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Sale of student loans – confusing post-2012 and pre-2012 loans

December 20, 2016

Last week, the chancellor, Philip Hammond, told a Treasury Committee that the decision to freeze the repayment threshold on post-2012 student loans was a central aspect of the government’s plans for ‘fiscal consolidation’ and that the freeze would help a future sale of those loans.

Hammond responded to a request from Wes Streeting to reconsider the freeze:

“I would have to be frank with you and say I do not see scope for reversing that decision. It is an important part of our overall fiscal consolidation and, of course, it is also about preparing the student loan book, ultimately, for sale as an asset sale.

“I believe that student loans represent a very favourable arrangement, a very favourable structure for financing students through higher education.”

Now, the government does want to sell post-2012 loans, but this is an aspiration that has been thwarted since 2011 and which was taken off the table for the time being in 2013 by George Osborne – Hammond’s predecessor. In the latter’s statement above, the stress is on the ‘ultimately’.

The government is currently investigating a retrospective sale of pre-2012 loans starting with the borrower cohorts who graduated in the early 2000s. These loans have not had their repayment thresholds frozen – they are now indexed to RPI. In April 2017, the new threshold for pre-2012 loans will go up by 1.6% to £17 775.

The threshold on these loans did sit fixed at £15 000, but were tied to RPI a few years back in order to prepare the ground for an imminent sale. Potential buyers do not want the ‘political risk’ of thresholds moving unexpectedly in future as a result of government decisions, so the RPI-index was introduced. (It was not an option to leave it fixed at £15 000 as that would become too low in a few years’ time).

Apparently a loan sale in 2017 is looking more likely, having been delayed since 2013, but it will be these pre-2012 loans that are on offer.

So why is Hammond talking about post-2012 loans, where the threshold has been fixed at £21 000 for the next five years?

Firstly, he may not know what he is talking about and it’s pretty clear that the Committee didn’t ask the appropriate follow up questions.

More likely, Hammond knows that a freeze doesn’t help a near-future sale but that come the next parliament (2020-2025) having a threshold still at £21 000 – as compared to incrasing in line with average earnings from April 2017 –  will have removed a little bit of uncertainty from loan projections (and pricings), because the threshold will be lower relative to median earnings and more graduates will be likely to be in repayment (as well as making higher repayments).

Either way, if parliamentary committees are to perform their scrutiny functions, those who sit on them need to pay more attention to what’s going on and learn how to ask the appropriate follow-up questions. And more importantly, it needs to understand that a plan to sell is no justification.

A loan sale is a bad deal for government and the public, particularly after the decision to lower the official discount rate used to value student loans. A loan sale loses money and does so wittingly as the value for money test used by government does not require that the loans are sold for what the government thinks they are worth (their fair or carrying value).

 

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22 Comments
  1. Brian permalink

    The RPI uprating had actually been planned prior to any preparation for a loan sale and certainly before the Sale of Student Loans Act 2008. Labour had intended to uprate from April 2010 but this was delayed in 2009 due to a negative RPI in March 2009 and the threshold was then reviewed as part of the Browne review which recommended it be increased to £21,000 as it hadn’t been raised since April 2005 when it increased to £15,000 from £10,000. However the incoming Coalition in 2010 decided only to apply this new level to new loans and belatedly implemented Labour’s intention of indexing to RPI but only from April 2012, 2 years later than originally planned.

    See the minutes (update from BIS) from the September 2009 meeting of the Collection of Student Loans Consultation Group (the repayment holidays mentioned were also later retrospectively scrapped):

    http://webarchive.nationalarchives.gov.uk/20101006145436/http://www.hmrc.gov.uk/consultations/esl-mins150909.htm

    See also comments on the following pieces for lots of information on this and also links to official Government information including letters from the then Universities minister Davd Lammy:

    http://wonkhe.com/blogs/comment-my-word-is-my-bond-freezing-student-loan-repayment-threshold/
    http://www.hepi.ac.uk/2016/07/28/why-the-moneysavingexpert-is-wrong/

    See also the following FOI request which states the original intention:

    https://www.whatdotheyknow.com/request/student_loan_repayment_criteria?unfold=1

    The following FOI request was refused but is awaiting an internal review (which is delayed due to the change of Department following the closure of BIS).

    https://www.whatdotheyknow.com/request/student_loans_negative_rpi_decis#outgoing-591407

    • That there was an earlier ‘intention’ on the part of the Labour government and parliament to link the pre-2012 repayment threshold to RPI is one thing. But even back in September 2013, the RPI indexing wasn’t settled for 2015 and 2016 (see Willetts’s letter to the NUS which is included in your bundle of links and comments). It was later decided that a sale of pre-2012 loans required a determinate index fixed for the life of the loans, so that potential purchasers could price them and not have to factor in the ‘political risk’ that later governments might move the threshold in different ways.

