Thursday 26 May 2016

Wildfire Myths, Student Finance and Social Media - Again!

Social media has seen a complaint about the English student finance system go viral. Simon Crowther, a recent civil engineering graduate from Nottingham, was shocked when, on receiving statements from the Student Loan Company, it transpired his student finance arrangement was not what he thought it was.

He accused the Government of having "misled" him and other students when it came to the student loans system. He took-out a student loan in 2012 under the scheme introduced under the Coalition Government, which overhauled completely the way Universities and student maintenance was funded by government.

What changed in 2012

The key changes to the system included the raising of tuition fees to a maximum of £9kpa, a significant up-rating of the "repayment threshold" above which graduates have to begin to repay their loans, a substantial expansion of the maximum maintenance payment for which a student was eligible (especially those from disadvantaged backgrounds), the imposition of a 30-year rule wereby unpaid balances of a student loan are written-off after that period, and a move away from charging RPI inflation on the balance of a student loan, to something resembling more closely, but still well below, a commercial borrowing rate.

All of this information was extensively made available and was able to be read about on both the Student Loan Company's website, the Department for Business Skills and Innovation website, was discussed at length in government information campaigns about the new system, was disclosed in all the paperwork made available to students applying for a student loan, and was spoken about almost non-stop by people like Martin Lewis on his MoneySavingExpert website and in television interviews. At the time many of us were frustrated that the mainstream media, including the BBC, and the opposition political parties, were focused obsessively only on the £9k fees, ignoring the other changes to the system that, in fact, cut the contributions made by low-earning graduates, both at the beginning of their careers and across their earning lifetime.

What's the problem?

The news coverage of Crowther's letter has perpetuated or accepted several myths and pieces of misinformation about the new scheme. The letter makes the false claim that the government has "sold our loans to a private company which has caused the interest rate to skyrocket". This is wrong on two levels.

"THEY SOLD OUR LOANS!" No. No they didn't.

Firstly, it is not true that the government has sold-off the right to receive loan repayments to a private company, at least not with respect to people like Simon. His loan is disbursed and administered by the Student Loans Company, which is wholly owned by government actors in the UK (85% by the Department for Business, Skills and Innovation, responsible for support of tertiary education in England and 5% each by the devolved administrations). The government has owned and run student finance through the SLC for almost three decades. This is nothing new. Nothing has changed here.

It is true that some legacy loans were sold-off by the Student Loans Company in 2013. These related to what were "mortgage-style" borrowing arrangements that existed to meet tertiary education/living costs between the formation of the SLC in 1989-90 and 1998. One of the reasons for the decision to sell-off these loans is that they individually had very low outstanding balances, and those that didn't were becoming a lot more expensive to collect. This was a consequence of difficulties tracking-down graduates that had long since disappeared off the radar of the SLC. The effect of this is to divert time and other resources available to the SLC from focusing on ensuring that more recent loans are paid back promptly. Even though the "book value" of these loans was about £890 million, the actual amount the government would stand to realise from enforcing these debts themselves would likely have been much lower. This explains why a £160 million lump sum, paid by the successful bidder, is not the terrible or outrageous sham its critics say it is.

It is also true that, since the Conservatives acquired a majority in May 2015, there has been renewed consideration given to whether the loans incurred between 1998 and 2012 should be sold-off. Vince Cable, as Secretary of State for Business Innovation and Skills, had been strongly opposed to this move, and blocked some efforts to take this idea further than exploratory stages. However, it should be noted that in the last budget this idea was put back on the back-burner and a recent OBR report suggested the plan was not advancing in the near future.


The second problem with Crowther's open letter is that he has seriously misunderstood how interest works in student loans. It is not the case, even among the loans that the Student Loans Company has sold-off, that the new beneficiaries have the right to change the terms and conditions, like the rate of interest the lender can charge on the remaining balance of the principal debt. That would be a breach of contract and those taking out loans between 1990 and 1998 could contest it.

But it's not even true that interest rates have rocketed on student loans under the new system, which remember hasn't been privatised. Part of the new scheme did, it is true, change the system that previously charged RPI inflation as the rate of interest on the accrued student loan balance. It changed it to RPI + 3% when you are studying, then RPI inflation on graduation if you earn less than the repayment threshold (£21kpa) and then a variable rate of interest between RPI and RPI + 3% until a student earns over £41kpa. These terms were made completely clear at the time and were readily available on the Student Loans Company website.

At the moment RPI inflation is about 0.9%, meaning the maximum rate of interest on the loan is 3.9%. This is actually lower than the rate charged on loans in the two years immediate preceding the introduction of the new system, because RPI inflation was itself higher than 3.9% in those years! It is also lower than most mortgage rates at the moment and much lower than most unsecured credit arrangements. It is straight-up fiction on his part when he claims that, when he took out the loan "the loan was at a very low interest, and at the time was around 0.5%."

