Martin Lewis: The five changes needed to improve the current student finance system

The following is a summary of my/MSE’s full submission to the Government’s Augar review of higher education.

Student finance is a political football. Many politicians, of all parties, and some in the media, portray it for maximum political point-scoring at the cost of ensuring it’s understood by those who take out the finance.

The danger is policy is then made based on misperceptions, not reality. While the psychological impact of policy changes do matter, it is better and cheaper to fix that by addressing misunderstandings – so any changes have the maximum practical benefit rather than just sugar-coat.

For example, tweaking the current system by lowering tuition fees by a few thousand pounds or cutting the interest rate would undoubtedly be popular and psychologically beneficial.

However, these changes could be regressive. Repayments are based solely on earnings; the ONLY people who would pay less as a result are those who clear what they owe in full within the 30 years before their loan wipes – ie, the very highest-earning graduates – yet it could result in less revenue for universities which could impact quality of education for all.

So if it’s a question of limited resources, these are not priorities. We should focus on changes helping all students and graduates – especially ones that will ease the passage for those from non-traditional university backgrounds.

The Augar review requires “... maintaining the link that those who benefit from post-18 education contribute to its costs”, so my suggestions are focused on improvements to the current (Plan 2 student loan) system. 

That should not be read as a wider judgement on the merits of one system or another (eg, whether tuition fees should be totally scrapped). Those are political questions over the balance of where the burden falls between the individual and the taxpayer. This is about improving what we have now.

  1. Student loans are misnamed and misframed as a debt. This is misleading, off-putting and leads to people making perverse decisions such as part overpaying loans after graduation, even though it doesn’t result in lowering their continuing repayments. The system should be improved and renamed as a ‘graduate contribution system’ as in other countries.

  2. Students don't have enough money to live off while at university. Too much political focus is on tuition fees. Most students complain to us about the practical cost of living, and high rents in student areas. Maintenance loans need to be increased.

  3. The Government must be honest about the parental contribution. Even though students are independent adults – almost all under 25 years old – their maintenance loans are means-tested based on parental income. Some get less than half the full amount. It is implicit that parents are supposed to make up the gap (see my The real cost of uni blog for more).

    If this system is to continue, honesty is required. The parental contribution must be explicit – parents should be told clearly what their expected minimum contribution is. This would stop friction between students and parents, and let parents realise they may need to save for years to have the money ready

  4. Student loan statements are damaging. Many are rightly frightened by huge interest added each month, even though the reality is few will repay all of it, and some won’t repay any of it. Statements should focus on explaining repayments and a predicted total cost.  .  The current ‘total debt’ figure should be strongly de-emphasised and put in its true light as ‘the current settlement value’, a figure which is rather meaningless for most.

  5. There should be a guarantee of no negative retrospective changes. When students sign up to finance, the terms should be fixed at the outset, with no negative retrospective changes (as judged by an independent panel) allowed by Government. If not, then at least it should be transparent which terms of a loan are variable and which are fixed. For example, the date loans wipe could be fixed, but interest rates amendable.

Let me know what you think below (again, a reminder: this is about changing the current system rather than the wider debate of which system is best).