Student loans aren't a debt – change the name to avert a national tragedy
Language is powerful. In some countries around the world that use our student finance system, repayments are called a contribution. In the UK we call it a loan – that’s killing us. With the increase in tuition fees, we risk damaging a generation of youth because of it.
This isn’t solely about the fear-factor of huge ‘debts’, which is wrongly putting some students off their university dream – but because we call this system a loan and force our youth to take part, we’ve also inured our nation to borrowing.
Why worry you won’t earn enough to repay student debt?
New research from the Independent Taskforce on Student Finance Information – which I head up – shows over 60% of school pupils and new university starters worry about not being able to repay their student ‘debt’ after university if they have a low income or lose their job.
Yet this is an irrelevant fear. You only have to repay fees and living costs if you earn over £21,000. And, even then, it’s proportionate to earnings, so you repay 9% of everything above £21,000. If you haven’t cleared what you owe within 30 years, the debt is wiped. For full help on how the system works, read www.moneysavingexpert.com/students2012.
In financial terms, what we effectively have is a no-win, no-fee higher education. However, the word "debt" is so evocative, the psychological effect puts many off due to the fear of it hanging over them.
On Thursday, just before I appeared on Daybreak to explain the system, I read this on my Facebook page:
"My youngest isn’t going to uni purely because she doesn’t want to come away over £40k in debt."
This devastating comment really affected me – it’s evidence of a potential national tragedy.
It means some bright young things, especially from non-traditional university backgrounds, who tend to be more risk-averse, are missing out on university for the wrong reasons.
The impact of a name change
The fear of debt is what worries her. In fact, the way student loans work is in some ways, more similar to income tax than a traditional loan. If we’re looking for a name for this hybrid form of finance, lets try "contribution", as used in Australia.
This switch makes explaining this system much easier. Below are key student loan facts, where I’ve changed the word ‘repay’ to ‘contribute’…
- You only need to contribute if you earn enough (£21,000 in a year) once you graduate.
- Your contributions are taken, like tax, via the payroll.
- No one will ever chase you for the cash – as contributions are taken off before you receive your salary.
- The more financially successful you are, the more you will contribute.
- If you lose your job or your income is reduced, so are your contributions.
- Contributions stop after thirty years, even if you haven’t contributed the maximum amount.
- Many people will be contributing for the whole 30 years – all of their working life.
Suddenly this fear of debt looks ridiculous. Would the Facebook lady’s daughter honestly have said: "I’m not going to university, because if I’m a high earner afterwards they’ll ask me for a large contribution to my education"?
No, of course not. She’d relish the financial success and be assured that if she didn’t do too well, she wouldn’t contribute as much.
The same is true of parents. Many say: "I’m worried my child will be £50,000 in debt when they leave university, I will do all I can to prevent it."
However, I’ve never heard anyone say: "I’m worried my child will earn enough to be a higher rate taxpayer after university, I’m saving up now to pay their tax for them."
It adds to your tax rate
The real effect of going to university is that you add 9% to your marginal income tax rate when you earn £21,000. So students need to weigh what they gain from giving up three years for education against the increased tax burden. But for those who university is right for, this would diminish unnecessary fear.
I’m not the first to raise a name change. A couple of years ago, education-access advocate Simon Hughes MP was suggesting we change the name. I discussed it with him then and my view was that to do it as tuition fees were being trebled, amid widespread myths and misunderstanding, was disingenuous. People would have said it was spin.
A name change can only come when enough people understand the system so they feel it’s justified. With students now about to start university on higher fees, for me, this needs sorting by the time they graduate and start repaying.
It’s about more than just students
The misnomer doesn’t just affect the student world. I often use the phrase "we’ve educated our youth into debt for 21 years, but never about debt" when rallying about getting compulsory financial education in schools. Yet more accurately it should be "we’ve educated our youth into what we call debt".
We’ve convinced young people they need to ‘borrow’ for their education. By association, those who aren’t scared off by it have had borrowing de-stigmatised, and we’ve had a debt balloon on the back of it.
Changing the association between university and debt would help ease education about the dangers of normal debts – those that still come calling and asking for interest even if you do lose your job.
Surely it’s a debt because interest is added?
This is a common thought. I’m no fan of the new above inflation rates of interest charged on student loans for 2012 starters and beyond, but, for many, they only have a psychological impact, not a financial one.
That’s because while interest is added to your Student Loans Company account, repayments (contributions) depend solely on your earnings. If you don’t earn enough to repay in full within the 30 years before it wipes, as many lower and middle earners won’t, you’ll never repay this nominal interest – so it’s irrelevant.
While currently we call this interest, it is just an uprating of the contribution.
The political problem
There is no doubt the cost of education has been shifted, in my view too far, from the general taxpayer to students – or more accurately, it will be shifted to graduates. Calling it a contribution doesn’t stop that debate, but it does stop confusion.
The real difficulty comes at Westminster. The Conservatives are wedded to the marketisation of university education – meaning that a student has the consumer choice of where they go, and the ‘tuition fee’ cost is a part of that choice.
Labour and student activists, on the other hand, tend to want a graduate tax. In reality, that’s close to what we have now, as the repayments are more like a tax than a loan. The crucial difference is all graduates would pay the same, regardless of course choice and the money wouldn’t be hypothecated to an individual university.
Some supporters of this have told me they won’t support a name change because it weakens their argument for a system change.
Sadly, I suspect it doesn’t suit Labour to admit what we have is a graduate contribution system, and it doesn’t suit the Tories to decouple the specific university cost from the loan.
The victims of this Westminster posturing may just be a generation of our youth.
Related past blogs
- "Once I’ve got a student loan, can the government change the terms?"
- Does the Adam Smith Institute understand how student loans work?
- Prospective students no longer so scared of £9,000 fees
- Financial education in the House of Commons – who said what
- ‘You can afford to go to uni’ – the message is getting through
