearance as a witness. Unfortunately I neglected to “OK” them for publication afterwards. One was on the background to interest rates on student loans; the other a briefing on accounting.

I have covered the accounting on here in detail but the interest rate piece summarises some thoughts that came together at the time. The pdf below gives some background to the following extract from the Treasury report:

The Committee also took evidence from Dr Andrew McGettigan who, when asked about the interest rate as a mechanism to introduce a degree of progressivity into the student finance system, argued that this was not the Government’s original intention.
(page 17)

The exchange referenced above…

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Lowering interest rates – why it’s essential

The Sunday Times reports today that the independent Augar review may recommend lowering interest rates on post-2012 student loans from RPI plus 0-3 percentage points to something akin to that accruing against older loans (the lower of RPI or bank base rates plus 1 pp).

Amongst a raft of other measures, I single this one out not just because its political appeal is obvious, but because it connects with the last post on the Money Saving Expert and Russell Group proposals for reforming the annual student loan statement.

What MSE/RG desire can only be solved by reducing the complexity of loans, not by presentational tweaks. Even though reducing interest rates only benefits higher earners in terms of reducing repayments, the public benefit of simplification trumps that redistributive element of the current scheme. Our current regime’s complications have a propensity to lead people into confusion that engenders harmful financial decisions: making voluntary additional repayments or paying upfront.

Setting aside broader questions about the funding of HE, it is better to forego some repayments from higher earners in order to avoid the potential to lead all borrowers astray.

Finance OhOhOh

What does it mean to say that 75% or 80% won’t repay their student loans before the policy write-off kicks in?

Read more…

Student loans – proposed form is not a fix

You’ve probably seen the coverage of the Money Saving Expert / Russell Group team-up and their proposals for overhauling the annual statements provided by Student Loans Company. Although the intentions are good, the “revamp” misfires and they’ve based a key part of their statements on an elementary mathematical blunder.

MSE and RG are keen to emphasise the “tax-like” behaviour of ICR loans by turning borrowers’ attention away from interest accruing and the outstanding balance (which is more likely to be written off than cleared). Instead, they want your focus to be on the current and future repayments.

The problem is that income contingent student loans are complex and have long lives.

Not only is it hard to give a sensible indicative level of cash repayments, it is extremely difficult to translate that projected cash total into something meaningful today. (MSE are most concerned by individuals who make additional voluntary repayments, which in most cases is throwing away money). Even if you have some familiarity with financial concepts like present value and discounting, the unusual nature of ICR loans makes such methods less reliable.

Unfortunately what’s proposed by MSE and RG makes a hash of this crucial issue: how should you understand today what repayments your student loan commits you to.

At this point, I should say that I haven’t read the accompanying report. I have only looked at the example statement. I will read the report tomorrow and blog a bit more.

The problems are located on the final page of the form: “Predictions of your likely future contributions”.

Various key assumptions are set out: repayment threshold, average earnings, salary growth, inflation and your working life. Average earnings growth of 2.7% is assumed for the next 30 years (government loan models assume AEG returns to over 4% in the long-run); the repayment threshold increases in line with that as does salary growth (no promotions or pay rises are factored in); your working life is assumed to be 30 years with no career breaks. We might quibble over these figures; we might also refer back to the previous work on this blog that forced the SLC to take down its “repayment calculator” owing to “everyday sexism”.

The first mistake seems to come with respect to inflation.

Read more…

Another Reading update: this time with some questions answered

As outlined in previous blog posts, I first contacted Reading about the money the university owes to its trusts in mid-January. On April 10th, I finally received an email responding on the record to the questions I had raised. That statement was worded in confusing fashion so it has taken a bit of time to have things clarified.

The main development: Reading has now revealed that the £120million is owed to more than one of its trusts (and not simply the National Institute for Research in Dairying – NIRD). The table provided compares the amount owing at the end of July 2018 (end of year for the 2017/18 accounts) with end of January 2019.

owed to trusts

Reading goes on to argue that these loans do not represent external debts, but interest is being levied. The university provided particular detail on the £77million owed to NIRD (though it subsequently confirmed that all the loans are being treated in the same way). The money outstanding is being 

“treated as a loan with an interest rate applied using the weighted average return on short term cash investments. Interest is payable on these sums and is rolled up in the balance on a monthly basis and recorded as such in the accounts. The sum is technically repayable on demand, and is therefore accounted as being repayable within one year. This is consistent with accounting practice for intra-group transactions. This approach has been endorsed by previous and current auditors.”

NIRD exists to advance research into agriculture and dairy at Reading. The statement goes on to specify recent NIRD-related projects at Reading:

Read more…