James Flynn discusses the plans to change the terms and conditions of student loans and makes the case for how Labour can put forward a more progressive alternative.
Conservative proposals to reduce the point at which graduates start making repayments to their student loans, from the current £27,295 to potentially as low as £22,000, are set to prove controversial. But these plans have left an open door for Labour to set out a much fairer way of funding university study, while also allowing it to keep its policy of getting rid of tuition fees.
Student loans are confusing. But in short, for those who went to university after 2012, once a graduate earns over and above the graduates earning threshold of £27,295, they start making repayments. Repayments are made at 9% of earnings over and above this threshold.
If a graduate does not pay off all of their student loans within 30 years of graduation, any debt remaining is forgiven. This means that, if a graduate never earns more than £27,295, they never make a single repayment and their degree essentially cost them nothing.
Tuition fees go straight to the Treasury, and they have observed some pressing concerns over the number of students who are expected to pay off their loans. According to the House of Commons Library, only 22 per cent of graduates are expected to pay off their loans in full. The remainder will have a proportion written off by the government. This proportion of loan debt written off (known as the RAB Charge) is estimated by the Commons Library to be around 53%.
According to the Telegraph, the government now want to save billions of pounds of loan write-offs by reducing the threshold to as low as £22,000 and, because of the terms and conditions of student loans, the government can apply this retrospectively and change the terms of the deal existing students and graduates signed up for.
The argument the government are set to take is that graduates who do not pay their loans back have done a ‘poor value’ degree and the taxpayer should not subsidise that.
This argument is actually developed from a framing initially proposed by Theresa May. In part, because she was spooked at Jeremy Corbyn’s mass appeal among younger voters, May increased the earnings threshold at which students repay their student loans up to £25,000 in October 2017 - roughly the average wage of non-graduates at the time. It has since raised further to £27,295.
May’s reasoning can be summed as this: If half of all young people go to university, and a graduate goes on to earn more than the average wage of non-graduates, then that graduate has benefited as a result of going to university. They should therefore contribute to their university education. Those earning below the average wage of non-graduates have not benefited, therefore they have no need to contribute.
The argument of course has some logic behind it. But what it did is open the door to questions over those graduates who no longer earned enough to make the threshold - were their courses ‘low quality’? Were the institutions ‘low quality’? Or were the students themselves better served by not doing a degree at all? This ‘low quality’/’bad investment’ argument is how the government has been able to frame its argument for lowering the threshold (along with other restrictions on the sector).
But this framing ignores the fact that some courses lead to very specialised, high-skilled careers (for example the sciences), while some - while delivering broad graduate skills - don’t so directly (for example, Politics or English). It also ignores that many courses (including Policing and Nursing) lead to starting salaries below the £27,295 threshold - thanks to payscales completely out of the control of universities - but nevertheless are considered important career paths in their own right (a ‘high quality’/’good investment’, to use the government framing).
It also ignores the core reason why the vast majority of graduates - 78 per cent - don’t pay their loans back in full. And this owes to the high rate of interest charged on the loans.
Student loans are subject to an interest rate of 3% over and above the Retail Price Index while the student is studying, and when they earn above the repayment threshold (loans are subject to only the RPI rate of inflation if earnings are below the repayment threshold). If this sounds unfair, it is. As through three years of study, thousands of pounds of interest is piling up. With the introduction of £9,250 fees and the conversion of maintenance grants into maintenance loans (perversely making the debt of poorer students much higher than their wealthy peers), it is little wonder that only the very richest have any hope of paying off their loans.
But student loans act very differently to other forms of debt. While 78 per cent of graduates never pay off their loans in full, after 30 years what is left is simply forgiven. This obviously does not happen with a typical bank loan. So when you break down the repayment structure, the vast majority of students pay a proportion of their income over a certain threshold for 30 years. This means that, while the loan system presents itself as a loan, with awkward regular reminders of how much you ‘owe’, the system actually behaves (for the vast majority) much more like a time-limited tax.
And this is why when concerns have been raised about the level of debt, the wild interest rates, and the ability for governments to retrospectively change the terms of the loan, the line back has often been that it’s actually less of a loan and more of a tax. Leading Mary Curnock-Cook (at the time the Chief Executive of UCAS, now a non-executive director of the Student Loans Company) to tell then-universities minister David Willetts that:
“If it looks like a tax, walks like a tax and quacks like a tax, perhaps we should call it a tax?”
This is why students and graduates are likely to be very angry about this. We are only a matter of months from the Conservatives raising National Insurance contributions lower earners. Now, after years of disrupted teaching due to the pandemic, students are not getting the fee rebate they wanted, instead, they will start making loan repayments much sooner than they expected (which we have established looks, walks and quacks like a tax increase for the very vast majority of graduates).
This increase in ‘tax’ would work out at just under £500 for those on average wages and, if these changes were applied to everyone under the Plan 2 system (IE those charged £9,000+ fees), this would affect students who applied for their loans all the way back to 2012.
And while the Conservatives tie themselves up in knots over whether this is actually a loan (which absolutely must be paid back), or whether this is a tax (where you can change the terms at will), this presents an opportunity for Labour - whose fee policy remains to remove tuition fees, but without much detail over where the money for universities will come from. The answer could well be a graduate tax.
This would allow Labour to continue offering the promise of removing tuition fees, removing the most unpopular parts of the tuition system (the high annual fee, the interest rates, the regular letters saying you owe over £50,000, the fact that you are asking 18-year-olds to sign up to a 30-year loan deal which can be changed on a political whim), and keep what is arguably a pretty progressive repayment system - where the more you earn, the more you contribute to the Education system.
This would also have the double opportunity of ensuring those with the deepest pockets don’t get the chance to duck out of repayments by either earning a super-high wage or simply having their parents pay their fees upfront. Bringing higher earners into the system, contributing to their education, and subsidising the tuition of those who never earned enough to make even one repayment.
Finally, as this would be formalising a higher rate of tax for graduates, Labour could commit to slowly tapering down the rate of a graduate tax (or continually raising the earnings threshold) and absorbing this into the wider education budget. This will be the most difficult bit to get right as they have to stack up formalising differing tax rates based on education, and the fact that the huge expansion of university study since the late 90s has meant taking this all under general taxation immediately would be difficult without either cutbacks in an already squeezed university sector, cutbacks in other areas at a time when training and retraining are so important, or tax rises for all.
There is certainly room here for Labour to set out its stall for a more progressive way of funding universities. One where the people who clearly benefit from Higher Education contribute fairly, and which gets rid of the misleading way it frames repayments like a loan debt to hang around a graduate’s neck. Getting rid of tuition fees is a policy and a promise Labour must keep, and a graduate tax looks like the only logical way it can do this.
James Flynn is a Policy Officer on the Young Fabians Education Network. He works as a Policy Analyst in the Higher Education sector. He tweets at @james_flynn.