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