The news again has been full of talk about cutting English tuition fees from £9,250 to, say, £6,000. While psychologically attractive – as it reduces the perceived ‘debt’ – the practical impact is to take money off universities, risking the quality of education, and handing it to very high-earning graduates.
I bashed out this explanation on my Facebook page yesterday and thought it worth repeating here, with key links added. Please feel free to share it with anyone impacted. It’s time we stopped making policy based on misunderstandings.
Two facts you need to understand to get this:
- What you repay each year solely depends on what you earn. All those who started university since 2012, including current students, repay 9% of everything earned above an annual salary threshold. That threshold is currently £21,000 a year, so for example, earn £30,000, and you’d repay £810 a year.
I’m delighted to say (as I campaigned hard for it), that threshold rises to £25,000 this April, dropping the repayments for all, eg, to £450 a year for someone earning £30,000. Each year after that it is set to rise in line with average earnings.
- What you borrow and the interest doesn’t change this. Whether you owe £5,000, £50,000 or £500,000, if you earn £30,000 you still repay £810 a year (£450 a year from April).
The only impact borrowing more (or higher interest) has is whether or not you will clear ALL the loan and interest within the 30 years before it wipes. Currently it’s predicted only 17%, the highest earning graduates, will clear it all. Everyone else will simply repay 9% of everything above the threshold for 30 years regardless – which is why increasing the repayment threshold is a big gain for most.
For more on how the system works, see my full 20+ Student Loan Mythbusters guide.
Who does reducing tuition fees to £6,000 help?
It helps three main groups.
- Those with rich enough parents that they don’t take loans in the first place.
- The top 17% of earners who will clear in full will repay substantially less.
- The next highest 10-20% of graduate earners (that’s very difficult to estimate but I suspect it is of that order) who currently don’t clear in full who would with lower fees.
So let’s say the main gainers from this are graduates on starting salaries of £35,000+, who take no work breaks over 30 years, and get above-inflation pay rises each year (see this for yourself using the Student Loan True Cost Calculator).
And so, to help ONLY these high earners we have to take money away from universities, or spend from general taxation.
We’re tweaking the wrong nipples
If we’re going to tweak the current system’s nipples (rather than replace or redesign it totally), cutting tuition fees and above-inflation interest are the wrong nipples to tweak. Both only benefit higher earning graduates.
Of course with unlimited funds they’re good to do, as both are psychological barriers. I especially hate high interest rates on principle, even though in practice they’re less of an issue.
Yet now we’ve upped the repayment threshold, my number one practical priority would be to look at the system of maintenance loans. Many from lower and mid-earning backgrounds find university living costs cripplingly unaffordable.
Part of the problem is the current disgracefully hidden system of parental contributions (ie, parents are expected to contribute £1,000s but are never told it). Living loans need to increase, and options like two-year degrees be explored.
For full info on this see my The hidden parental contribution requirement blog and for those with more than one child my FT piece The UK’s hidden one-child-per family university policy.
And if we’re sticking with this system, let’s start to be honest that it is far closer to a graduate tax than a loan. I’d call it a graduate contribution system, and rework it to make that name fit.
Using the language of loans and debt is especially off-putting to those from non-traditional university backgrounds who are most risk-averse – and causes others to make perverse decisions such as borrowing elsewhere to part-clear a loan they’d never have to repay. Never mind the fact that it has inured a generation to borrowing, with dangerous knock-on effects.
For more on this, see my original 2012 blog It’s time to rename student loans and the results of that campaign, that the Govt finally agrees it’s time to change the name.
What about the interest rate?
I’ve not included much here on the 6.1% interest rate, nor have I answered the common question “Who pays if 83% of people don’t?” as I’ve written about those in detail in my Student loans 6.1% interest, panic or repay? guide. You can also watch my recent Martin Lewis Money Show student loan special where I explain it in detail.
I’d love to know your views below. I know many of you will have questions, but I promise the vast majority of them are covered by the key links I’ve posted above. So do click and read the relevant ones first.
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