Almost everything which is said officially about student finances is obfuscatory and contradictory, starting with Damian Green’s assertion at the weekend that we need ‘a national debate’ on tuition fees, only for former education secretary Michael Gove to say the opposite the following day.
A week before the General Election was called, the Student Loan Company announced that it was increasing interest rates from 4.9 percent to 6.1 percent, according to its formula of inflation plus 3 percent. Due to the effects of compound interest, that potentially takes the lifetime cost of a typical student’s debts from around £51,000 to £70,000, according to the calculator on the Money Saving Expert website. However, try finding accurate repayment numbers on an official site and you will be disappointed. Indeed, the internet is full of somewhat dubious calculators, many of them giving different answers.
The Student Loan Company has to charge such usurious interest rates because the levels of default rates and special deals – for example for the disabled and those earning below £21,000 – are so high.
Incredibly, the student loan system is apparently largely exempt from regulation from the Financial Conduct Authority, which is one reason why politicians make false and contradictory statements the whole time.
The most frequent of these is that students earn more than other taxpayers and consequently should not be subsidised by them. It is certainly true that graduates from top universities earn hundreds of thousands of pounds more, but if you compare non-Russell Group graduates (ie the majority) to, say, those with grade 4 apprenticeships, the difference is on average only £1,700 a year, according to Boston Consulting Group.
Furthermore, the level of default rates and payment holidays in the system is so high, that large parts of the £100bn loan book, rising at £13bn a year will be written off and the bill footed by the taxpayer. Just how high default rates are is not known, as the Student Loan Company lacks both transparency and proper Parliamentary scrutiny.
Such scrutiny might also examine the service levels of the Student Loan Company. Since writing an article on the subject recently I have had several emails from individuals complaining that it does not update loan balances in a timely or accurate manner. I have no idea how widespread this issue is nor, I suspect, does anyone else (least of all ministers or MPs).
Put the student loan system together with high house prices and it becomes even more toxic. The typical graduate has negative net worth and if they earn, for example, £30,000 a year then they are paying £220 a month in loan repayments on top of their taxes. Clearly, banks have to take this into account when they make affordability calculations for mortgages, reducing borrowing power significantly.
There is no single answer to the complicated questions raised by the student loan system. Clearly, Jeremy Corbyn’s promise to write off existing debts and pay tuition and maintenance fees is totally unaffordable. But among the policies the Government should consider are: reducing the interest rates to fairer levels; making student loan repayments tax-free (including for employers and parents); subjecting the Student Loan Company to proper regulation, disclosure and Parliamentary oversight; and finding a way to fund endowments for a generous system of scholarships and bursaries.
Given the flaws in the current system, it would actually save the taxpayer money for the Treasury to contribute alongside other donors to such endowments, perhaps through asset sales.
As it stands, the system is not only a mess but politically toxic. Most students – many of whom are the children of Conservative supporters – are entirely right to vote Labour and will continue to do so. In political editor James Forsyth’s words, you cannot sell capitalism to people without any capital.