Independent Student Finance Taskforce

Wes Streeting, former President of the NUS, and Martin Lewis, a popular, independent financial journalist, have been appointed to head up the newly launched Independent Student Finance Taskforce. 

You might wonder about the politics of launching such an initiative (and agreeing to front it) prior to parliamentary approval for key features: repayment terms and rates of interest on loans (see footnotes 2 and 4 at the BIS site on Student Finance).  But the real issue is that an independent website on financial matters seems to have put itself into a conflict of interest, since it is aiming not to dissuade people from going to university.  Now I believe everyone should go to university if they can benefit from it and introducing a complex financing scheme is a disaster from this perspective; as such, I feel we should be informing people about why they should resist these measures not accept them as the new ‘reality’.  To repeat, this scheme does not yet have parliamentary approval.

For some context, the discussion I had with Lewis on his website now has a different sheen.  He seeks to bust some myths with ‘20 Key Facts’ everyone should know. (Note how he places some blame for the confusion on those campaigning against the imposition of new higher fees and the cuts to central funding for universities).

I first posted on his forum to alert the site to some misplaced assumptions about the manner in which the scheme should work.  In response, ‘MSE Dan’, the website editor who made the corrections I suggested, wrote in reply:

What’s struck me during the process is how marked the changes caused by a tweaked assumption have been. It will be really interesting to eventually find out the levels set by government, and how they affect repayment amounts and timescales.

The manner in which ‘tweaks’ to the assumptions about future RPI and wage inflation cause large-scale changes to total repayments made is the mark of the volatility of the scheme (on which I’ve already commented repeatedly).  It is for this reason that I think the published models, which are supposedly meant to provide information on the ‘investment’ made in going to university, are misleading.  On the Lewis website, Fact 17 declares- many people will never repay their loans in entirety. 

Some will never repay them, but if too many begin to fall into this category, the government will change the scheme – in terms of the interest rates charged and the repayment thresholds.

Why then is Lewis’s site so reluctant to explain two basic points to its readers?

1. The government has the ability to shift the terms.
2. It has the power to sell loans to third-parties who will be able to rates ‘no higher than those prevailing on the market’, if the 2011 Education Bill goes through parliament.  (This is why the scheme is not a tax).

Lewis admits in his reply to me that I am ‘technically correct’ but thinks it ‘extremely unlikely’. 

First, this scheme involves a much, much bigger outlay for government than previous student loans and any precedents should be viewed from that perspective.  Second, although Thesis Servicing purchased the pre-98 loans (which had a fixed five-year period for repayment once it had commenced), governments have had difficulty selling off the post-98 loans to third parties precisely because they are ‘income-contingent repayment loans’ and legislation prevented interest rates from going over ‘the specified rate for low interest loans‘ (subsection 4 of Section 22 of the 1998 Teaching and Higher Education Act).  Interest rates are currently administered by determining  the ‘lower of the Retail Price Index (RPI) in March 2010, or 1% above the highest base rate of a nominated group of banks’.

The 2011 Education Bill removes that protection.  You should understand government intentions from the manner in which they enact legislation etc. Why seek to grant themselves this new possibility, if it is meant to be like a tax?  Why would this be one of the few legislative changes to student finance so far drafted and currently working its way through parliament before the appearance of the White Paper?

Either way one reads that, a consumer information website should explain this possibility of sale to its readers regardless of judgments of ‘likelihood’. It is precisely because his figures show too many people failing to repay the loans, that such future changes become more likely.

Moreover, Lewis is wrong in one very important regard.  In response to my comments he offers this interpretation:

“… the policy has always been that they [the government] stick with what was said at the point of study start … that legislation is to enable future schemes to change – it is not about changing conditions for those who have already contracted their course.” (my emphasis)

We haven’t seen the draft terms and conditions for the new loans, but what are the terms and conditions of the current loans?

Read Page 7 of this government guide to current loans, Section 3. ‘Your responsibilities’:

You must 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 may be replaced by later regulations.

Think of it like a tax? Given the tone of debates we see regarding raising the £40 000 rate of income tax by even 1 percentage point, what does it mean that we see a 9% levy on earnings over an initial £21 000 threshold, which has the potential to be spun off to a third party for 30 years?

Correction: This post was corrected on 24 June 2011.  The Independent Student Finance Taskforce is not funded directly by government. According to Lewis’s site:  “It’s formed by Universities UK, the National Association of Student Money Advisers, Guild HE, the NUS, and others.”