Martin Lewis: Five changes to fix student finance

I lost it a little, while on the BBC’s Question Time programme recently. I’d just explained how student finance really works, when another panellist tried to use the standard trite political point scoring of a “£57,000” debt burden on young people. This type of misrepresentation needs calling out — and after years of throwing my sock at the TV while watching politicians say similar on the programme — I did, vociferously.

You can argue that the current system is wrong, without the bitter scaremongering that risks putting people off going to university for the wrong reasons. Student finance has become a battered political punchbag, and as the parties demonise each other’s suggestions, young people are the victims — especially those from non-traditional university backgrounds who tend to be more debt averse.

Worse still, some make policy suggestions targeted at appeasing the public misperceptions they’ve created, rather than the reality. While a policy’s psychological impact does count, it is better and cheaper to address misunderstandings directly, while focusing extra cash on giving maximum practical benefits, not just a sugar coat.

For example, tweaking the current system by just lowering English tuition fees to, say, £6,000 would undoubtedly be popular and psychologically beneficial. However, the change could be regressive.

Student tuition fees are paid automatically for first-time undergraduates via a loan. Repayments start after university and are solely based on earnings. Those on “Plan 2” loans (students in England and Wales who started in or after 2012) repay 9 per cent of everything earned above £25,000 for 30 years, unless they clear the borrowing plus interest first.

Crucially, it’s currently predicted by the Institute for Fiscal Studies that only the top 17 per cent of graduate earners will clear this in full within the 30 years. For the rest, repayments simply work like a term-limited graduate tax.

Lower the fees, and the people who will actually repay less are those who will clear it in full within the 30 years. A back of the envelope calculation suggests that’s probably only the top 20-30 per cent highest earning graduates.

In other words, lowering fees would not only reduce costs for big earners. The effect is to cut revenue to universities which could impact the quality of education for all. So if it’s a question of limited resources (which it usually is) that would be far from my priority.

Similar logic applies to lowering interest rates. While I don’t like the principle of charging students real rates of interest, in practice, only higher earners actually repay it.

Instead we should focus on changes helping all students and graduates — prioritising ones that will ease the passage for those who struggle the most.

The government’s Augar Review is looking at the structure of post-18 education. My team and I have focused our suggestions solely on the student finance element (read our full submission at mse.me/augar).

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

This shouldn’t be read as a wider judgment of whether tuition fees should be scrapped. That’s a political question over the balance of the burden between the individual and the taxpayer. If you radically reshaped the system, some of my analysis above changes too. So here are my tweaks.

1 Change the terminology

Student loans are misnamed and mis-framed as a debt. This is misleading, off-putting and leads to people making perverse decisions such as part overpaying loans after graduation, even when that doesn’t result in lowering their continued repayments.

Plus, forcing huge numbers of our young people into getting what we call a loan has inured them to other forms of borrowing such as payday loans and credit cards, and contributed to our growing indebtedness. The system should be improved and renamed a “graduate contribution system”, as in other countries.

2 Focus on living costs

Students do not have enough money to live off while at university. The political focus is on tuition fees. Yet most students complain to us about the practical costs of living and high rents in student areas. Maintenance loans need to be increased.

Some also want to reintroduce student grants for those from lower income families. This would be a psychological win and relatively cheap for the exchequer. Yet it’s cheap because most people who get the grants won’t gain in practice.

That’s because lowering their borrowing doesn’t change what they repay, all but the highest-earning university leavers will still repay 9 per cent of everything earned above £25,000 a year for 30 years.

I suspect if the policy were sold as the more accurate, “student grants to help high earners repay less” it might not fly as well. So with limited resources, I’d target increasing the size of living loans.

3 Be honest with parents

The government must be honest about the parental contribution. If this system is to continue, at the very least honesty is required. Even though they are independent adults, almost all under 25-year-olds’ maintenance loans are means tested based on parental income. Some receive less than half the full amount.

It is implicit that parents are supposed to make up the gap, yet it should be explicit. Parents should be told clearly what their expected minimum contribution is. This would stop friction between students and parents, and let parents know that they may need to save for years to have the money ready.

4 Loan statements are damaging

Student loan statements are damaging. Many people are understandably frightened by the huge amounts of interest added each month, even though the reality is that few will repay all of it, and some won’t pay any of it. Statements should focus on explaining current and predicted total future repayments. 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 No retrospective changes

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 the 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 could be amendable.

The other major problem currently is part-time students, where the 2012 changes have hugely damaged participation — but that’s a column for another day.

Martin Lewis is the founder of Moneysavingexpert.com and is former head of the Independent Taskforce on Student Finance Information. Twitter: @MartinSLewis