Student Loans Contents

5Issues for students

Complexity

100.Many witnesses expressed the view that the student finance system is overly complex, making it difficult for prospective students to understand. Amatey Doku—Vice President for Higher Education at the National Union of Students—noted that prospective students are required to comprehend the system at a relatively young age, and that changes to student loan terms generate further complexity. He said:

To expect 17 year-olds to go into making this choice fully informed is sometimes unfair […] Even if you understand it as you are going in, it has been retrospectively changed and the loans have been sold off, so all that makes it very difficult terrain.106

101.Dr Helen Carasso reflected on discussions held with university applicants, and highlighted the fact that even experienced economists can struggle to understand the system. She told the Committee:

We are talking as, in some cases, very qualified economists, and we are confused about it. I have had a number of people who say, “I cannot work out the costs. I cannot work out what it means.”

We are talking about the signals that are being sent out here to people who cannot unpick them. It is not because they are financially illiterate. It is mixed signals, because they are very complicated signals, and they do not even have the full evidence.107

102.Dr Andrew McGettigan noted that the Government’s decision to fund universities primarily through student loan write-offs—instead of through direct grants as in the past—can be difficult to comprehend:

Now we have a scheme with much higher fees but which appears to cost the same. That is very difficult for people to interpret. There is a lack of transparency there.108

Terminology

103.The Committee’s inquiry examined the logic behind, and the impact of, the Government’s choice of terminology. Specifically, the Committee was interested in the use of the terms “loan” and “debt”, and whether they contribute to the system not being well understood. In its written evidence submitted to the inquiry, MoneySavingExpert argued:

The Government must get rid of the language of debt. It is simply misleading. Calling the current system a “loan” makes it more difficult to explain and puts potential students off. Using the language of debt means people unnecessarily fixate over the total amount they borrow and interest rates, rather than the rate of repayment which is arguably most important. […] Reforming the language to a graduate contribution system would help prevent people being put off from studying, or making ill-informed financial decisions, such as using savings to pay their children’s tuition fees to “save them from a lifetime of debt”.109

104.Numerous witnesses noted the unhelpfulness of the current terminology in their oral evidence to the Committee. Referencing the fact that student loan repayments are conceptually similar to an additional tax on income but the terminology leads many not to think of it in that way, Professor Janet Beer said:

Nick Barr [Professor of Public Economics, London School of Economics] said a very interesting thing in the lead-up to this change in the student funding system. He said that no parent ever stayed awake at night worrying about how much tax their son or daughter would pay in the future.110

105.Lord Willetts said of the terminology:

Saying, “If you are in a well-paid job, you will be paying back the cost of your higher education”, is not like a student getting into debt and having to service it. We are all trapped in that language, and I very much regret it. It is a very misleading picture.111

106.In evidence to the House of Lords Economic Affairs Committee, Martin Lewis—Executive Chair of MoneySavingExpert—commented on the loan statements provided by the Student Loans Company, saying:

Each month, people get a statement telling them that £400 of interest has been added to their student loan. They ask, “Should I pay it off?” I ask how much they are earning and it is £23,000 a year. I say, “No. If you paid off £10,000, you would still pay 9 per cent of everything you earn above £21,000 for 30 years”. The best advice for most students is to rip up their student loan statement because it is psychologically damaging and completely misleading.112

107.Even Jo Johnson agreed that “The language of debt and interest is not particularly helpful […] It would be preferable for us to use language […] that thinks of it more as a time-limited and income-linked graduate contribution, because that is what it is.”113

108.It is clear that the student loan system is complex, and has become even more so as a result of piecemeal changes to student loan terms. In conducting its major review of university funding and student financing, the Government must be mindful of the risk that additional changes lead only to more confusion. The Government should take this opportunity to simplify the system and significantly improve how it is explained. Prospective students must be able to easily comprehend the system, given the long-lasting financial implications of accessing student finance. It is the Government’s responsibility to ensure that a good understanding of the system is commonplace.

