What Can Defuse the Student Loan Time Bomb?

by Steven Jones, The Conversation

According to a new pamphlet issued by the Social Market Foundation:

“The Tories’ student loan system that finances our universities, voted through by the Lib Dems, is a timebomb waiting to go off”.

The author Liam Byrne, Labour’s shadow minister for universities, science and skills, rues a “free-market experiment gone wild”, but offers few insights into Labour’s preferred alternative. There is no shortage of ideas out there for him to choose from.

The reason the system isn’t working is because, on current estimates, 45p for every £1 borrowed will never be paid back.

In a recent statement, the Russell Group dropped several hints about what Britain’s leading universities think should happen next in terms of student funding. Responding to a Business Innovation and Skills Select Committee report that also warned of an “increasingly fragile” system, the Russell Group pointed out that graduates currently pay back “only” 9% of their annual earnings above £21,000. This, they noted, was a “far” higher repayment threshold than under the previous system before the new fee regime was introduced in 2012.

The statement added that the government “can, of course, change these repayment conditions in order to increase the amount of money repaid, if they so choose.” With this line, the Russell Group acknowledged that the 2012 system requires change, but stopped short of calling directly for new thresholds for student loans to pay their loans back. The decision for that would remain the government’s, as would any subsequent blame.

Who benefits from a lower threshold?

Some, such as LSE’s Nicholas Barr, have explicitly advocated a lower opening repayment threshold. £21,000 is an arbitrary figure, for which no specific rationale was ever provided. If it were cut to, say, £15,000, a graduate earning £20,000 per year would still repay only £37.50 per month (compared to nothing now). A graduate on £25,000 would pay £75 (compared to £30 now).

However, such benign calculations do not address the broader question of whether lower-earning graduates should be hit harder than their higher-earning counterparts.

The graph below is a crude initial attempt to visualise how a reduced repayment threshold would affect graduates’ total lifetime repayments.

What lowering the repayment threshold would mean. Steven Jones

The blue blocks represent how much four types of earners would currently pay back, in today’s money, in return for borrowing £9,000 in fees, plus £5,500 maintenance per year, using the defaults currently set on a popular student finance calculator.

The red blocks represent approximate total repayments under a lower £15,0000 threshold for the same four groups of earners. The groups are those with starting salaries of £20,000, £30,000, £40,000 and £50,000 respectively.

As the graph shows, a reduced threshold would hit lower earning graduates harder than higher earning graduates (excluding those whose incomes never rise above £15,000 and who therefore receive full debt forgiveness). Higher earning graduates would be slightly better off.

Punishing middle earners

Note that in neither system do the very highest earning graduates repay most. As explained by the University of Bristol’s Ron Johnston, the 2012 system is regressive because high earning graduates complete their repayments earlier and thereby accrue less interest on their debt. Cutting the threshold at which repayments begin would both benefit and enlarge this group. They’d be the winners.

The losers would be graduates who aren’t high earners. As noted in the Sutton Trust’s report, Payback Time, under the 2012 system an “average teacher” will pay back around £42,000 of student debt, and still be making repayment in their early 50s. Under the system that was withdrawn in 2012, the same teacher would have paid around £25,000 and complete at the age of 40. The danger is that tinkering with repayment thresholds makes the current system even more punishing for such graduates.

On the surface, keeping a loan-based system has its advantages. The Russell Group is right to point out that UK universities punch well above their weight relative to the proportion of GDP that comes their way, and though the 2012 system failed as an austerity measure, it has safeguarded overall funding levels for most students.

What’s more, fears that the 2012 fees hike would deter young people from lower socioeconomic backgrounds from enrolling on full-time degree programmes appear not to have materialised. This summer’s figures have shown an 8% increase among the poorest groups (though the number of mature and part-time students has fallen alarmingly).

Give graduate tax a go

An alternative approach that receives less attention is that of a graduate tax. Understandably, some commentators have expressed concern that “hypothecated” taxes (ones earmarked for a specific purpose such as a graduate tax) might be diverted elsewhere by capricious future governments. But the principle that England’s highest earning graduates should contribute the most (or, at least, as much as their middle earning counterparts) is one that would surely enjoy popular support.

Liam Byrne is right. Today’s students are, as he says:

“Highly anxious about taking on an average of £44,000 worth of debt in an uncertain job market where nearly half of employed recent graduates are in non-graduate jobs.”

Of course, a graduate tax would make it trickier for universities to compete on price and therefore sits uneasily within fashionable, “student-as-consumer” thinking. But the alternative is that the cost of higher education, having already been transferred from taxpayer to graduate, could be further shifted from those who benefit most to those who benefit less.

Steven Jones has received research funding from the Sutton Trust.

This article was originally published on The Conversation. Read the original article.