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Loan repayment thresholds announced

October 10, 2017

Jo Johnson provided a written statement to the House of Commons yesterday, which confirmed that maximum tuition fee levels would be frozen for 2018/19 and that the loan repayment threshold for post-2012 loans would increase to £25 000 this coming April and then be uprated annually in line with average earnings (undoing Osborne’s 2015 freeze and more). The lower threshold for the interest rate taper will also rise to that level, while the upper threshold will increase to £45 000, with the taper maintained at RPI to RPI + 3 percentage points.

The repayment threshold for pre-2012 loans, currently set at £17 775 will continue to increase in line with RPI, while the threshold for postgraduate loans will remain frozen at £21 000. PGT loans now look an even worse deal as their interest is fixed at RPI +3pp (no taper) and so can prove expensive for those who earn above the threshold, but not enough to erode the debt quickly. Since the loan limit is only £10 000 in total, PGT borrowers are likely to repay a higher percentage of interest.

Back to post-2012 loans: a major review is likely to be announced at the Budget on 22 November. Even if the Treasury had had a welcome change of heart and was prepared to support greater investment in HE, this isn’t the way to do it.

London Economics and the Institute for Fiscal Studies have costed the measure independently and concluded that it would cost at least £2bn per cohort of borrowers (IFS: £2bn; London Economics: £2.78bn), with the RAB charge rising from around 30% to 45%. That is, for each £1 lent, the government would expect to get back 55p … which leads us to the problematic optics. The loan subsidy is opaque and much harder to present to the public than lower or zero fees (as a result of direct teaching grants to institutions).

Without futher review, the scheme is more expensive than what we had before 2012, fees are over £9000pa, graduating debt is still enormous, and the interest rate is unchanged. An expensive measure which benefits almost all borrowers will scarcely address the concerns aired continually in the press over the last year. (Although a repayment rise benefits all existing borrowers and that would appear to have advantages over Labour’s offer of zero tuition to future students, Labour’s interest in debt write-offs would come into the picture here.)

Moreover, from the Treasury point of view, repayments from all post-2012 cohorts will be lowered immediately, thus affecting cashflow and short-term projections for public sector net debt.

As I said in the previous post, I expect a review to look at loan outlay, not just fee levels.  The Conservative line against Labour has to be that undergraduate study is worth it and that requires making value for money the focus. From both lender and borrower perspective, you want to focus on lending less so that what goes unpaid is reduced. It seems unlikely that Hammond will want to replace loans with teaching grants (except in specific subjects like engineering and mathematics), so institutions (and staff) should be preparing for some delayed austerity and may need to think about how they would operate in an environment where the tuition fee loan on offer to their students did not match the maximum tuition fee.

 

 

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12 Comments
  1. Brian permalink

    What a complete and utter mess the ICR student loan system has now turned into.

    Theresa May – by jacking up the repayment threshold even further – has dismantled the economic and political viability and sustainability of the system and frankly the system’s not a pack of cards waiting to collapse.

    And the political pressure point of the interest rate hasn’t even been addressed. As David Willetts said today, “raising the threshold wasn’t necessary” and is enormously expensive as it impacts so much on how much of the loan outlay is recovered. A 45% RAB is ludicrous as the subsidy is so opaque so isn’t even a political fix. Further retrospective corrective change will inevitably be needed.

    What a mess to have 3 repayment thresholds now as well in a system that few understand already. The correct policy lever to pull was the interest rate, not the repayment threshold which was already higher than intended – and raising this even disadvantages graduates holding a combination of both pre and post-2012 debt as it doesn’t lower contributions but merely changes which loans the contributions go to paying off – more will now go on the pre-2012 loan meaning repayments will be both larger and longer than for someone with just a post-2012 loan.

    Utter madness.

  2. Tom permalink

    You mean RE-anounced!

    The turmoil over this unscheduled change has created mass confusion on the payroll side of things as software developers and payroll operators had been informed in August by DfE in the annual update that £21,000 was the confirmed threshold for post-2012 loans in 18/19:

    https://www.slc.co.uk/media/latest-news/changes-to-interest-rates-and-thresholds-1.aspx

    https://www.reward-strategy.com/news/top-stories/confusion-over-student-loan-thresholds-2018-19-3830

    Frankly the system is now unsustainable as it is. Either the repayment threshold needs lowering, the repayment rate needs increasing or the fee levels and interest rates need to be cut substantially. As it is at the moment it’s just a fiendishly complex and confusing ticking time-bomb of debt that much of which is due to be cancelled. As if the logic behind that isn’t confusing enough for potential applicants, the Government wanted to go one step further on the barmy scale of disjointed policy in setting 3 different threshold levels and indexing each differently – all of which are meant to protect ‘low earners’ from repayment. So for pre-2012 loans £18,330 rising with prices is meant to be low, for postgrad £21,000 frozen is meant to be low, and for post-2012 loans £25,000 rising with earnings is meant to be low.

    The system needs all these perverse loose ends created by successive bolt-on changes to be tied up. It’s over-complicated and we need to revisit first principles that brought about ICR loans of a simple contribution system. Abolish the 3 thresholds and set one threshold to cover all loans at 75% of average earnings.