      I don’t believe the Browne review made any recommendations about what the threshold for pre-2012 loans should be. A higher loan threshold for post-2012 loans was needed to preserve a proportionate structure to repayments: with a higher graduating debt a £15000 threshold would have extracted a much larger share of repayments from lower earners and made the new fee-loan regime resemble a regressive tax.
      For post-2012 loans, freezing the repayment threshold at £21 000 for 5 years is a regressive measure as the table (official government data) at the beginning of this article makes clear.

  2. Brian permalink

    I think it’s pretty clear that the Browne review envisaged that the threshold would be increased to £21,000 for all ICR loans. Indeed it justified the increase precisely because the £15,000 threshold hadn’t been increased since 2005. It said “as the threshold has not been increased since 2005, there will be a one-off increase at the start of our new system from £15,000 to £21,000. So a one-off increase to account for the fact the threshold had remained fixed for 6 tax years by then. Leaving existing borrowers with the same £15,000 level until 2012 was nothing more than a money saving decision. You are right that Labour may have chosen to regulate for the threshold increases differently had they stuck to RPI increases after the Browne review (it’s a big if as I think they would have raised the threshold to £21k for all loans, as Browne recommended); for example they may have just decided to amend the repayment regulations each year, inserting the new nominal threshold value which would make it easier to stop the practice of annual increases as you simply don’t pass the amendment. I think you’re right that fixing the terms for a loan sale was the main reason for both keeping the threshold low for longer and regulating for the methodology of increasing annually by RPI (albeit initially time-limited to April 2015 – this time-limit was removed in the 2014 amendment to the regulations).

    There is one group of borrowers that were particularly hard hit by that decision to introduce a separate threshold rather than keep the same threshold for all ICR loans. These are borrowers with both pre-2012 and post-2012 loans who, despite large debts, continue to repay above a lower threshold and gain no benefit from the higher threshold, and moreover don’t see their post-2012 debt written off for 30 years after they left post-2012 courses. Many of the borrowers in this position had their post-2012 loan write off date pushed further back still than would ordinarily have been the case by the decision to only start post-2012 repayments from April 2016. So for example someone graduating with pre-2012 loans in 2011, doing a one year PGCE in 12/13 with post-2012 loans would usually have their 30 years countdown start from April 2014, but it was delayed until 2016 leaving them in repayment for longer (while continuing high pre-2012 repayments) if their post-2012 loans are not cleared in full. They will only be cleared in full if enough of their repayments are apportioned to the post-2012 loans. For that to happen, the post-2012 threshold needs to be as low as possible and indeed the threshold freeze has helped this set of borrowers for this reason.

    As David Willetts recommended in his policy pamphlet below (page 40-41) when he wanted the post-2012 threshold frozen, there is a good chance that the thresholds will be merged when the pre-2012 threshold reaches the post-2012 threshold. This would be desirable for all parties including the borrowers above and employers administering repayments who would not have to differentiate between the types of loan.

    http://www.kcl.ac.uk/sspp/policy-institute/publications/Issuesandideas-higher-education-funding.pdf

    • I don’t follow the logic of the final two paragraphs.

      A threshold freeze generates higher repayments and hits middle to low earners particularly hard (in absolute and relative terms). Even if no payments on post-2012 loans are counted until the pre-2012 loan balance is cleared, a lower repayment threshold on the post-2012 (as a result of the freeze now) results in higher repayments on those loans when they begin.

      Although clearing the balance is desirable, the tradeoff of higher earlier repayments for a few extra years of repayment is not normally in the interest of borrowers (because the value of present money is higher than future money – barring deflation).

      Since post-2012 borrowers will be in repayment for 30 years (highest earners excepted), what we are really taking about is relative levels of account write-off rather than accounts being cleared. This means we’re just talking about borrowers making additional repayments as a result of the freeze.

      The freeze is effectively a price hike and a retrospective one for those who started between 2012 and 2015.

