Shockingly, the new English student loan system could mean some students will be better getting commercial debts. I’m flabbergasted by one mooted proposal – it’d be the first time we’d see legislation designed to penalise people for good financial management. Worse, it will add a terrible hidden burden onto parents across the country…
There’s a huge amount to take in with the new proposals, so unsurprisingly the potential ‘no early repayments’ clause hasn’t been focused on – yet it’s often the small changes that cause big problems. I wanted to note down a stream of consciousness about this, but before I get onto that let me just run through my view on some of the other proposed main changes (see the tuition fees to treble news story and student finance guide for more info).
- Tuition fees to rise up to £9,000. Not great, but with funding slashed for universities it’s effectively shifted the burden of paying for a degree from general taxation to students – that’s a political decision. I’m not the greatest fan, but if everything else was done to protect students and proper financial education to explain the system, I don’t object too much.
- Charging real rates of interest. Unlike interest based at the rate of inflation, in the new system the more you earn the higher interest you’d pay – this could see some paying commercial interest rates. I think this is a dreadful mistake. Please see my earlier real student interest blog for full info.
- Repayment threshold raised to £21,000. I had thought this good news for many as it means lower and less stressful repayments, and for those unable to ever repay after thirty years it’ll be wiped. Yet now I’ve seen the detail even this rise has some problems (see below).
And then there’s…
Not allowing students to repay early.
It isn’t confirmed this will happen, though Universities’ Minister David Willetts told the BBC it was important higher earners were "not able to unfairly buy themselves out" of the system by paying their loans back early.
If it’s done by preventing repayments, it’d be a horrendous mistake for three reasons.
- Reason 1: It’s a terrible precedent. Only a few years ago we finally banned commercial lenders from levying redemption penalties and keeping people locked into loans. For the Government to start doing it – in an even more severe way – would set an awful example and terrible financial education for students.
- Reason 2: It’d pressurise parents into stumping up so people don’t need loans. I’ve always thought the one good thing about the current student loan system is students don’t pay upfront, they only need repay afterwards, depending on what they earn. Add to that that there’s no real interest (as it’s set at the rate of inflation) the onus isn’t on the parent, it’s on the student to repay.
It’s for this reason I’ve often cautioned parents: “it’s your child’s borrowing, if they’re successful; not yours, so don’t hurt your finances to protect them.”
Yet if we change the system, as soon as you take out the loan, from day one you’re effectively trapped in possibly paying commercial interest rates, meaning parents will feel a genuine pressure to use their savings or even borrow to stop their children needing to get into these loans.
- Reason 3: Higher repayment threshold means people in debt for longer. Under the ‘you start repaying at £21,000’ rule, people will be in debt for longer as they’re repaying less, with interest accruing at commercial rates. So combine “no early repay” and “higher threshold” and you’ve effectively got a trap to keep students in debt paying interest for longer.
Frankly, without the ability to repay early it would actually be the case that some students could be better off getting commercial loans at higher rates of interest, which they can pay off early, because it’ll be cheaper in the long run – what a terrible situation.