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Labour’s plan to cut tuition fees to £6,000 is a financially illiterate policy

graduates

Labour needs to rethink its plan to cut tuition fees

Labour has long touted that it may cut English tuition fees to £6,000 if elected. Today university chiefs wrote a letter about the proposal that made the front pages, saying that they’d struggle to survive on such a drop of income. Yet as I explained a year ago when it was first mooted, the biggest problem with cutting tuition fees is that it helps exactly the wrong people – only affluent graduates will gain.

This all stems from an illiteracy about how student finance works. People worry about “how much I borrow” whereas what really counts instead is “how much I repay”, and changing the level of tuition fees doesn’t do much to change that. So I wanted to bash out a blog to explain.

PS: Before anyone thinks I’m taking a political side, that isn’t it, only a few weeks ago I attacked the Government for its student finance policy (see my I’ll organise mass protest if you change the system blog).


How much will you repay?

The amount that you pay on tuition fees isn’t dictated purely by what tuition fees are set at but more by what you earn after you leave university.

After leaving, students repay 9% of everything they earn above a £21,000 a year threshold. And this threshold is set to rise with average earnings from 2017 (see my ‘don’t change the threshold blog’ for more on that).

A graduate would then continue to repay until they had cleared what they had borrowed plus interest, or until 30 years had elapsed since the April after they graduated – whichever comes first (for a more detailed explanation see my 20 student loan mythbusters guide).

In practice, of the graduates who earn enough to repay – which is most of them – all but the highest-earning after university will be repaying for the whole of the 30 years.

Reduce tuition fees to £6,000 and only high earners gain

So let’s examine the real impact of this policy. The only people who would gain from it are those who would clear their entire loan for tuition fees plus any loans for living costs, plus the interest, within the 30 years. To do this you’d need to be a high earner.

To see the exact amount, go to my student finance calculator and play about with different scenarios – watching the impact of reducing tuition fees. It shows that only those with a STARTING SALARY of at least £35,000 – and then rising by above inflation each year after – would pay less if you cut tuition fees (we have assumed the student also takes out £5,555 in maintenance loans per year).

That’s a very high amount, mainly only City law firms, accountancy firms and investment banks pay that much as starting salaries. Is that really who Labour wants to target with this plan? Worse still, by cutting tuition fees it will reduce the bursaries that universities can give to attract poor students.

Thus, while it seems counter logical, cutting tuition fees this way risks being a regressive rather than a progressive policy – in other words it benefits those with more rather than those with less. I suspect if any other party had a policy which in tabloid terms meant “student from poor backgrounds would subsidise City Bankers” – Labour would be up in arms.

NB. The student finance calculator makes some assumptions over future rates of inflation and average earnings growth, changing those changes the answers – which the calculator allows you to do. Yet I’m using some pretty standard assumptions here.

There is a psychological gain to cutting tuition fees

The one positive of this plan is that cutting tuition fees is likely to reduce fear among those who don’t understand the system. Yet instead of spending billions to do this, why not spend £100 million on financial education for potential students and their parents to fight unfounded fears?

This is something I did with the Independent Taskforce for Student Finance Information, which I chaired, and we achieved fantastic results explaining the system with less than £100,000, never mind £100 million.

If I were in charge I’d up the repayment threshold and change the name

Much of this whole issue centres around the confusion over who is “rich”. Who is more/less deserving of help: a student from a wealthy background with a low income after university, or a student from a poor background with a high income after university?

We should ensure those from non-traditional university backgrounds aren’t unnecessarily put off university by the fear of debt. Yet we shouldn’t be doing that by pumping in extra cash to hugely affluent graduates.

If you want a more progressive system – and to stop the marketisation of universities (ie, different courses, different prices) – then make them all £9,000 but increase the repayment threshold, for example to 12% of everything earned above £30,000 (that’s a rough example, not a fully worked figure). Though of course that’d cost the Exchequer billions too…

And just as importantly to fight off fear – change the name! Student loans are as much a tax as a loan, in fact they’re somewhere between the two, and as I’ve said before (see student loans aren’t a debt – change the name to avoid a national tragedy), calling it a graduate contribution would both be more accurate and promote better understanding.

Labour isn’t the only one who gets this wrong

Labour isn’t the first one to be financially illiterate over the tuition fee issue. The Coalition itself did it when it set up the new 2012 system. Not just because it fundamentally miscalculated how much people would repay, but also because it allowed universities to offer some poorer students a choice between a fee waiver and cash as a bursary.

Yet, for the same reasons as above, a fee waiver did little to help, only very high earning graduates afterwards would have gained from it, so in truth I was out there shouting vociferously: “Make sure you take the cash.”