  3. Brian permalink

    I don’t deny your last paragraph. However there are very proportionate reasons for freezing the post-2012 threshold, not least it’s level in relation to earnings being far higher than expected and the disproportionate impact that uprating it would have on certain categories of borrowers, namely those who hold both pre and post-2012 loans. The freeze was only retrospective in the sense that it had been an earlier intention yet to be enacted in the regulations, just like the delay to the original RPI uprating intention from April 2010 had been an intention that was retrospectively altered, and the repayment holidays that were announced for post-2008 borrowers but were retrospectively scrapped in 2010.

    You seem to be unaware of how repayments operate for borrowers with both pre and post-2012 loans. See this FOI release for the actual submission made to David Willetts as Minister in 2011 https://www.whatdotheyknow.com/request/230088/response/579884/attach/4/Annex%202%20Submission%20Dual%20loan%20repayments.pdf but I’ll give an example to illustrate.

    Most borrowers with both pre and post-2012 loans will have their pre-2012 balance wiped after 25 years (a small number who borrowed prior to 2006 and then post-2012 will have part of their pre-2012 loans written off at age 65 instead but the numbers are small – see this FOI release https://www.whatdotheyknow.com/request/353593/response/883165/attach/2/Data%20118%2016.xlsx for the actual figures) and their post-2012 loan written off after 30 years. Borrowers with both types of loan repay at 9% above the pre-2012 threshold as if they only held a pre-2012 loan. But only repayments from income above the post-2012 threshold is used to repay the post-2012 balance. Repayments from income up to the post-2012 threshold goes against the pre-2012 balance. So the lower the post-2012 threshold, the more repayments go towards paying off the post-2012 loan which is in the interests of these borrowers as their pre-2012 gets wiped first. So if the post-2012 loan is cleared by the time the pre-2012 loan is wiped, repayments cease. If the post-2012 loan remains uncleared, repayments continue up to 30 years (starting at the earliest in April 2016).

    EXAMPLE

    Borrower takes an undergraduate degree starting in 2009 and finishing in 2012. This loan enters repayment in April 2013 and continues for up to 25 years from then when any outstanding balance is wiped. This borrower goes on to take a PGCE in 2012/13. This post-2012 loan enters repayment in April 2016 and any outstanding balance is wiped in April 2046, 30 years after entering repayment.
    The borrower repays at 9% above the pre-2012 threshold, but only 9% of income above the post-2012 threshold is used to pay off the post-2012 loan. So come 2038 when the pre-2012 loan balance is wiped, there may still be a post-2012 balance remaining, so repayments continue at 9% above the post-2012 threshold for a further 8 years until that balance is also written off. If the post-2012 threshold and the pre-2012 threshold were both the same and post-2012 repayments were prioritised (which they would have to be due to the interest being determined by income) then this borrower would likely repay less in total and make repayments for 8 years less.

    • Thanks for the clarification.

      The uprating on the £21000 repayment threshold was a last minute concession granted to the Liberal Democrats in December 2010 to persuade their reluctant MPs to vote with the coalition government to raise the maximum tuition fee to £9000. Uprating wasn’t the original government intention – a five yearly review was proposed. That the regulations fixing the uprating were never made was one of the junior coalition partner’s failings. So there are some differences in what we mean by intention here.
      More importantly, a freeze for five years is very costly to the majority of those who only have post-2012 loans – median graduate earners can expect to repay around £4000 more in net present value terms and lower earners an increase in repayments of up to 40% over the loan lifetimes. In contrast, higher earners might only see single digit percentage changes and the very highest might expect to repay less than an extra £1000.
      It’s a regressive move in a way that removing the repayments holiday wasn’t (since most borrowers are earning more in their 40s than early 20s, switching a couple of those years of repayment might generate more income for govenrment in the long run).

      I think your example needs backing up with some modelling of the repayments and the different scenarios.
      Since your post-2012 loan is for only one year’s worth of fees and maintenance, it is very likely that will be repaid within 20 years on either of the set ups you outline.
      It’s not clear to me without some numbers that you would benefit enormously if the repayment threshold were brought into convergence at £21 000 by freezing the post-2012 threshold and then abolishing it when the RPI-indexing of the pre-2012 loan caught up (rather than both going up in line with RPI). (The larger pre-2012 loan debt is currently benefiting from the bank base +1 rate cap which makes modelling things more complicated).

      But those with the larger post-2012 debts would definitely be adversely affected if the freeze were extended further until pre-2012 loans hit the threshold of £21000. And there are an additional 200 000 of them each year, as opposed to the 100 000 (?) in your situation.