109.Student loan debt is only repaid when earnings surpass a given threshold and is written off after a defined number of years. It should not be thought of as akin to typical debt. In using the terms “loan” and “debt”, the Government has made it all too easy for students and their families to think of it in this way. It is easy to imagine how the thought of accruing tens of thousands of pounds in so-called “debt” could serve as a deterrent for young people considering applying to university, and the Committee is concerned by the thought of prospective students choosing not to enter higher education due to misperceptions about the nature of student loan debt. Loan statements sent by the Student Loans Company are likely to have reinforced this troubling misconception, and must be improved to better convey the true nature of student loan repayments.

110.The Committee welcomed the former Universities Minister’s admission that alternative language would be preferable. The Government should introduce new language that better reflects the workings of the student finance system.

Is it a graduate tax?

111.Student loan repayments can be thought as sharing some conceptual similarities to an additional tax on income. While students will leave university with a notional stock of debt, this serves only to determine the length of time for which they will be required to make repayments, not the size of the repayments themselves. As discussed earlier in this report, actual repayments are currently fixed at nine per cent of income above £21,000 (rising to £25,000 in April 2018). Lord Willetts told the Committee that the current system is “tax-like” and “has many of the good features of a tax”.114 However, a key difference between the existing student loan model and a so-called “graduate tax” is that repayments end once the debt has been paid off or written off, whereas graduate tax payments would theoretically continue in perpetuity. Jo Johnson described the current system as having “similarities to a graduate tax but also important differences that make it a better system”.115 In taking oral evidence, the Committee asked Lord Browne why his review did not propose the introduction of a graduate tax:

There was no evidence that the Treasury would permit hypothecation of a tax to a specific activity. We asked them; they said, “We have no statement to make on this”—i.e. they would not do it. Secondly, there is the amount of time it would take to build up revenue, because the taxation is for students, and we would have a lot of time to build up the needed revenue.

The third thing was that it went against the question of, “Can you use the mechanisms involved with students paying to make sure that quality is maintained and improved?” It would just be a tax, and everyone could get away with whatever they wanted to do as long as they paid the tax. We felt that on balance, while it did many of the similar things to do with finances, it was not quite the right thing to do at the time, and I still think it is not the right thing.

Lord Willets added:

[A tax will] create perverse incentives for students who are going to do a course that is strongly associated with higher pay to go and study abroad, because you have removed the link between the amount you repay and your specific higher education. Being a graduate of an English university means that you are saying, “I am going to have a lifetime of income tax at whatever rate is higher”, massively more than the actual cost, so it suddenly becomes a bargain to pay to go and study abroad, and that would be very unfair on our universities.

Secondly […] because none of this can be hypothecated, it all clearly counts as public spending, and that is where the problem starts.116

112.When asked by the Committee if it would be beneficial to introduce a time-limited graduate tax, Dr Helen Carasso said:

If you did that it might be easier in the simple accounting methods, but it raises quite a lot of questions about where the money would go and how the funding would go through into the system and institutions. You would go back to some sort of teaching grant model.117

Maintenance loans and grants

113.Students have the option of taking out a maintenance loan to help meet their living costs whilst at university. The size of the loan that a given student is eligible for depends on where they are studying, whether they are living away from home, and their household (parental) income. The Committee examined whether maintenance loans are intended to meet students’ living costs in their entirety, or whether they represent only a contribution that students or their parents will need to supplement. The Committee asked whether the fact a student’s maintenance loan entitlement depends on their parents’ income implicitly means that the Government expects parents to contribute to living costs. Jo Johnson said:

There are a number of different ways in which students can bridge what may be a gap between the amount that they can borrow for their maintenance costs and the actual costs that they incur. They come in a number of forms. Parental contribution will, for many, be part of that picture, but it is not the only part. They also have an ability to use their own savings, should they have any, or to work while they study to bridge any funding gaps they have. […] The Government are not being prescriptive about a parental contribution. It has always been the case that the Government’s contribution towards living costs has been just that—it has been a contribution. It was never meant to be a blank cheque whereby it covers all maintenance costs for students, whatever they might be. It is a function of the fact that limited resources are available to Government inevitably and they have to be targeted towards those who are most in need of them. A proxy for that is household parental income. That is the proxy by which we get to addressing the question of the respective needs of particular student groups. […] The government system was never intended to cover the entire amount of a student’s maintenance costs.118