I’d love your thoughts below

Past student finance blogs

 

What happened to the £10m I promised to donate to charity?

In 2010 I pledged to give £10 million to charity

In June 2012 I pledged, as part of the announcement that MSE was joining the MSM group, that charities would receive £10 million. So for transparency’s sake I want to knock out an updated quick blog explaining what’s happened and what will happen with this donation.

How much will go to charity?

At the time of the announcement I said I wanted charities to get £10 million (a mix of cash and shares from the deal proceeds). My plan was for them to get £4.5 million in cash and £5.5 million in MoneySupermarket shares (which, as they were worth £1.16 at signing, meant giving away 4.75 million shares).

By the time the deal completed in September and I received the proceeds, the MoneySupermarket share price had increased, but I felt it right not to reduce the number of shares – so effectively the total donation was around £11.1 million (£4.5 million cash and £6.6 million in shares).

Since then the share price has increased rapidly and in total the donation is now worth more than £17 million. The shares can’t be sold until October 2015 at the earliest, so there is always the risk the price could move the other way, yet all dividends that have been paid out meanwhile also go to charity.

Donations so far

On the day of announcement, I pledged £1 million direct to the Citizens Advice Bureau (CAB). I did this as I wanted the donation to have an immediate impact – and the CAB is an outstanding organisation that I’ve long supported and believe in – so there was no place better. Plus I wanted to use the opportunity while I had the media focus to say:

1. It’s a disgrace that this brilliant organisation has had its debt counselling funding cut by the Government at such a crucial time. It should not be for private individuals to make up this gap – and it’s a tragedy as it’s needed.

2. Few people realise the CAB is a charity, even those who avail of its services. So many who’ve been helped don’t consider giving back when things are better. This needs to change as the organisation is really struggling.

That money was donated in 2012 as follows:

As shares need managing, it made sense to keep these in one tranche.

Since then I have also made a number of other donations, the main ones being:

What about the rest of the cash?

That of course, leaves a very large amount. I am naturally cautious to get this right and don’t want to make a knee jerk decision – I want to ensure these funds have real impact.

Therefore in 2012 I donated the money into a Charities Aid Foundation (CAF) account. For those unfamiliar with the CAF, while a charity itself, it is effectively a charity bank account as once donated, the money is no longer mine – I can never personally get it back – though I retain the ability to direct its use towards any registered charitable organisations.

If you give to charity regularly, with £100 initially or £10/month, you can open a CAF account. The donation is made with Gift Aid and you then get a cheque book you can use for any charity. See the Charity Giving guide for more.

All the donations above have come from this fund. Yet even after that there is still currently £4,030,000 cash and 4.53 million shares (so a total value at today’s share opening share price of £2.64 of more than £12 million). So even though I have made donations, at nearly £16 million the amount is far more than I put in – the cash total includes the interest and dividends earnt meanwhile.

I should note before anyone says it, for this volume of cash it may have been a tiny bit cheaper to set up my own charitable trust. I didn’t do that, as I support the CAF and therefore wanted to put my money with it for a time and help the work it does.

What’s the rest of the donation to be used on?

This money is a legacy from the success of MoneySavingExpert.com so it seems right to me that a good chunk of the proceeds are to be used for consumer and financial empowerment and education.

As such, my aim with a good chunk of the rest of the resources was to help with financial education (which, thankfully we’ve now succeeded in getting on to the curriculum) and to try and provide solutions to the marriage made in hell that is mental health and debt problems (see the Mental Health & Debt Guide).

Yet with such a sizeable fund, I’d like the money to work on bespoke projects (done with charities), rather than just donate cash to go into a charity’s pot.

This is a long-term aim – not something I want to rush. I’ve always said that this will be one of my focuses after my contract with MoneySavingExpert is up, which is in September this year (don’t read that as meaning I’m leaving though, I don’t intend to and the site is very important to me – just that after then I intend to gradually move away from being full-time to free up some time for other interests, including these charities).

I am still working on and coming up with ideas on how to do this over the next few years, especially as I want the money to actually have a hardcore impact, not just to cover admin costs.

As a side note, unsurprisingly, I’ve had many charities approach me since the donation was announced, a few rather aggressively. I would continue to ask for some patience and to allow me to work through the priorities.

There will be some, still substantial, money available from within the CAF funds to be donated to specific charity projects outside of the two areas above, but ensuring much of the money makes an impact and ‘does good’ rather than go into a generalised charity pot, is important to me.

PS. Just to clarify, the donations above are separate to the MSE Charity Fund and the MSE Charity.