  4. Brian permalink

    There’s actually over 200,000 borrowers in the position of repaying both a pre and post-2012 loan (which is higher than the initial 100,000 rough estimate in the submission to David Willetts) according to the figures released by SLC in the 2nd FOI link I posted. But in my opinion it’s all whether the regulations at any one time (for the time being) are equitable and whether repayment policy is meeting its objectives. The objectives of the post-2012 reforms were to increase the amount of private contribution from individuals and save money for the state. Amending the regulations to increase the post-2012 threshold against that backdrop of the objectives failing clearly would have been inequitable for both taxpayers and certain categories of borrowers, and would have increased operational costs and demands as a new set of terms would have been needed for future borrowers. When the objectives of the policy for 2012+ borrowers were not being met with an uprated threshold there was no need to implement a new set of terms for new borrowers, but rather correct the 2012 policy to meet the objectives which would’ve been the same objectives as a future policy.

    Obviously different earnings paths will change the impacts. Someone earning just above the post-2012 threshold is hardest hit if the pre-2012 threshold stayed substantially lower as it maximises the time spent in repayment. Also remember that now maintenance grants are gone, debts even for a one year course are high and outside ‘repayable range’ for some of the lowest earners. Also don’t forget that there’s nothing preventing higher earnings from making additional voluntary repayments to incur less interest and speed up their repayments which has the same regressive effect.

    With regards to repayment holidays, whether they would have been regressive or not depends on how different borrowers would have used them. Some generally lower earning borrowers could have saved lots by taking a repayment holiday in a year where they receive a large bonus for example, and older borrowers nearing retirement (whether low or high earners) could have saved themselves repaying anything by taking their repayment holiday in their final working years before retiring.

    • You seem to think ‘time spent in repayment’ necessarily means higher total repayment. That may be the case in cash terms but the value of money is not stable – a £ today is not worth the same as a £ in 25 years’ time.
      Just as the government isn’t subsidising someone who doesn’t borrow in the first place, the government don’t have a little cry when someone makes additional payments early to clear their balance. Paying £30 000 today to avoid paying £35 000 over 30 years doesn’t make financial sense for the borrower. It isn’t then ‘regressive’ to allow higher earners to repay early – the government would much rather have that cash now, which is why it’s willing to sell the loans at a large loss to third parties.
      (The reason interest while studying is RPI+3% is to dissuade the very wealthy from taking out a cheap SLC loan for a few years before paying it off on graduation).
      Although the v e r y highest earners may save a little from repaying early, it still is unlikely to be in their interest given the built-in death and disability insurance.
      That takes us into the murky world of discounting future repayments – but it is a necessary detour if you want to assess the policy.
      Since the government has recently lowered its discount rates those official figures I cited in previous posts about the impact of the freeze are now underestimates.

      I’m not sure what you mean by ‘repayable range’, but again I think you are focusing on whether borrowers clear their accounts before the policy write-off kicks in. This is not the way to assess ICR loans – you have to focus on the repayments generated to see the impacts. The loans are designed to protect low earners from their high graduating debts. The loans wouldn’t be improved if every borrower paid off their account in full.
      As for the conversion of maintenance grants to loans – you should look at this piece https://andrewmcgettigan.org/2015/07/22/ifs-provide-revised-figures-for-he-financial-changes/
      Only the top earning third of those now eligible for the maximum loan end up repaying any more as a result of the change. It’s the repayment threshold freeze which has a much bigger impact on their NPV repayments.
      The post-2012 fee-loan regime was designed initially to generate more repayments from the upper two quartiles of graduate earners and so ‘bend the distribution curve’ to make student loan repayments resemble a progressive tax. With higher graduating debt, that needed a higher repayment threshold (to protect lower earners) and a real interest rate (to keep higher earning borrowers in repayment for longer).

      I’m not sure why you think the measure of equity is the repayment threshold given the other key differences between pre- and post-2012 loans: lower interest rate; shorter loan lifetimes; lower graduating debt.
      But in so far as we were meant to have a loan scheme resembling a progressive graduate tax, then it’s not clear whether that policy objective is being met. While we’ve also now created a feature which resembles a tax on social mobility – those eligible for the maximum loan based on family income who go on to be high earners face a much larger repayment take.
      But the real problem as I see it is the following. By changing mandatory repayment terms to the detriment of existing borrowers, you make it more rational to: decide against full-time higher education; study in London (higher debt means more exposure to policy contingency); and – much, much worse – mislead people into thinking that alternative student finance products represent a good deal.
      These and the regressive impacts of the retrospective freeze already discussed make it a bad policy. It would have been much better to change the terms for new borrowers only.