    There’s also the perverse situation of the way repayments are sliced between the loans as a result of operating different threshold amounts. The hike to the post-2012 threshold means up to £360 that would have been used to pay off the post-2012 loan (at the higher interest rate and latest write off) will now be used to pay off the pre-2012 loan instead, making it impossible for anyone other than ultra high earners to pay off the post-2012 part of their borrowing and extending repayments beyond the pre-2012 loan period for everyone on realistic earnings pathways.

    I hope this threshold change will not impact on the introduction of part-time maintenance loans for second degrees due to come in for 18/19.

    Personally I would prefer tuition for first degrees to be free with maintenance support through a loan and then (not necessarily the full) tuition fee loan and a reduced rate maintenance loan available for second degrees and retraining/upskilling. The current loan system is inflexible and too rigidly geared towards a 3 year first degree. The loan system should be available to dip in and out of throughout your working life for lifelong learning.

    • Well, May said the threshold for Plan 2 was increasing to £25 000 but no further details were confirmed (including implementation date), so I’m happy to use ‘announced’ for the details.

      I tend to agree with these points and said as much at the Treasury Committee last week. I’d add that I still believe there will be further announcements to come at the Budget (perhaps on interest …).

      The problems are deeper than can be resolved by a single threshold for all loans. And I wouldn’t anticipate any changes for Plan 1 loans.

      • Tom permalink

        Agree that the problems are deeper than multiple thresholds but it certainly doesn’t help general understanding as there’s no sense nor reason to the various current threshold levels and for those repaying multiple loan types it creates perverse and unpredictable outcomes (like how raising the post-2012 threshold can worsen terms for those who are also repaying pre-2012 loans). All of the thresholds have somehow spawned from one of the main recommendations spun out of the 2010 Browne review to increase the £15,000 threshold to £21,000 “as it had not been increased since 2005”. Instead of simply doing what Browne said and raising the existing threshold (which a Labour Government almost certainly would’ve done) they used the difference in thresholds as political leverage to claim the new system better. The messy sop to the Lib Dems over the threshold uprating in 2010 rather than again following Browne and reviewing it periodically to take into account increases in earnings also contributed to this mess.

        Although I absolutely agree that the interest rate should be capped at close to the Government cost of borrowing, the Times reported that Hammond was against cutting interest so I’m not so sure about the Budget:

        https://www.thetimes.co.uk/article/hammond-holds-out-against-cutting-student-loan-interest-qdwnsbgsn#

        I hope that the ‘major review’ announced by May is a proper independent Robbins/Dearing/Browne rather than an internal Government exercise as frankly ministers have proved themselves pretty useless when it comes to setting up a sustainable student finance system. Almost certainly such a review would radically change the parameters of the current system.

      • We’ve covered that ground well enough on here before: much of Browne was not adopted.
        But I agree that the scheme is now complex and the details lack any clear rationale.

        The review is apparently an internal, ‘first principles’ review to be conducted from number 10. And I suspect that the main concern will be whether to impose funding differentials somehow. All the focus will be on Plan 2 loans and unfortunately other things – part-time, post-grad and the slicing used to distribute payments between Plan 1 and Plan 2 loans (for those who hold both) will be an afterthought.

  3. Tom permalink

    Where did you find that out about review being internal?

  4. Brian permalink

    Official RAB forecast 40-45%:

    http://www.parliament.uk/business/publications/written-questions-answers-statements/written-question/Commons/2017-10-17/108255

    Unsustainable. Radical change needed. Review should be external and implemented in full without cherry picking.

    • Thanks. Financial sustainability depends on what government is prepared to support – it might well be OK with a RAB that high.
      Public goodwill is another matter and is more to do with the confusing inter-relation of debt, interest and non-repayment (than RAB per se).

  5. Brian permalink

    Scottish review of student loans just published and it could lead to the Plan 1 (pre-2012) threshold being forced up:

    http://www.gov.scot/Resource/0052/00527875.pdf

    Scotland currently uses the SLC repayment plan 1 (which is applicable to English pre-2012 loans). The review recommends the interest rate stays the same (lower of base rate +1% or RPI), loans written off after 30 years (rather than 35 years) and the repayment threshold increase from £17,775 to £22,000.

    If the Scottish Government accept these conditions, they are unlikely to only apply them to new loans as there’s no reason not to apply them to existing loans (the threshold and write off are being made more generous and the interest rate is staying the same). Applying them to new loans would also need a new repayment plan to be operated by SLC on a UK-wide basis which would be problematic and costly when it would only apply to one devolved nation and when the only thing that would be different compared to Plan 1 would be the threshold.

    To raise the Plan 1 threshold in Scotland would also need the agreement of the UK Government (for pre-2012 loans) and the Northern Irish Government who also use Plan 1.

    The review also suggests that raising the threshold to £25,000 (in line with Plan 2) should be considered. However, if the interest rate was not also raised to the Plan 2 rate of RPI to RPI+3%, this would also need a new repayment plan.

    So some interesting decisions to watch out for in Scotland and how it could impact pre-2012 loans here in England…

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