I write as I watch BBC Question Time. It’s petrifying me. While I’ve problems with the proposed changes to student loans, many people’s dreadful misunderstanding of the new system frightens me far more. The current row could fundamentally damage our nation’s future education base…
I think it’s important before I go on that you understand student finance has been a passion of mine since 1991, way before I was a Money Saving Expert. When I first started at Uni, I spent many hours discussing the subject with Prof Nick Barr and Ian Crawford, the academics working to bring the ‘income contingent loan’ system to the UK (it happened 7 years later).
Later, as President (General Secretary) of the LSE students union, I lobbied hard on these issues, even founding the Aldwych Group of students unions – which still exists now – to tackle educational elitism and try and fight for access for all.
In recent years, the site and I have worked with the Government in communicating how student finance really works (see the parents guide to student finance). Yet I’ve never been more worried than I am right now.
Most people simply don’t know how it works.
A typical example was this statement (paraphrasing from memory) made on the programme to the panel.
Woman in audience:
"I don’t think you’ve thought through this at all – when people hit £21,000 they’ll be at the same point when they’re hoping to start relationships and now they won’t be able to afford it because all their money will start going to repay the loans."
Actually the one decent thing in the change is that people will have MORE disposable income than they do under the current system, not less. The new student loan system says you repay 9% of everything you earn over £21,000, rather than the current 9% of everything over £15,000.
Look at the real impact of that:
|Earnings||Annual Repayments now||Annual Repayments under proposals|
As can be seen, under the new system you’re always repaying £540 a year less than the current system (and nothing below £21,000).
So actually, in terms of disposable income, people will be better off. In terms of ability to get a mortgage, as student loans don’t go on credit files and disposable income is increased, it’s actually likely to be a boon not a detriment (countered to some extent by the fact the debt will last longer, see below).
This is just one example of people not understanding how student loans actually work. It’s actually a totally different side of the system that worries me (I’m ignoring the £9,000 cost as that’s more a political than a financial point, so I’ll steer clear from a view within my job role).
- Real interest cost:
Student loans are currently linked to inflation, so there’s no real cost (ie, if you borrow enough to buy a shopping trolley’s worth of goods, you repay enough to buy the same, even though the actual cash amount may increase).
Under the new system the interest for many will be over and above inflation. This is simply wrong for me, it encourages our youth to not only get into debt, but into what could be seen as bad debt (see my Stopping students repaying student loans early would be a terrible mistake blog). And there’s a worse impact.
- It will take a lot longer to repay:
Actually the real problem with the new £21,000 start point is the opposite of what the woman in the Question Time audience was saying. The problem is people will repay LESS, so it will take much longer to pay off the loan.
Now that wouldn’t be so bad if it were still inflation linked, but with the new interest charges, compounding will mean the cost of these loans is going to escalate massively over the years.
The danger of misunderstanding
What scares me silly is the fact the sit-ins, the Government, and others involved in this are trying to subvert explanations of how the system actually works for political gain. That runs the risk of miseducating and scaring an entire generation unnecessarily (there are some things to be scared of, but not the ones we’re frightening people with).
Sadly this isn’t he first time this has happened. In 1998 when income contingent loans were first introduced (that’s the official name for paying proportionately through income tax) it was a massive improvement.
Unfortunately it was introduced at the same time as tuition fees, which stole the headlines, painted everything negatively and meant many never truly understood the system, and the benefits of it. I have met many disadvantaged sixth formers over the years who were scared because they "can’t afford to go", whereas they wouldn’t have needed to pay anything till they left university and only then if they earned enough (and that won’t change).
Our society is in danger of making the same mistake again. The easy solution would be financial education in schools which would help this enormously (see nore financial education info). Yet in the short term we need to ensure that whatever the political decision, however palatable or unpalatable people find it, we don’t stop our youth from getting an education out of a misplaced fear.
I’m going to try and have a think about what can be done about this, both on the site and elsewhere (we’ll see if the Minister returns my calls), as it’s too important to our youth to let this pass. Ideas welcomed.