  5. Brian permalink

    What you say is true of those who only have post-2012 loans. However as someone in the position of having both pre and post-2012 loans and on a teacher’s salary, I come at it at a somewhat skewed perspective due to the way my loans interact with each other. While the removal of maintenance grants and therefore higher maintenance loans won’t impact greatly on the lowest earners who only hold post-2012 loans, the higher post-2012 debt will keep those who hold both pre and post-2012 loans in repayment for longer and therefore is likely to result in higher overall repayments as a result (as after the pre-2012 loan debt is written off repayments will continue on the outstanding post-2012 debt). What I mean by ‘repayable range’ is what you thought – the likelihood of clearing a particular loan balance. If I can clear my post-2012 debt (at the moment even with the threshold frozen, my repayments aren’t covering the interest added!) then I will cease repayments 8 years sooner than if I still have post-2012 debt outstanding at the point my pre-2012 balance is written off, as in the example I gave earlier. 8 years of repayments in the latter part of my working life isn’t likely to be an insignificant amount.

  6. But if you only have one year of post-2012 loans – roughly £15 000 in your case? – and you are on a teacher’s salary or equivalent for the next 20 years, then you will clear your post-2012 debt in 20 years. Your mandatory repayments must already be very close to the interest accruing, if they don’t exceed it already.
    And you would probably clear it, if the threshold had increased in line with RPI from April. I don’t think there’s likely to be any difference in that regard. (What difference arises in repayments depends on how long you pay at the lower pre-2012 threshold and whether that debt is cleared before the write-off or nor under the two scenarios). I susoect you do end up paying a little bit more without the freeze, but it isn’t going to be anyway near the effect of the freeze on those with only post-2012 loans.

    The real interest rate on post-2012 loans has a much larger effect when the graduating debt is £40k and above. That’s why 70%+ of those borrowers will be in repayment for 30 years. You aren’t in that situation. (This is why for those borrowers, the repayment threshold level is such a key issue).

    I’m not sure why you think higher repayments at the end of the loan terms are a bad thing, but seem unconcerned about higher repayments throughout the loan as a result of a lower repayment threshold. Earlier repayments are higher value (£ for £) – that’s why you need to model the repayments not simply talk about being in repayment longer.

  7. Brian permalink

    I’m not so sure I would’ve cleared my post-2012 balance within 30 years, let alone 20 without the freeze on the threshold because not all of my repayments go to paying off that balance. Yes, my post-2012 balance is around £15k and my current income £23k.

    So my repayments this year are 9% of (£23,000 – £17,495) = £495. Of this £180 goes to my post-2012 balance (9% of the £2k over the £21k threshold) and the other £315 goes to my pre-2012 balance. The interest on my post-2012 balance is currently 1.6% + 3 x (2,000/20,000)% = 1.9%. So 0.019 x 15k = £285. So my post-2012 balance will grow by £285 – £180 = £105. RPI is only going to rise over the next few years so I fail to see how my post-2012 balance would be cleared within 20 years with the £21k threshold rising as it looks dubious whether it will be cleared with in frozen!

    • But your salary will increase by more than RPI. For example, the scale for public sector teachers is increasing by RPI+1, while there’s also the chance to move up through the scale. In the next year or two you will catch up with the interest accruing and then start to reduce the balance.
      I ran up a quick model and it shows the post-2012 balance clearing in roughly 20 years on a conservative estimate of salary path. With some form of indexing of the threshold between 2017-22, it takes a little longer but not enough to have the years of additional repayments you fear.

  8. Brian permalink

    I accept that moving up the scale may save me, but the salary increases at the moment are not RPI+1%; they’re 1% nominal, i.e. below inflation! Either way, I think that it demonstrates that the post-2012 threshold is too high currently when a teacher’s salary may not even be enough to clear the loan balance for only 1 year’s study. The threshold level should allow someone like me with a relatively low post-2012 balance to comfortably repay my full balance, whilst still retrieving a fair proportion of repayments from those with circa £50k balances. That’s exactly what the freeze achieves.

    • Sorry, my mistake.

      But ‘comfortably repay’ in your example means repay more. You can always help to clear your balance by making additional repayments.

      This is what has confused me throughout this exchange. You don’t seem to see that ‘clearing the balance’ isn’t unequivocally a good thing.