114.In its written evidence, MoneySavingExpert said the “Government does not communicate clearly the implicit parental contribution”, adding that:

Many students don’t get the full maintenance loan, and parents are meant to fill the gap. However, nowhere in the main Student Loans Company communications does it explicitly say this–the most is a statement that “depending on their income, parents may have to contribute towards the living costs of their student children”.

It must be the Government’s (or its agencies’) duty to explicitly inform parents about the parental contribution, including exactly how much they are expected to give. Not doing so causes rifts between students and parents who don’t make up the gap, as well as budgeting problems which are sometimes so severe that students are forced to leave university.119

115.MoneySavingExpert also argued that “the maintenance loan is too little money in the first place”, meaning that “the biggest practical problem that students face is merely affording to live while studying”.120 Jo Johnson told the Committee that “students are pushing us to be more generous on the maintenance side”.121 The Government has previously commissioned research to allow it to understand better the financial position of students studying in England, known as the Student Income and Expenditure Survey. The most recent survey was conducted in 2014–15, but has not yet been published by the Government. The Committee asked the then Minister why this is the case, and he said:

We are quality-assuring it at the moment. It is a big, complex piece of research and we want to ensure it is right. The department has a huge amount on its plate at the moment and we have to prioritise, but it is being quality assured and when it is ready we will publish it.122

116.Students were previously able to apply for maintenance grants, but the Government announced its decision to scrap these grants in the Summer Budget 2015, which said “the expansion of higher education relies on funding being put onto a sustainable footing. The Government must therefore ask graduates to meet more of the cost of their degrees once they are earning. From the 2016–17 academic year, maintenance grants will be replaced with maintenance loans”.123 Lord Browne told the Committee that he felt strongly about the Government’s decision to eliminate maintenance grants, saying “That was, in my mind, a bad thing”.124

117.Students from low-earning households are eligible for larger maintenance loans. This means that those students typically graduate with a larger stock of debt than students from high-earning households (who are eligible for smaller maintenance loans). The Committee heard that large debts could deter some prospective students, but Jo Johnson’s view was that “we are not seeing the current system of student finance deterring people from disadvantaged backgrounds going into higher education”.125 He added that “A better way of looking at it […] is to say Government are making available the most financial support to those who need it most, and that is what Governments should do.126 On this subject, Amatey Doku said:

We were very clear, when maintenance grants were scrapped, that that was the wrong thing to do, and we have been very clear that maintenance grants need to be reintroduced. We cannot have a system where students from more disadvantaged backgrounds will come out with bigger debt.127

Professor Janet Beer echoed this point, telling the Committee that “we need to return to means-tested maintenance grants”.128

118.Maintenance loans are equally, if not more, difficult than tuition fees for prospective students to understand. The Government sends mixed messages; former Universities Minister Jo Johnson told the Committee that maintenance loans are not intended to cover a student’s living costs in their entirety, but that the Government is not being prescriptive about an expected parental contribution. This may mean that some students who lack access to additional sources of income are priced out of a university education. This is clearly at odds with the Government’s stated aim of removing barriers to access—the Government should consider how to address this as part of its major review.

119.The former Minister’s assertion that the Government does not assume parents will contribute to living costs is directly contradicted by official Student Loans Company documentation, which states that depending on their income, parents may have to contribute towards the living costs of their student children.129 The assumed parental contribution will undoubtedly create financial pressure for households with multiple children at university, and the Committee is unconvinced that the maintenance loan system adequately accounts for this. The fact that parents are expected to contribute to living costs must be made much more explicit. Alternatively, if the Government maintains that it does not expect a parental contribution, Student Loans Company documentation must be corrected, and the Government must explain how university is free at the point of use for students without additional sources of income.

