We all know that the student loan system is rubbish. £9,000 fees combined with a lack of job prospects are bad enough, but The Guardian showed last month that the Government has been advised to make repayment terms more stringent for graduates. It turns out that the small print on that massive loan allows for the Government to adjust the interest rate and rate of repayment on the loans at any time. Which is nice of them.
But that’s not all. Research published this week by the Intergenerational Foundation (written by this veritable blogger) has found that graduates in England and Wales are currently charged twice as much interest on their loan (6.6%) as the average across the OECD (3.3%). The interest rate is also the highest in Western Europe, the third highest in the OECD.
The only two countries charging more than this Government for tuition are Mexico and the Czech Republic, both of whom have public universities that charge exceptionally low fees. Tuition fees in England and Wales are the highest headline figures of any public university system in the world. Yeah. Ouch.
Recent research has shown that the overall cost to the Treasury of the higher-cap, £9,000 scheme is far more than under the Labour cap of £3,000, with any hope of savings rather forlorn. The impact of this lack of foresight will likely fall most heavily on future generations via higher income tax, climbing retirement ages and a rising cost of living.
But this has been well documented. The Government continues to harden the loan system for students, even in the same month of the most recent Budget speech this year in which pensioners’ benefits were – once again – safeguarded and long-term savers were protected. And despite the austerity measures causing a disproportionate impact on the younger generations, applications to UK universities remain high and, in fact, increased 3.5 per cent for the 2013/14 intake.
The repayment plan for UK graduates has not been so heavily scrutinised. It has been ignored, somewhat, that the interest rate on student loans has more than doubled since 2010, from the APR rate of 1.5 per cent to the RPI rate of 3.1 per cent. This rate increases to RPI plus 3 per cent when graduates earn more than £21,000, a rate which (it is worth repeating) is the third-highest rate across the OECD, combined with the third-highest tuition fees.
Upon graduation, whether their course is completed or not, graduates are liable to repay their loans and start doing so once they earn above £21,000, and not before. 9 per cent of any earnings over this threshold are owed to the Treasury. While studying, interest on the loan matches RPI, currently 3.6 per cent, + 3 per cent. After graduating, the rates change as shown in the table below.
Under the Labour Government, students borrowed at a rate that matched APR (currently 1.5%) but the current loan scheme switched the interest rate to RPI, meaning students are to accrue a heavier interest burden on their loan. Now, since the interest on UK loans will in most cases simply not be repaid (whether or not graduates can find work) the real rate of interest is used primarily to bend the distribution curve of repayments to make the scheme more progressive.
For example, a 2016 law graduate from a low-income family earning under £25,000 studied for their 3-year law degree in London. In order to take the course, they were entitled to 3 years with the maximum maintenance loan (£7,675) offset by the maximum maintenance grant (£3,354), giving a total maintenance loan for those 3 years of £12,963. On top of this, the tuition fee loan at £9,000 per year totals £27,000 giving a total outstanding loan of £39,963.
Now, suppose they graduate and are set to earn £42,000 per annum while taking their training contract at a City law firm. They are obliged to pay 9% of their earnings over £21,000 which would total £1,890, or £157.50 per month. By the end of their first year since graduation, they have repaid £1,890. However, earning over £41,000 requires our law graduate to pay RPI + 3 per cent, totaling 6.6 per cent. This interest rate applied to their loan of £39,963 adds, in the first year, £2,637. As such, they are not likely to begin repaying their loan – or, indeed, the interest accrued on the loan – until they earn a significantly higher amount. (They would not begin to meet the interest repayments until they were earning in the region of £51,000.)
Suppose our graduate, perhaps owing to tough economic conditions, cannot secure a training contract and, instead, takes up work as a paralegal, and let’s suppose they are earning £22,000 per annum. They owe 9 per cent of their earnings over £21,000 (so £1,000), which would total £90, or £7.50 per month. Their annual interest rate matches RPI (and they would not accrue the additional 3 per cent on top of RPI until they were earning over £41,000) – at 3.6 per cent. In the first year, the interest on their loan is £1,438. Clearly, a graduate on this salary would not make a substantial dent in their accrued interest, let alone the outstanding loan amount.
Though the UK holds a position of esteem in global higher education, with universities like Oxford, Cambridge, LSE and UCL continuing to lead global league tables, it is clear that the value of a UK degree is very high, in comparative terms. As such, one would expect the fees, to an extent, to reflect this.
However, the current situation means that UK students are agreeing to pay fees which they may never meet, on the basis that they agree to pay at a rate which, combined with income tax, means they may never pay off the capital on their loans. Dr Andrew McGettigan has claimed that the “income-contingent repayment loans offered to students are also future-policy-contingent, potentially creating an indentured class of graduates from whom higher repayments can be extracted.”
This tax, on top of a necessarily longer term of repayment on loans to cover the increased fees, means that graduates are settling a significant bill left by the Government’s austerity plans. With high youth unemployment, a serious fall in first-time buyers, rapidly increasing rents and absent growth, the high rate of interest on student loan repayments is another impertinent assault on younger and future generations on whom the new system places atrocious financial burdens compared with the relative comfort of many of the older generations.
The full report, ‘Squeezing Our Students? An English/OECD Comparison’, is available here.
This piece also appeared on the Huffington Post.