  9. Brian permalink

    Ordinarily clearing the loan balance would mean paying more but I still maintain that in my situation with the way my repayments work, I will pay more in total if I DON’T clear my post-2012 balance as my repayments far from being 9% of earnings over £21,000 for up to 30 years would become 9% of earnings over the currently lower pre-2012 threshold for 25 years (which in itself means I pay more than someone with just a post-2012 loan over that time period) and then 9% of earnings over the post-2012 threshold for a further 8 years, making 33 years of repayments in total (more than someone with just a post-2012 loan) with much of it over a lower threshold than £21,000.

    RPI is going to increase with currency depreciation and higher oil prices so I’m hoping the thresholds can be aligned so some of my repayments are not being ‘wasted’ on my pre-2012 balance that is destined for write-off first when all my repayments could be going to clearing the balance that would potentially prevent the extra 8 years of repayments (i.e. I’d be repaying for 25 years as opposed to 33). Whether money is worth less in the latter years is irrelevant as nil repayments during those years is better than whatever the repayments would be in either nominal or real terms. Policy could also have changed for the worse by that time making repayments much more onerous and I only see it being beneficial to not have a post-2012 balance outstanding when the time is nearing billions in write-offs for the majority that will still have large post-2012 balances eligible for write-off. If I was minister in the 2040s Government I wouldn’t much like what I’d inherited with the ‘off the book’ loan write-offs rapidly becoming public spending. Whether the Government still owns the loans then is another question.

  10. Yes – in your situation – there may be advantage. But given the assumptions in government loan projections and the salary path of a teacher, you will likely clear your post-2012 balance of £15 000 well before 30 years and more likely before 22. Have you made a model of salary path and repayments?

    Should those macroeconomics assumptions not hold up and for example RPI exceed increase in average earnings for a significant period, then the government will have a much bigger set of economic and political concerns than where the loan repayment threshold is located. (It’s fair to say that loans depend on the British economy returning to something like the trends of the 40 years from 1955-2005.)

    “Policy could also have changed for the worse by that time making repayments much more onerous …”
    I agree – this is why you should oppose changes to loan terms for existing borrowers. You benefit this time – you might not do so next time.

    You are arguing in favour of a policy which might give a relatively small benefit to 100-200 000 borrowers against the much bigger hit that is taken by a larger number of existing post-2012 borrowers (and arguably e v e r y subsequent borrower – an extra 250 000 of them per year – who faces a lower repayment threshold). On certain short-term estimates of inflation, new borrowers face an extra £350 in cash for every year that they are over the threshold, even if indexing is introduced after 2020. And more importantly, it sets a precedent for active management of existing borrowers. It should be opposed in principle; you are granting far too much administrative power to government.

    If you want to discuss what happens in 2040, then I request that you take those comments to a relevant post. Just to say here that the impact on the deficit of write-offs in 2040 is largely a paper exercise in accounting – the cash has already gone out the door, it just wasn’t classified as spending. What gets written off (which is expenditure) is determined by repayments as they come in over the following 30-35 years, once repayments diverge significantly from the initial projections the loans will be managed. The accruals conventions of departmental budgeting and accounting demand that any such divergences be dealt with when it becomes clear that they are likely to incur additional costs. Which is precisely what happened with the loan freeze.

  11. Brian permalink

    It’s not just the benefit to borrowers such as me that makes me support the threshold freeze policy (although it is the main reason as I believe the repayments work for borrowers like me would be simply unfair and disproportionate given the skewed situation of having a post-2012 threshold higher than expected in relation to earnings and a pre-2012 threshold lower than expected with the lower RPI figures of late and also lower than intended originally by Labour who had promised uprating from April 2010, and the Browne review who recommended a one-off increase as a result, which wasn’t delivered to pre-2012 borrowers). I’ve already been hit by negative retrospective change (such as the extended freeze on the £15k threshold and then only RPI increases from April 2012 and when the advantage of taking repayment holidays was removed). So I’ve already experienced both sides of the argument on active management of the loans and have come to accept that such changes are justified with ICR loans, just as they are with taxation. Two main reasons why I support this. Firstly, the loan performance depends on macroeconomic assumptions and forecasts way out into the future and if the loan terms could not be adjusted in the meantime to react to changes from the original assumptions then future borrowers would face disproportionately worse terms which is unfair (existing borrowers agree to loan terms being variable so it is not unfair in principle to implement changes to either existing terms or intentions to change terms like the threshold); secondly, the loans are managed through the tax system. As far as I’m aware no other country operating ICR loans only changes policy for new borrowers as the tax system isn’t built to cope with multiple student loan thresholds. We don’t have multiple income tax thresholds for different age groups. The complexity would be both ridiculous and unnecessary. With regards to the threshold freeze, whilst if I was a first-time borrower between 2012 and 2015 I would be disappointed with the freeze, I was just as disappointed with some of the retrospective changes already experienced to my loan term ‘intentions’ promised when I took out my first loans which weren’t delivered and I genuinely think it would be unfair to everyone else (including taxpayers and borrowers with pre-2012 loans who’ve already had negative negative retrospect give change to then say we will continue to plough ahead with raising the post-2012 threshold despite meaning post-2012 borrowers pay less than we intended them to, simply because of an original intention to raise the threshold already outlined).

