Loans for Higher Education: the dodgy dossier

Antony Mason argues that, even if they can’t do anything about being stuck with higher debts, university students still have cause for complaint about the terms which they are forced to agree to

“You must agree to repay your loan in line with the regulations that apply at the time the repayments are due and as they are amended. The regulations may be replaced by later regulations.”

The Intergenerational Foundation has recently published a paper – widely respected – on Higher Education fees which shows how the tripling of tuition fees will fail in just about every way that is used to justify it. It is called False Accounting? Why Higher Education Reforms Don’t Add Up, written by Dr Andrew McGettigan.

The new fees and loans scheme

  • will fail to reduce the government deficit
  • will fail to reduce the national debt

It will also indebt most students to the tune of £45,000. To pay that off in 30 years, you’ll need a starting salary of about £40,000. If you don’t believe me, try playing with an online Student Loan Calculator, such as the one provided by Martin Lewis’s Money Saving Weekly.

Think of it this way: most teachers will be saddled with their student loan throughout their career, and will never pay it off in full.

Bad deal

The government claims that its new loan-repayment scheme is generous.

  • Graduates will not have to pay back anything before they earn in excess of £21,000.
  • Any part of the loan that is not paid off after 30 years will be written off.

The interest rates on the loan, however, are not so generous: they begin at the rate of inflation or RPI, currently standing at 3.1%, and rise on a sliding scale of RPI + up to 3% when your earnings exceed £21,000 (to the cap of £41,000).

When you earn over £21,000, 9% of any income you receive above that figure will be extracted to pay off the loan – in fact, mostly just paying off the accumulating interest to start with.

Subprime lending

Some may argue that the terms are in fact too generous. Many graduates will never earn more than £21,000 p.a. and so will pay back nothing at all. Others will fail to pay off all their loan before the 30-year moratorium arrives. Even the government predicts that 32% of the loan book will never be paid off.

No business could possibly work on this model. Basically the government is lending to a whole swath of people who will never pay the loan back in full.

When this attitude was applied to the US property market it was condemned as “subprime” lending.

Dodgy terms

So at some future date – and maybe not too far into the future – the government (whatever that government is) may have cause to change the terms of the loans. It could lower the income threshold beyond which repayment is required; it could increase the interest rate; it could postpone the write-off date beyond 30 years; or it could simply abandon the write-off completely.

Future governments can do this because the contract for the loans contains an unforgivably vague clause, which no bank or business would be able to get away with. It appears at the head of Section 3 (“Your Responsibilities”), on page 8 of Student Loans – A Guide to Terms and Conditions 2012/13.

“When you take out a loan, you will sign a declaration form which will be a contract. This states that you have read and understood the Terms and Conditions. You must agree to repay your loan in line with the regulations that apply at the time the repayments are due and as they are amended. The regulations may be replaced by later regulations.”

If there is one thing that the government should change – if not the whole wretched scheme – it is this clause. Otherwise all students taking out a loan on this basis will be hostage to fortune.

To signal your disapproval of these Terms and Conditions, you can sign Dr Andrew McGettigan’s e-petition to the government, entitled “Set fixed repayment terms in student loan agreements”.


Posted on: 16 July, 2012