Top 10 blogs 2014 – from a ‘Zara trick’ to ‘My five rules for a happy relationship’ and ‘Erudio sell out’

Here are my top 10 blogs by numbers of readers from 2014

No spiel, no chatter – just in true nerd style a list. Here are my top 10 blogs by numbers of readers from 2014. 

1. Does the Santander 123 3% interest beat the top cash ISA?

2. Buy Zara clothes at a fraction of the cost, and get a flight thrown in

3. The trick to access every network’s signal from your mobile

4. The UK’s mortgage ticking time bomb… Mr Osborne will you help?

5. Get 5% interest on your ISA money

6. Don’t shorten your mortgage term if you can overpay

7. My five rules for a happy relationship

8. The Chancellor’s pension changes are both wonderful and horrid

9. The Government has sold people out over Erudio student loans

10. The real reason why companies offer ‘a month’s free trial’

A deliberate threat to the govt: if you U-turn on the £21,000 student loan repayment threshold, I will organise mass protest

A deliberate threat to the government if it u-turns on the £21,000 student loan repayment threshold

A deliberate threat to the government if it u-turns on the £21,000 student loan repayment threshold

Let me be plain – I am writing this blog to put down a marker to the Government. If it decides to renege on its promise to uprate the £21,000 student loan repayment threshold, it will have mis-sold university education to many students, personally betrayed me and I will do all I can to organise protest.

It is thankfully only a mooted idea so far, yet I’m worried that it is quickly gaining traction. So I want to bash out a quick explanation…

  • What is the uprating of the £21,000 threshold?

    Students who started university in or after 2012 will repay 9% of everything they earn above £21,000 (pre-tax salary) once they graduate. The first repayment will be in 2016, then from the following year the repayment level is due to increase in line with average earnings. This is very important – if it doesn’t increase, in real terms students (ie, factoring out inflation) will be paying an ever increasing proportion of their monthly income on student loans. 

    For a more detailed explanation see my 20 student loans mythbusting guide.

  • Why it might be changed

    It’s pretty clear the launch of the 2012 fee system has been a bit of a disaster for the Treasury. The calculations on how much people would repay in the 30 years before the debt is wiped were wrong – far fewer students will repay in full than the Government thought (though interestingly, I and many others were saying this from the start). That means the gain to the Treasury is much less than thought – as a debate in the Commons yesterday showed, it loses around 45p for every £1 lent out.

    Freezing the threshold in 2017 would help recoup some of this and indeed as this Independent article shows, it is seriously being mooted – thankfully only by Government advisers, but that’s bad enough.

    And, I’ve heard rumours that off-the-record some have said:

    "If we do this we’d get bad press for one day, then it’d be over."

    So this blog is for me to say:

    "I will do my damndest to ensure the noise and bad press goes on and on and on."

  • Why I am so against it

    This seemingly small change actually has a huge impact on student finance. All the maths behind the explanations of what will happen to university students is based on the promised uprating.

    There is also a principle here – while a Government is free to change how student finance is done for future university starters it should never retrospectively change things (if it only froze the £21k threshold for new starters, with a decent notice period, while I wouldn’t like it I wouldn’t be protesting). Retrospective changes haven’t happened before (well there are some arguments that the sale to Erudio has resulted in such changes, but nothing as fundamental as this). It shouldn’t happen now.

    The terms that you get at the time of the loan should never be negatively changed (or even positively changed without giving you the option to opt out). This would be a negative change, so it is wrong.

  • Why I’d see it as a personal betrayal

    In 2011 I was asked by the Government via the then universities minister David Willetts to head the Independent Taskforce on Student Finance Information. I "ummed" and "ahhed" about it as while I didn’t support the change to student finance in 2012, I was very scared that the huge myths and misunderstandings about it would wrongly put many students off going to university, especially those from non-traditional backgrounds.

    So I agreed. However, my condition was that the taskforce had to be independent of Government and that it had to include the National Union of Students. The job wasn’t to sell the changes, it was just to ensure people understood them. As part of it, I wrote guides like 20 student loan mythbusters and created the student finance calculator to show the real impact of the changes. I believe we did a great job and certainly decreased the fear for many students and their parents – without softening the increased cost of the changes.

    Repeatedly during the process (and since) I asked for assurances of the continuation of the uprating from 2017, and was promised it directly – it formed a major part of the calculations and explanations I gave out. I was also promised there would be no retrospective changes for anyone under the 2012+ system (though I did still continue to warn people that changes are always possible).

    Thankfully there haven’t been any – yet if this is changed, I would see it as a personal betrayal and if possible, I would retrospectively resign from the taskforce.

I am not sure that my threat will move the Government greatly, but I want it to know that if it does decide to do this I will use my media presence to ensure it won’t be a "one day of bad press thing".  