This is, admittedly, one of the most complicated aspects of the system. Crowther has clearly misunderstood how this works. The impression his letter gives is that the 3% above inflation rate is charged on all graduates, and that therefore, as he claims, he would need to be earning over £41kpa to begin to repay the principal debt over and above the interest.

How it actually works

This is wrong for two reasons. Firstly, someone earning, say, £27kpa, the national median household wage, will only be paying interest of 1.8% on the principal. The purpose of having a sliding scale of interest levied on graduates is actually to prevent higher-earning graduates from getting an unfair advantage in saved interest with respect to saving money by paying-off their debt earlier than those earning less than them. It isn't a perfect way of doing it, but, assuming we are talking about those who do in fact pay off the whole principal of their student loan, this isn't unfair and only hits graduates earning almost double the middle income of someone living in the UK. Instead, these people would, just like anyone else, have to make a conscious overpayment if they wanted to extinguish the debt early, though why they'd want to given the generous terms of repayment I cannot for the life of me understand.

The second reason it is wrong is because it completely ignores the fact that interest, for many graduates, will function as a hypothetical accounting exercise and for most will only slightly increase the total amount for which they are liable. The fact that student loans are written-off after 30 years means that, regardless of how much you've paid, you don't have to pay any more. If you are paying 9% of all your earnings over the threshold for 30 years, and the total of that contribution is less than the original loan amount you took out, the government is effectively writing off both the amount of the principal you didn't pay, and every single penny of the interest you accrued.

Even if you would have just and no-more paid off the principal but for interest charged, then the amount of interest you are effectively charged is still only the difference between your total repayments and the original sum you took out; not the whole amount of interest nominally charged to your account.

The only people actually affected by high rates of interest are those who are paying off their student loan with several years to spare.

The frustrating thing

If Crowther is right about one thing, it's about just how much of a gap there is between how the student finance system actually works, and how many people think it works. The problem is that how he now thinks it works, having had this "veil of secrecy lifted", is in fact... not how it works. What we are seeing is a culmination of media dumbing down of the system, to such an extent that it seems clear that bright, generally mathematically literate, students, secondary school teachers and politicians alike do not understand the mechanics of it all, despite the information being readily available and easy to communicate to those taking out those loans.

It is also clear that headline grabbing about "selling loans to the private sector" and "commercial rate interest" and the like are being used as dumbed-down signals to suggest that education is being marketised in some sort of free market frenzy. This makes the debate turn into one of ideological criticism of what the political extremes think the system is motivated by, rather than an evidence-based approach that properly considers how the scheme works compared to others.

It also distracts from the ability genuinely to criticise changes made by the government that actually are unfair and retrospective. When the new scheme was introduced, it was understood that the £21kpa repayment threshold was supposed to rise in-line with inflation. This would mean that, as the cost of living went up, graduates were not left with less real disposable income in the years to come. Alas, in George Osborne's Autumn Statement, he left in the fine-print the fact that this was no longer going to be the case.

The effect of this was a bit like cutting the personal allowance for taxpayers: more of a graduate's income would be subject to the 9% deduction from their pay-packet than if it had held with inflation. In terms of the impact on real disposable income, this most affects those whose debt repayments are least contingent on the size of their principal debt. Put more simply, it affects those earning between about £21k and £40k the most. Those earning much more than that don't suffer as much from a lower threshold as they end-up repaying their debt in full, and do it earlier than they otherwise would. The effect of that is... that they don't accrue as much interest on the debt as they otherwise would have so pay less for their University education!

Martin Lewis has been very vocal about this change, and it is one people should be angry about. That really is a case of going back on an implied undertaking or changing the rules of the game after the fact.

Wider context

This debate also takes place, from the perspective of observers like me in Scotland, against the backdrop of a vastly oversimplified public debate about the full state-funding of tuition fees in Scotland. This is a policy that benefits those who frankly don't need the state to underwrite their education for them. The evidence shows that this policy has done nothing to widen access to Scottish Universities when it comes to admitting those from deprived backgrounds. While the gap is closing in fee-ridden England, it is stubborn and static in Scotland.

We are also seeing Scottish Universities increasingly dependent on international and rUK students being admitted in order to meet their costs of operating and providing a diverse range of courses and subjects. This need to admit those bringing external sources of funding is holding back admissions levels for Scottish students, which disproportionately hits those from disadvantaged and minority backgrounds.

The dangers of misinformation in public debate allow governments to advocate things that are symbolically powerful, but ultimately terrible policies. And in the age of social media, the myth can travel half-way across the world before the truth has so much as got its boots on. We need to demand better.


  1. I used to work at SLC. They, and they gov dept staff, always erred in favour of the student, within the operating principles coming from government.