Student loan sell-off – should you be worried?
In the Chancellor’s Autumn Statement last week, he made a passing mention of "increasing student numbers by 30,000 paid for by selling off the student loan book". So more student loan debt is to be sold off. All pre-1998 student debts already have been sold – and they’re eyeing up selling the remaining £40bn. I know this worries many of the 4m uni leavers since 1990 with outstanding loans.
I’m looking at this purely from a personal financial perspective. However, it’s important to note many, especially on the left, politically disagree with the concept of selling off the loan book – both from an ideological perspective, and because it could be expensive. The way loans are structured means many won’t be fully repaid, so it’ll cost the Government to provide the necessary sweeteners for the deal. However, I shall leave that debate for elsewhere.
The big question I’m getting is – will it change what I repay? In a nutshell, the current answer is no. This means in summary, repayment terms remain as follows…
(For full help and terms, eg, how long you need to repay for, see my Should I Repay My Student Loan? guide.)
Pre-1998 university starters: You have old ‘mortgage-style’ loans.
Repayments: You repay a set amount each month (usually the amount you borrowed, spread over 60 months), providing you earn over £28,775 a year.
Interest: This changes each September depending on the previous March’s RPI rate of inflation – currently 3.3%.
Those who started uni between 1998-2011: You have an ‘income contingent’ loan.
Repayments: You repay 9% of anything you earn above £16,365 (rising each year with inflation) each year.
Interest: This is changed each September based on the lower of the previous March’s RPI rate of inflation, or ‘the Bank of England base rate plus 1%’. We are in one of those historically rare times when the Bank of England rate is lower, so it’s currently 1.5%.
Those who started uni in 2012 and beyond: You have an ‘income contingent’ loan.
Repayments: You will repay 9% of anything you earn above £21,000 each year, starting after you leave/graduate (or 2017 at the earliest).
Interest: This is changed each September, based on the previous March’s RPI rate of inflation plus 3% while studying, and then between RPI and RPI + 3% after graduation (depending on earnings). That means current students are charged 6.3% interest.
No change to the cost
Earlier this year, a Guardian article reported that an internal Government-commissioned report had suggested the loan terms should be changed to make the sell-off more attractive. This caused much consternation. However not long after, the secretary of state responsible, Vince Cable, said there were no plans to do this.
To double-check nothing has changed, after the Autumn Statement we checked with the Department for Business, Innovation and Skills (which deals with universities). It sent us the terms of the student loan book sale which, includes:
Borrower protection is a primary aim of the Government. That is why terms and conditions, including the calculation of interest rates will not be altered to the detriment of borrowers as a result of any sale."
And it also told us:
Following a sale, SLC and HMRC will continue to administer loans, with the collection processes remaining the same. This means that there will be no changes to the way individuals make repayments through the PAYE system or to the way individuals make repayments through self-assessment channels."
Therefore, currently there are no planned changes to the terms of the loans. For how to most effectively manage your outstanding student loan, see the Should I Repay My Student Loan? guide. For current students, see my 20 Student Loan Mythbusters guide.
However that does leave two outstanding questions (if you’ve more, ask me via ‘discuss’ at the end)…
What is a non-detrimental change to terms?
The loan book does state alterations which aren’t detrimental are possible. For clues to that, we need to look at past changes.
1998-2011 starters’ current repayments are set at 9% of everything above £16,365. This was originally 9% of everything above £15,000, but from 2012 it started to be uprated in line with average inflation.
My suspicion is any further hikes in this would be seen as a positive change – and indeed I’d see it as positive too, as it means people repay less each month, and fewer people repay.
However in some circumstances, repaying less each month could result, over the life of the loan, in you repaying more interest (as by paying less each month you elongate the borrowing, meaning more interest can accrue).
This does mean a positive change could have a nebulous definition, though I wouldn’t be overly concerned about it.
Update: One thing that has been mooted to me by Andrew McGettigan is the govt could stop the uprating of the thresholds. In other words they’d freeze while incomes rise, which would in effect increase ‘real’ repayments – not a good thing for most people. Its likely though this is do-able without being a detrimental change.
Will it change the terms in the future?
This is the far more substantial question. It’s important to understand parliament is omnicompetent; it can overturn itself at any time. So there is never any certainty.
It’s also worth noting that in some circumstances, the Government can change the terms of the loan via delegated legislation (ie, the minister can make changes without Parliament voting).
However, this is unlikely. In the 23-year history of student loans, we have never seen any regressive changes to existing loan terms. In other words, the terms you take the loan out on are the terms you repay them.
If changes have been made, they’ve only applied to new starters – which is why there are three different types of student loan systems running concurrently.
Any negative change would rightly be seen as a huge betrayal both of the parliamentary precedent of no retrospective changes, and of everything we have been told.
That of course doesn’t entirely rule out it happening, but the political flak on it would be huge (I’d be out campaigning against it too). So I think on balance, it still remains unlikely.
Related info:
- 10 things about work, life and money every graduate should know
- Sheer ignorance from financial giant Fidelity on student finance
- A generation of Muslims not able to go to university?
- Student loans aren’t a debt – change the name to avert a national tragedy
- "Once I’ve got a student loan, can the government change the terms?"
