The viral letter about mis-sold student loans due to retrospective interest hikes is well meaning, but wrong

The papers are full of an angry letter from recent graduate Simon Crowther to his MP, which has been shared over 20,000 times, complaining about retrospective hikes to student loan interest. 

The letter is well meaning and does a good job in raising awareness. It’s been in all the newspapers, and indeed in articles in Huffington Post and The Guardian the letter has been linked to my own letter to the PM about retrospective changes.

However, while I agree with the sentiment – and the fact many students have been outrageously mis-sold loans due to changes – the content of the letter isn’t technically correct, and shows a continued general misunderstanding of how student finance works, that could mislead some.

So not to attack where he’s coming from, but to ensure people understand their own loans, I wanted to bash out a quick blog just explaining the situation (for a beginner’s guide to how loans really work see Student Loans Mythbusting).

The full transcript of his letter seems to have been taken offline before I could get to it, so I’m taking my quotes from the newspaper copy. If there was more in Simon’s letter explaining the bits I’m talking about, apologies to him.

1. There has been no retrospective change to interest rates

The newspapers write: “Crowther said that he took out the loan on the understanding the interest rate would remain at between 0 and 0.5%, but it has since risen to above 3%.”

The only people whose rates are above 3% are those who started university in or after 2012. For them rates are currently 3.9%, likely rising to 4.6% in September. And the rate’s never been below 3% for this cohort of students – nor, to be fair, has it ever been promised to be lower. It was always due to be inflation plus 3%.

In his letter Simon writes

“I feel we have been mis-sold the loan. A commercial firm would not be allowed to buy loans from another company and then hike the interest rates. This is not what I and thousands of others signed up to. How can it be allowed?

“How can our loan agreements be altered without our prior knowledge? This is a disgraceful act by a Government which encouraged us, when at school, to go on to higher education – helped by a Government loan with the promise of a low interest repayment scheme.

“Along with many of my former university colleagues, we have lost our trust in this Government. We have been told that as graduates, we are the future leaders of the country in politics, engineering and commerce.

“I trust when our generation reaches Parliament, our future Government is never so short sighted as to treat their ‘future leaders’ in such an underhand way.”

While I absolutely agree with ‘How can our loan agreements be altered without our prior knowledge?’ as they have (see point 3 below), that change isn’t about interest rates. For 2012 starters they have always been…

– While at university, inflation (RPI) + 3%.
– After leaving, a sliding scale between inflation (RPI) and inflation + 3%, depending on earnings – the highest rate being for those earning over £41,000.

The rate of inflation changes every September based on the prior March’s figure. This has been the case ever since student loans were introduced. The recent change of inflation is just the annual uprate; there’s no retrospective change. This was always due to happen and has happened. Full info on how this works in Should I pay off my student loan?

2. Just to cover the interest I would need to be earning £41,000 a year

In another section of the letter he writes…

“Just to cover the interest, I would need to be earning over *£41,000* a year. Unless I earn that much, my student loan will increase due to the interest.

“I would like to know how many new and recently-qualified graduates are earning over £41,000? I am only 22 years old and out of university less than a year.

“I have actually set up my own business and have been able to employ two people. As I am employing two people my own salary is lower, which means my student loan will be increasing due to the interest.”

This is an interesting point, not because it’s wrong, but because in some ways I think it isn’t a helpful way to think about the practical impacts on your pocket.

In many ways the interest is an irrelevance to all but the very highest-earning students (see my Student loans are interest free for most blog). The fact is you repay 9% of everything above £21,000, and you do that for 30 years. Most people won’t pay it off within that time, so it doesn’t matter what you owe, that changes nothing – it is effectively like paying an additional income tax at that rate.

The interest is a red herring as you’re not even clearing the loan before it wipes, so for most you won’t pay it anyway. Most people’s loan statements are in practice an irrelevance and could just be binned and not worried about – just accept you’ll pay 9% above £21,000 salary for 30 years. The amount ‘owed’ is notional, not real.

I know this is confusing. But the amount left when the debt wipes isn’t an issue for the individual, and shouldn’t scare anyone off university. It’s an issue for the taxpayer who has to fund the gap. If you’re finding this a little confusing, please do read Student Loans Mythbusting where I explain it in detail.

3. The real retrospective change students should get angry about

While there hasn’t been a retrospective change to interest rates, disgracefully and against all natural justice there has to the repayment level, and that is very costly to students. I suspect that’s what generated the passion to make this go viral, but to campaign on it we need to get the facts straight, otherwise we just give the Government an excuse to say “not correct”.

For students who started university in 2012, it was said that the £21,000 level at which you start repaying would rise annually with average earnings from 2017. Last year the Government backtracked on that. So now it’s frozen until at least 2021, when they’ll then review it.

In practice this means students will pay more each year. Here’s an example to explain…

Imagine it’s 2021 and the threshold has increased to £23,000 a year and you earn £24,000 – you’d repay 9% of the £1,000 gap, so £90 a year. Yet as the threshold is frozen at £21,000 you have to repay 9% of the £3,000 gap, so three times as much: £270 a year.

Over the five years it’s frozen this could add up to £1,000s extra for some students. And remember as most students don’t clear within the 30 years before it wipes, there’s no gain from paying more, you don’t clear the debt quicker, it’s just an absolute cost increase.

I’ve hired lawyers to look at challenging this, and will be blogging on that soon, though frankly it doesn’t look good. So the more students and parents that can campaign to their MPs about this hike the better.

Recent student loan blogs:
– Student loan hike: Meeting with Minister to propose mitigation measures

David Cameron snubs my retrospective student loan hike open letter

– Open letter to David Cameron about the retrospective student loan hike

– I’ve hired lawyers to investigate Govt’s retrospective student loan hike

– Help fight the Govt’s student loan U-turn that means many will pay more