1 February 2018

Clearing up the student debt mess


Few problems are more pressing for the Government, and society, than sorting out the Student Loan System.

What has been surprising, so far, has been that the argument has tended to hover around how to enable students to carry on borrowing large sums while simultaneously coming up with financial ruses so they don’t have to pay it back.

This is currently the Government’s policy, announced last October. By freezing university fees at £9,250 and raising the income threshold at which students have to repay their loans to £25,000 a year, they have, according to the Institute of Fiscal Studies notionally saved the average student £10,000 in repayments over 30 years.

That is only true because, after those 30 years have elapsed, the Government will pick up the tab for more than 80 per cent of loans which will not have been fully repaid. This may be superficially attractive, but it means that the cost of writing off the loans falls on taxpayers – most of whom do not go to university and earn less than graduates – to the tune of £7.9bn.

Even that is likely to be an underestimate. The size of the student loans book, at £110bn and rising by £10bn a year, is so vast that it is highly sensitive to the slightest tweak. The so-called RAB charge for writing off loans rose from 31 per cent of the book to 45 per cent on the back of these small changes.

In addition, the majority of graduates have a salary deduction of 9 per cent of pay above the threshold hanging over them for nearly their entire working lives. Wealthier graduates are also fleeing the system in droves, either funded by their parents or simply refinancing their borrowings by, say, a mortgage, at lower rates. So it is lower earning graduates who are the real victims.

Th Government’s policy is, therefore, actually worse than Jeremy Corbyn’s. At last year’s election he promised to write off all student loans (something he has since backtracked on) which at least had the merit of taking the hit now, before 30 years of interest has accumulated.

The Conservative policy is to write off about half of the total, but only once all that interest has compounded. In the meantime, it is selling off chunks of the loan book to investors.

Like any complex problem in life, there is no one solution to the issue of how to pay for higher education. But one significant piece missing from the jigsaw so far has been employers. Or are they?

In a little noticed announcement in October, Justine Greening announced a pilot scheme to enable about 2,500 teachers from 25 local authorities in high-demand subjects, such as languages and science, to have their loans partly redeemed by their employers – schools.

The reason no other employers are doing the same is that they will incur national insurance on any loan repayments and their newly hired graduates themselves have to pay income tax and national insurance on repayments too. As a result, of every pound an employer puts into redeeming a student loan only about 60p makes it to the Student Loan Company. This makes no sense. And it is why a system of commercial degree sponsorship has not emerged.

Under the Department for Education pilot scheme, the lucky graduates will have their tax and national insurance on repayments refunded by the National College of Teaching Leadership. So here is a question. Why shouldn’t everyone’s repayments of student loans – up to a certain amount per year – be tax and National Insurance free? This is nearly what happens in the US, where graduates get a tax break worth $2,500 on the interest on student loans.

The remaining fiscal hawks in the Conservative Party and the Treasury would not doubt cry that we cannot afford such a subsidy. We should reply: phooey. The Government is already on the hook for billions of pounds for student loans which will never be repaid. Far better to spend that money on actually paying the debts than storing up trouble, off the Treasury’s balance sheet, in some shadowy offshore structure, as is currently the case. Furthermore, the Government has already conceded the principle of tax-free student loan repayments, so the argument has already been partly won.

There are other things too that can be done, such as reducing the interest rate formula. But as employers themselves benefit from well-educated graduates and, in many cases, are actually willing and able to help fund the system, this is the first place to look to bring more money into the system.

George Trefgarne is founder of Boscobel & Partners, a communications firm.