  12. The administrative problem of maintaining separate loan repayment thresholds is overblown. The government had the chance to index the threshold to a percentage of median earnings, rather than an absolute level. But chose not to do so in 2015. This would have avoided in future one of the factors offered in favour of the freeze and meant that it was only the 2012-2015 borrowers who might have to have a separate threshold in future.

    Your analysis is free of any repayment modelling so have forgotten the basic point – the post-2012 borrowers have much higher graduating debt. Just because your post-2012 loans also have a 30-year write-off clause doesn’t mean you will repay for 30 years. You can only make claims of unfairness based on repayment modelling, not on an abstract comparison of terms and conditions.

    The ‘disappointments’ you describe are not equivalent. How long was the £15k threshold frozen from April 2010 (given that keeping it at £15 000 in 2010 benefitted borrowers)?

    If your £15000 debt makes you exposed to future policy changes, their £40000, £50000, £50000+ debt makes them more so.

    ICR loans are a complex design of threshold, interest rate (you need to consider the effect of the same interest rate on graduating debt too), repayment rate over threshold and write-off policy. The interaction of these features is meant to mimick a progressive (or at least proportionate) tax system. The higher threshold was implemented to mitigate the impact of higher debt on middle and lower earners. You can’t simply freeze it without changing the distributional features of the scheme.

    Freezing the threshold increases the overall repayment take but does so regressively. You are treating post-2012 borrowers as a lump, but the official government distributional analysis is clear that that is misleading – http://wonkhe.com/blogs/spending-review-loan-freeze-is-a-tax-on-social-mobility/

    As I’ve said, by having variable terms the government undermines confidence in its loan scheme, undermining confidence in HE or leading people to look at much more onerous alternative financing. That’s a more nebulous problem but the fall in applications this cycle might point to how serious undermining goodwill might be.

  13. Brian permalink

    I take the point about fixing the repayment threshold as a percentage of average earnings. Ideally this one threshold would cover all ICR loans. I think they chose to implement an absolute threshold level of £21k (a) because the Browne review recommended this amount, and (b) so that repayments from 2016 could be exemplified (whereas they wouldn’t have known the threshold level from 2016 in 2012 had it been subject to a percentage of earnings), as Labour made such a poor effort at explaining ICR loans in the past. The £15k threshold had been frozen since 2005 (although the initial 5 year freeze had been planned) and the change to the plans came from the March 2009 RPI being -0.4%. The minutes of the meeting I posted a link to in my first comment shows that they had planned to review the threshold again for April 2011. The Browne review carried out this review by recommending a one-off increase as the threshold hadn’t been changed since 2005, but bizarrely the £15k threshold wasn’t changed in April 2011 either (nor increased to £21k) which would have used the April 2010 RPI of 4.4% going by the original Labour threshold policy. So indexing it from April 2010 as originally intended would have left it higher than it is, despite it decreasing marginally in 2010. It was probably not changed in April 2011 as it took until 8th December 2010 for the Coalition to finish messing about deciding what to do over threshold indexing, so was too late for implementing a change in April 2011.

  14. Most of the Browne review wasn’t implemented. Browne review recommended no cap on fees, for instance.

    If you recall the politics of this: the coalition went to parliament in December 2010 for a snap vote on a proposal to raise fees to £9k from September 2012. It didn’t go in with fullblown set of proposals on HE – it wanted to pre-empt organised opposition to an HE Bill by dealing with the most unpalatable bit first with secondary legislation. Much of the subsequent shambles is a result of that rush. (Your repayment ‘slicing’ for instance was determined after the fact; the interest rate on post-2012 loans needed primary legislation so a clause was sneaked into the 2011 Education Act).

