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Mortgage-style student loans – the repayment threshold goes down !??!?

October 3, 2014

In November last year the government sold its remaining ‘mortgage-style’ student loans to Erudio. These loans were available to those starting HE between 1990 and 1998 as replacement for student grants. At the time, outstanding balances on those loans were roughly £900m.

Unlike student loans now being issued, these loans are fixed-period repayment loans meaning that outstanding balances must be repaid within 5 years once an earnings threshold is crossed.

The 1998 Education (Student Loans) Regulations specify that threshold as

‘85% of the lender’s estimate of average monthly earnings of all full-time employees in Great Britain for the January when the level will apply based on figures published by the Office for National Statistics’

Each September a new threshold is announced and borrowers are able to apply for deferral. In September 2013, the threshold was £28 775, much higher than on other student loans and one reason Erudio paid much less than the face value of the outstanding balances.

BIS continues to calculate the repayment threshold each year. The figures applies to the loans bought by Erudio but also those sold in the 1990s and now owned by Thesis Servicing.

The 2014/15 threshold was announced at £26 727 and came into effect on 1 September.

That’s a drop of over £2000. Since wages are not falling that looks very odd.

A BIS spokesperson told me:

“The repayment threshold for mortgage style loans will be £26,727 from 1 September. The threshold is calculated annually by BIS using earnings data published by the Office for National Statistics (ONS). This is set out in legislation and outlined in borrowers’ loan credit agreements which are regulated by the Consumer Credit Act 1974. As a result, neither BIS nor any third party are able to alter these terms.

“The threshold has reduced as a consequence of the reduced earnings growth indicated by the ONS data.”

Now reduced earnings growth is not a decline in earnings (or negative earnings growth, if you must). So it’s still hard to see what has happened.

BIS kindly provided me with their calculations.

BIS aim at estimating the Annual Mean Earnings found in the Annual Survey of Hours and Earnings (ASHE). Unfortunately there are lags in the publication of data which means that when trying to estimate a figure for 2014/15, BIS only has the ASHE data from April 2013 to go on.

So BIS uses monthly data about average weekly earnings which is provided more regularly and with much less delay (also ONS data) to estimate the likely increase in mean annual earnings over the next 21 months (Jan 2015 is the target in this case). BIS focuses on the weekly earnings data for April each year to get a year-on change.

The culprit is clear: April 2013 average weekly earnings are anomalous because of a large amount of bonus payments (following the abolition of the 50% tax rate for higher earners). The figure jumps to £484 pw from £472 pw (Apr 2012) but has now settled back to around £478 at present. If you just use those data points, it looks as if there were large wage increases in 2012/13 but that we have then had declines in income; since BIS then projects that trend forward into 2015, the effect is magnified.

On that basis, BIS has looked at the average annual earnings in April 2013 – £32 370 – and has projected, on the basis of the change in weekly earnings, a decrease of 1.65% per year over the 21 months to January 2015 to give estimated average annual earnings of £31,444. This then generates the repayment threshold for 2014/15 of £26 727.

But this is unreasonable – the ONS data overall shows a small but steady increase over the relevant period – roughly 1.9% pa, which would give a Jan 2015 figure of £33 464 and a 2014/15 repayment threshold of £28 444. A threshold £1717 higher.

That is a significant difference. Moreover, you won’t find anyone who thinks the ONS data supports the official figure. BIS have used the same calculation as every year but not used common sense to correct for a clear anomaly.

I do not know how many people might be caught out here for the next year (before the threshold ‘corrects’), but I do know they will face having to pay back at least one fifth of their debt over 12 months before they can get a new deferral – that could be over £100 per month.

Obviously the sales have complicated matters, but nothing in the legislation or loan agreements specifies the particular calculation used by BIS.

You could argue that by sticking to the method they have always used they have in fact gone against the legislation.

BIS have ended up using the only ONS data point which would indicate a decline in earnings.  BIS are meant to be estimating the ASHE figure for 2015 but have reached something mechanically that no one believes to be reliable. Prima facie that looks unreasonable and ought to be open to challenge under consumer credit legislation.

BIS have promised to provide me with further comment on Monday.

Update

This blog was updated on Friday afternoon to reflect the fact that the BIS calculation is used for loans owned by Thesis Servicing as well as those bought recently by Erudio.

Second Update

An expanded version of this blog with updates from BIS and NUS appeared on the MoneySavingExpert website. It includes a discussion page.

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19 Comments
  1. has there been any update on this please?

  2. Ben Wakeford permalink

    Brilliant. I have been trying to find out how this happened for quite a while and this is the first proper explanation I have found. While Erudio are clearly exploiting the statistical anomaly for their own benefit, it is at least encouraging that they did at least still use the same calculation and not just brazenly flaunt the agreement not to change terms and conditions of the loans. Presumably actual average earnings figure will be far in advance of the predicted one, and, given a decent projected increase rate the next Threshold should be very much higher than 2014/15?

