Martin Lewis: If 83% are predicted not to repay student loans, who pays it? It doesn’t work like you think…

Martin Lewis: If 83% are predicted not to repay student loans, who pays it? It doesn’t work like you think…

Student loans are a political hot potato and widely misunderstood. I recently blogged on why, bizarrely, cutting tuition fees risks hurting not helping most graduates and within the logic of that I explained it is predicted that 83% of university leavers under the newest English system won’t repay their loans in full within the 30 years before they wipe.

No surprise then that many people have asked me: “If so many won’t repay, who does?” This is something I discuss in the Q&A section of my ‘Graduates’ 6.1% interest – panic or pay it off?’ guide, but I thought it worth pulling out of that and giving it its own home. So here it is…

Millions are repaid, even if people don’t repay in full

This is a ‘loan’ from the state, so it’s not a question of who pays the rest of the contribution, it’s more the fact that the state doesn’t get repaid.

Though remember the 83% figure is the number of people who won’t FULLY REPAY – far, far fewer won’t repay anything at all. Already graduates who started since 2012 have paid back over £200 million and they’ve only been out of uni a couple of years at most.

Initially in 2012, the system was set up with the anticipation that under 50% wouldn’t fully repay. They got that wrong, and now it’s predicted to be far higher. It was expected to be 77% just before the announcement that from this April people would start to repay only when earning above £25,000 rather than the current £21,000 (and it will rise with average earnings each year after).

That announcement means even fewer will repay in full, just 17%. That overall means this has been nowhere near as successful for the public purse as it was supposed to be – the 2012 Coalition Government got its costings wrong.

Yet it still does mean compared to before tuition fees, when the Government simply paid universities by a direct grant, billions are now paid back. Whether that’s enough to justify the tuition fees, or if it’s caused inflationary issues on universities’ costs, is for the politicians to debate.

Be prepared to have your brain twisted

One more thought on this, though it may make your brain hurt. The problem with saying the “taxpayer foots the bill” for what’s unpaid, or “the state makes a loss if student loans aren’t repaid”, is that the whole concept of what SHOULD be repaid is arbitrary.

For example, one way to increase the number of people fully repaying would be to cut the interest rate to the rate of inflation (as it used to be before 2012). Do that and more people would repay in full within 30 years, thus the ‘loss’ would be reduced. But that would mean the total amount the state receives would be less, so the taxpayer would actually foot a bigger bill.

Conversely and perversely, if interest rates were increased, and for ease, let’s be ridiculous and say to RPI + 100%, then almost no graduates would fully clear the loan within 30 years, so the ‘loss’ would be huge, but the state would take in far more, leaving the taxpayer far better off.

This means you can’t use the percentage of people not clearing in full as a decent mechanism for assessing the real cost to the state (though it is useful to see how well it matches up to what was planned).

What you’d really need to do is compare how much the Government gets back to its own costs. That is how much its shelled out (so the loan effectively) plus the interest at its cost of borrowing, which is likely a far lower rate of interest than the one added to student accounts (though I’ll leave to economists to provide an exact rate). Compared to that, many more students do actually repay the Government’s costs. 

I hope this makes sense, do let me know your thoughts below.

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