Liz Emerson explains, point by point, what makes the UK’s student loan system so deeply unfair.
Interest Rates on Student Loans
- Interest rates on student loans after 2012 were increased to RPI + 3% at the same time as fees were tripled to £9,000 a year. Interest starts building up from the moment the loan is taken out.
- The average student now will end their university undergraduate days owing around £53,000 (£9,000 tuition fees + averaged £8,200– £10,700 (London) maintenance loans (for living costs) over three years), which also attracts interest for the next 30 years.
- The use of the Retail Price Index (RPI) as a measure of inflation has been discredited since 2013, but the government likes to use it as it tends to give a higher figure for inflation compared to the CPI (Consumer Price Index). The CPI is now 1% vs 2%.
Compound Interest and APR
- Compound interest means that the interest is compounded on a monthly basis, so a student taking out a £9,000 one-year tuition fee loan plus a £8,200 (£10,700 in London) one-year maintenance loan will be charged RPI+3% each and every month of that year. Based on the current Student Loan Rate the 2016/17 interest rate is RPI+3% i.e. 4.6% (4.7% APR once the effect of adding interest monthly is added). In September 2017 the interest rate will rise to 6.1%.
- After three years of university education, the average student is likely to owe £53,000.
- On UK average earnings of £26,000 graduates could owe £130,000 thirty years later, even having paid back £43,000. The outstanding loan will be written off then, but in the meantime many graduates will live most of their adult working lives with high levels of increasing debt hanging over them and loan repayments adding to their tax burden even at low earnings levels.
- This assumes RPI at only 3% – remember that inflation is low at the moment, but likely to rise, so it is crucial that students are better protected.
Student Fees Set to Rise
- The government has given the green light to allow universities to increase fees in line with inflation until 2020. It means that tuition fees could pass £10,000 a year within the next four years. Durham, Birmingham, Kent, Royal Holloway and Oxford all showed “disgraceful arrogance” by pre-empting parliamentary approval.
A 41% Tax Rate for Young Earners
- Graduates will in effect have a marginal tax rate of 41% under the current system once National Insurance Contributions (NICS) of 12% and basic-rate Income Tax of 20% are taken into account. Add to this average housing costs of 40% of income, plus living and transport costs, it is therefore no wonder that half of graduates who had to pay £9,000/yr fees are now living back at home.
Income-Contingent Loans and the Repayment Threshold
- These loans are structured so that students only start paying back their loan when they earn a certain salary. Currently students start to repay 9% of their income over £21,000. However, the government has gone back on its 2010 commitment to raise the threshold of repayment in line with inflation: in spite of promising otherwise, it has frozen the repayment threshold at £21,000. This means that more lower earners will be pulled into starting to repay their loans earlier. The Regulator would not allow commercial lenders to change the terms in this way. Furthermore, students from wealthier families won’t have to pay an extra 9% “graduate tax” on income when starting work if their families have paid their fees and living costs upfront.
The Student Loan Book
- Student loans are classed as an asset rather than a cost on the government’s balance sheet, and so they do not add to the deficit. It also means that government can sell the loan book on to a third party. The government recently announced that it is seeking a buyer for the pre-2012 loan book in the same way that they sold off the 1998 loans.
- The terms of the student loan contract are vague and could be altered by the new owners of the loans. So the 9% loan repayment on income over £21,000 could be raised further; the interest rate for outstanding debt could be increased, while the length of the loan term (30 years before the outstanding debt is written off) could in theory be extended, thereby squeezing even more out of their “clients”.
- If you think this hasn’t been done before then you are wrong. Erudio bought the 1998 loan book and, once the threshold of repayment was met, the company could take compulsory direct debits in 60 equal monthly instalments irrespective of the “clients’” ability to pay. At least students then had the protection of the Financial Ombudsman Service; today there is no such protection for students and graduates, hence our call to bring student loans back within the Consumer Credit Act.
15% Increase in Pay and Perks for Senior University Staff
- Can it be any surprise that those in charge of the student finance gravy train received a 15% increase in salary, fee or profit from employment or office over the past five years which covers the period during which student fees were increased to £9,000? According to the University College Union, 33 institutions now pay their heads (vice-chancellors and so on) more than £300,000 per annum, with six of them on packages that exceed £400,000. Furthermore, 16% of institutions contacted disregarded Freedom of Information requests asking about the pay and perks of senior staff members. This is simply not acceptable.
University Living Costs
- According to the Student Living Index 2016, weekly rents amount to around £110/week for the average student in England but this figure covers all types of rental accommodation. The cost of halls accommodation, which makes up more than 36% of all university accommodation, is also exorbitant at around £141 per week in 2015/16, marking a rise of 5% in just one year. With the removal of Student Maintenance Grants, according to the NUS, the price of university accommodation has reached 95% of the maximum student maintenance loan.