  3. Yes, the anomaly will work its way out in the next figure. But in the meantime a few thousand people will have been caught out and have had to pay 1/5th debt back unexpectedly.

  4. Diana Carmody permalink

    Yes this blip is probably going to catch me this time. And that I hadn’t bargained for as I am coming up to 1 year away from it being written off (I think, at least that is what I have been told when I questioned them … twice to make sure. 60 is write off time). To be caught for payments 1 year before because of a statistical blip is a real bummer!

  5. I work in the public sector and our wages have been static for the last 5 years. I have been deferring repayment since 1999 when I graduated as I have never earned a salary that was over the threshold. In each of the previous years since then, the threshold has gone up slightly so I never thought I was in danger of reaching it anytime soon (especially with no pay rises due in the near future at least). Now that it has gone down quite substantially for 2015/16 I have hit the threshold – I’m over by £1 per month. This means that from April this year, I will have to find £167 per month, which is the amount my repayments have been fixed at, which I have not budgeted for. I don’t see how I will be able to afford it..,. Is this something I can challenge?

  6. Dave Clarke permalink

    According to the pre-1998 student loan agreements, a) Your income for the month before the month you apply for deferment has to be below the threshold, and b) Your income for the 3 months following that month will not or is likely not to be above the threshold.”

    I find part B utterly baffling. The threshold from Sept 1st is £26,737, the definition of a threshold being, “the magnitude or intensity that must be exceeded for a certain reaction, phenomenon, result, or condition to occur or be manifested.” So, to my mind, I am eligible for deferment until such a time that my earnings in the year before deferment exceed the threshold, currently set at £26,737. Part B uses the word threshold, but is actually referring to a future projection, which is quite different.

  7. Dave Clarke permalink

    Also, I believe section 4 of the Erudio form, which refers to contract workers, is being abused. This section asks contract workers and workers in short term jobs to add their total yearly income and divide by 12 to get a monthly figure. I am contract worker. If I calculate my income like this, I am under threshold in the year before deferment and also the three months before deferment. However, two months before deferment renewal I got a job with a salary slightly higher than the monthly threshold. Erudio are basing their decision to refuse deferral on these two months. What is the point of section 4, if not to smooth our self-employed / contract income? I have had three months with no income in the last year and two months slightly above threshold. Surely the purpose of section 4 is to make it fairer for people like me. I believe Erudio are choosing to ignore section 4 to force contract workers to pay.

  8. I am not a lawyer so am unable to advise on these contractual issues. I suggest using the forum at MoneySavingExpert to find further advice.

  9. Jim Jones permalink

    I’m confused the deferment forms come out about april 16 but the dates are set by the government in September 15 so can we get a new deferment form now? or do we need to pay up to april 16 even though we are now under the new 28kish amount (if that makes any sense?)

  10. Barbara Scott permalink

    Hi! Do you know when this year’s threshhold for mortgage style student loans will be announced? Last year it was announced on the second Friday of August – but I can’t find anything for this year yet. Thanks 🙂

  11. Tina permalink

    I had previously applied for student loan in 1996 to do my HND, unfortunately, I have been unwell, thus, I was only able to finish the HNC level, I have not earn any salary above the threshold, and also, I have deferred my loan payment, surprisingly I applied for student loan for a degree this year and I have been told to contact a third party company in charge of the loan I took out with them, I have made an arrange to pay off the loan monthly with this company, even though, I am not earning enough, I have gone back to the student loan to approve my current application but they refused on the grounds that I must clear my outstanding loan before I can apply for another one. I have already enrolled on the course for 6 weeks because they promised to approve my loan as soon I reached an agreement with the company they sold the loan to. I am a single mother. Is there any other way out, I don’t want to pull out of my studies.

    • You should see someone at citizen’s advice in the first instance.
      Based on your comment, you will only be eligible for a new loan when you have paid off your first loan in full.
      You may also find that your hnc means you will not be eligible for aloan to cover the fees for the first year of a three year undwrgraduate degree course as it is considered a equivalent qualification. This may depend on what subject you are now studying.
      I do not recommend considering alternative finance products as the repayments are very onerous. Looking at part-time options may be a good alternative.

      • You should also get advice about withdrawing from your arrangement with the company that owns your old loan.

  12. “BIS have ended up using the only ONS data point which would indicate a decline in earnings” – I’m sure you’ll find that was purely by chance.

    It’s worrying for anyone with a loan that retrospective changes are being made like this. I doubt the students were expecting it, but clearly, it’s permissible. Although it’s comparing apples with oranges, a trend emerges regarding thresholds. They are going down in all cases. On the whole, that doesn’t seem reasonable, but, there you go.

    I’d love to know why Tony Blair set a target of 50%. There’s little in the public domain to say it was anything other than out of thin air. Why not 70%? As we speak, in 2016 the demand for graduates is pretty much the same as it was in 1992 if you dig around in the stats, yet we have triple the number now. We are planning to write-off around 45% of loans made. And all this is thought normal and nobody says a word.

    Well, it isn’t normal. It turns my stomach.

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