While it would expect radical students to protest, I want it to know that my voice too will be shouting very loudly and at the mainstream public. I hope that if this is currently just a ‘blue skies idea’ this threat will be enough to knock it off the table.

Your thoughts welcome below….

Related past blogs

The Lords mustn’t miss the chance to treat payday ads like gambling or alcohol

The Lords mustn't miss the chance to treat payday ads like gambling or alcohol

The Lords mustn't miss the chance to treat payday ads like gambling or alcohol

Payday lenders want to financially groom the next generation of borrowers. They’ve plastered their adverts on children’s TV channels and family TV shows, used puppets and kid-friendly slogans, and even had people in Disney-esque costumes handing out lollipops in the streets.

These ads pressurise parents with pester power

This is a danger for our entire society. It pressurises parents with pester power, in our poll one in three parents reported that their under-10s had repeated payday loan slogans, and 14% shockingly said that when they had refused to buy something, their under-10 nagged them to go to a payday lender.

One five-year-old even asked for money from Wonga as a Christmas present from his parents. This is no surprise, as the number of these adverts seen by children increased from 3 million to 596 million in the four years to 2012 alone.

They normalise this niche lending for the next generation

Yet more damaging is the fact that they normalise this type of niche borrowing for the next generation – inuring them to the livelihood damage this type of high-cost lending can cause.

The House of Lords has a chance to stop this

That’s why this Wednesday we need members of the House of Lords to grab the opportunity to back an amendment to the Consumer Rights Bill which would put restrictions on payday loan advertising, similar to those for gambling, alcohol, tobacco and junk food.

Specifically, it would ban payday TV and radio ads before the 9pm watershed – according to Ofcom research, this is when the majority of such ads are broadcast. A second amendment would stop firms cold calling people to offer payday loans.

Many of us have been campaigning on this for years, naming and shaming the payday lenders. Thankfully that pressure has started to have an impact – for example, payday lender poster boy Wonga has pulled its puppet adverts and is taking its sponsor logo off children’s Newcastle United replica shirts.

Yet this isn’t enough. There’s a lot of unprincipled money being spent in this area – and we can’t rely on lenders’ goodwill, we need legislation to cut it dead and protect our children.

Those whose job is to protect young people’s interests are vocally behind this too – the Children’s Society is a prime lobbyist for this ban and a joint report between it and debt charity StepChange recently showed how family debt causes children to suffer from worry and anxiety, experience bullying and miss out on the basics of life.

A third of children surveyed by the Children’s Society found payday loan adverts to be fun, tempting or exciting – and this group were much more likely to say they would consider using a payday loan in the future. 

The growth of the payday loan industry is frightening. It didn’t exist at any scale seven years ago. It’s a self-manufactured industry built by technology, marketing and advertising. It has made billions based on lending without a care, at wince-worthy cost, regardless of affordability, and snatching back cash heedless of the effect on the borrower. 

Thankfully some of the industry’s nastiest tricks – such as using recurring payments to snaffle every penny coming into people’s bank accounts day after day – have been regulated away. However, the Government’s sloth, failure to heed warnings and laissez-faire market policy means millions have already been burnt. Its belated but welcome regulatory volte-face only came after campaigners and other parties started making political capital by attacking such lenders.

Since then the regulator has kicked into action – write-offs of millions by Wonga as part of the supposed cleaning up of its act, fines for sending threatening fake lawyers’ letters and thankfully, soon, new limits on charging, though these are not quite as stringent as I’d have preferred as people still risk paying back twice the amount borrowed. 

Of course, you can’t solely blame irresponsible lending – we need responsible borrowing too. This year financial education joined the English National Curriculum and that should help, but it’ll take time. And it won’t help adults who already lack financial capability, are vulnerable or have mental health or capacity issues.

We also need to promote alternative ethical borrowing – through credit unions, using (the sadly much-reduced) Government Social Fund loans, and of course, better budgeting to avoid the need in the first place. 

The Church of England has valiantly vowed to try and compete lenders out of business by opening credit unions in churches. However, much payday lending is a technology play as well as financial, targeting people’s impulses (sometimes late at night when they are drunk watching gambling programmes) for instant cash.

The Church can’t, and won’t, compete with that. Nor should it offer to lend to people who can’t afford to repay. But some payday lenders do, knowing they can use hard-core tactics to get money back.

So we cannot allow the good being done in financial education and capability work to be wiped out by powerful multimillion pound payday loan ad campaigns. We’re already at a dangerous point in the growth of payday loans – if it goes on unchecked, just imagine the dystopian future in 10 years.