    MPs (and peers a few days later) voted on the new maximum fee for publicly funded institutions – the various ‘administrative’ details about loans were left to afterwards for various amendments to regulations. Why the indexing of the threshold is more contentious as an ‘intention’ – or a broken promise – is that the vote was won by a small margin and a significant number of LibDem MPs only voted with the government after the indexing proposal was granted as a last minute concession.

    That doesn’t alter the fact that a freeze is regressive. But it does mean that there are some discontinuities in ‘intentions’ as a result of how the coalition choose to proceed in parliament. The reason someone like Martin Lewis is so exercised by the freeze is partly to do with the prominent role the index played in the politics at the time and that he was promised by the minister that it would be implemented in regulations. It wasn’t just an intention that people regrettably had to drop – there was what we might call dissemblance around the administrative business of putting regulations in place. It seems to me that the drafting of the regulations were delayed until after 2015 precisely because people thought that the LibDems wouldn’t be around to hold people to account.

    (Here are my arguments with Martin Lewis at the time about the government’s ability to vary terms – https://andrewmcgettigan.org/2012/06/27/news-from-new-zealand-changing-repayment-terms/ &
    https://andrewmcgettigan.org/2012/10/13/two-points-about-martin-lewiss-recent-posts-on-student-loans/ )

    Re the post-2012 freeze, I think you missed out on a uplift in 2011, but then the indexing came back in 2012.

  15. Brian permalink

    Picking up on the last point “I think you missed out on a uplift in 2011, but then the indexing came back in 2012” on the issue of retrospective changes to repayment thresholds, there are now 2 extremely insightful freedom of information releases on how the policy on this developed with the pre-2012 threshold (notably hardly anyone seemed to acknowledge prior to me raising it that retrospective changes to thresholds and policy intentions occurred with the pre-2012 threshold). There was much misinformation and misunderstanding from the likes of Martin Lewis when the post-2012 threshold was frozen.

    In order to further people’s understanding of the retrospective changes which occurred with the pre-2012 threshold I am sharing these FOI releases.

    The first shows how the threshold policy developed under the Labour Government. Some people realise that it began life at £10,000 from April 2000. Most people recognise the £15,000 level which it was raised to in April 2005 (not 2006 as stated in the submission below – it seems some people even in Government confuse the year the threshold was raised with the year the new top-up tuition fees came in, which shows the threshold was meant to be reviewed separately to any changes in tuition fee policy). What very few people realise is that it was meant to be raised annually by RPI (at least in the short term, with raising by earnings growth a longer term aim) from April 2010. However the spanner in the works came when RPI was negative (March 2009) at the point it was first meant to increase in April 2010. The following submission shows the 3 options that were considered to the then Minister (David Lammy): (1) decease the threshold by RPI (which happened to be -0.4% in March 2009); (2) freeze it at £15,000 for a further year and uprate by RPI from April 2011; and (3) uprate by earnings growth instead from April 2010. The recommended option was (2) but it was not what happened. The first part happened, as the threshold was frozen at £15,000, but it was not uprated by the March 2010 RPI (4.4%) from April 2011.

    https://www.whatdotheyknow.com/request/353572/response/967020/attach/3/Annex%20A%20Repayment%20Threshold%20Redacted%20FOI.pdf

    This following freedom of information release neatly dovetails with the above and explains what happened next after the change of Government in 2010. Following much political wrangling in the Coalition Government, an announcement was made in December 2010 by the Secretary of State (Vince Cable) to uprate the threshold in 2012, 2013, 2014 and 2015. The submission to the new Minister (David Willetts) in February 2011 contained this recommendation to implement threshold uprating from April 2012 – presumably this was the earliest that the uprating could now start given that April 2011 was nearing and the above submission shows that practical time sensitive issues with HMRC and the devolved administrations need to be considered. Notably, in the below submission, paragraph 13 identifies that “the inflation increase in the repayment forecast has already been factored into the RAB forecast, so there is no financial impact.”

    https://www.whatdotheyknow.com/request/353572/response/939043/attach/5/Gibney%2020936%20Annex%20B.pdf

    However, as the first submission shows, the RAB forecast and budget calculations were based on the threshold increasing by 2.8% year-on-year from April 2010, so the fact it was maintained at £15,000 until April 2012 was actually a financial windfall to the Exchequer.

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