Don’t breach trust – raise the student loan repayment threshold

The Money Charity today responded to a government consultation that may sound dry, but represents a huge threat to trust in England’s student loans system.

Students who started university from 2012 currently pay back their loans at a rate of 9% of their income above £21,000 of earnings. When the system was introduced, it was promised that this £21,000 would rise with wage growth so that lower-income graduates would not have to repay. The government is now considering freezing this figure, meaning someone earning £25,000 will be £309 worse of a year by 2021.

A private lender would not be allowed to change the terms and conditions of a loan after it had been made, so why is the government even considering it?

Student loans have not often been out of the news since the current system was introduced in 2012. The idea of burdening students with tens of thousands of pounds of debt has been vehemently opposed by many. When this system was introduced, government ministers were keen to point out that the debt itself was not as important as the repayment terms. Because students would only repay over a certain threshold, at a set rate, this was not so different from a graduate tax, and should not be thought of like other debt. David Willets set out the following:

“…our graduate repayment scheme is closer to – it’s not exactly the same – but it’s closer to the income-tax end of the scale than the credit-card end of the scale.”

There is some merit to this argument. Many of the scare stories were disproportionate to what the loans would actually do to graduates’ finances. But this defence is only sustainable if students and graduates can trust the terms and conditions loans are offered on. The partial sale of the student loan book and the changes proposed in this consultation begin to undermine this trust.

The ability to plan is a central part of financial capability and going to university is a huge financial decision. English students entering university in 2016/17 year will potentially have more than £50,000 of debt when they leave. Regardless of the terms and conditions, this is nearly half the average mortgage, so may deter people from going to university on purely financial grounds. If terms and conditions have changed, and might do so again, £50,000 becomes a lot more frightening and undermines people’s capacity to plan for the long term.

If the threshold and rate at which that sum is paid back is subject to the whim of any incoming government, prospective students will rightly fear this debt and existing debtors will live in insecurity.

You can read our full response to the Department of Business, Innovation and Skills here:

The Money Charity response to freezing the student loan repayment threshold.