120.It is vital that public debate on the issue of maintenance loans is well informed. It is deeply regrettable that the Government is still yet to publish the 2014–15 Student Income and Expenditure Survey, which will clearly be highly informative in helping the public understand students’ financial circumstances. The value of the survey’s findings is no doubt diminishing with the passage of time. The Committee recommends that this information is published urgently. The need for maintenance grants to be reintroduced has also been highlighted to the Committee, and the Government should assess the case for doing so as part of its major review.

Other issues

Part-time students

121.From a peak of almost 590,000 in 2008–09, part-time student numbers fell to just over 310,000 in 2015–16; a fall of 47 per cent.130 Given the timing, it is reasonable to link this decline to the 2012 reforms, due to the increases in tuition fees, reluctance among mature students to take out loans, and the fact that many would-be part-time students are ineligible for tuition fee loans. In its written evidence to the Committee, the Open University—whose student numbers fell by 30 per cent between 2010–11 and 2015–16131—said “This catastrophic decline in part-time higher education was unanticipated and counter to the UK Government’s policy objectives. […] this collapse in part-time higher education is the symptom of a broken market.”132 Both Lord Browne and Lord Willetts told the Committee they regretted the way in which the reforms had affected part-time students,133 with Lord Willetts saying:

I plead guilty on part-time students. I was surprised at the time, and remain shocked, by what happened. […] We hoped and expected—it did not turn out like this—that the extension of the fee loans would help the part-time students. It clearly did not work out that way. The lesson I learned from this is […] that there is not a single model that works for all students. […] The evidence is that repayable loans work for some, like 18 year-olds going to university for three years, and do not work for others, like part-time students.134

122.The Committee agrees that the sharp decline in part-time student numbers—brought about in part by the 2012 reforms—is regrettable. It is clear that the Government failed to anticipate the impact the 2012 reforms would have on part-time students. The Government’s major review of student financing and university funding should include a fundamental rethink of its offer to part-time students. It should ensure that part-time study is a credible option as part of lifelong learning and retraining, and that it provides access to higher education for those who are unable to study full-time.

Alternative student finance

123.Student loans are subject to a positive real interest rate, meaning they are not Sharia compliant. A DfE White Paper, published in May 2016, notes that “this could deter some prospective students who feel unable to use interest-bearing loans for religious reasons, particularly some Muslim students, from participation in higher education.”135 The Higher Education and Research Act—which received Royal Assent in April 2017—makes provision for the introduction of a model of alternative student finance which could address this issue. When the Committee asked Jo Johnson whether alternative student finance would be available to students for the 2018–19 academic year, he said:

We will not be able to do it by 2018–19 because it is just too complicated, but let me tell you: it is a priority. We absolutely are committed to bringing in alternative student finance and we want to see it delivered in an efficient and effective way. It has a real importance to the Government’s widening participation agenda. We want to see people from all faiths and backgrounds feel that there is support to remove financial barriers to access.136

124.The Committee recognises the complexities associated with the task of introducing Sharia compliant loans. The Department for Education should make use of Islamic Finance expertise both within Government and externally to ensure an alternative student finance model is introduced as soon as possible.

The Student Loans Company

125.The Committee took evidence from HMRC on its provision of information to the Student Loans Company, following reports that thousands of people had repayments taken from their salary even after their loans had been paid off. The Committee also asked whether HMRC should take on responsibility for the administration of student loans. Jon Thompson, HMRC Chief Executive and Permanent Secretary, said the following:

We receive information from employers much more frequently than [monthly] […] We have the ability to give that information to the Student Loans Company on a more regular basis. […] There is an ongoing project that would give them information on a more regular basis, but the question is whether they can ingest it. […] We believe that we collect 82 per cent of all student loan repayments. […] Could we do the administration of it? Probably, yes—but that’s not me saying I want some more things to do.137

126.It is concerning that the Student Loans Company’s inability to make use of readily available data is leading thousands of graduates to overpay their student loans. The Committee notes the Government’s commitment to tackling this problem in the 2017 Autumn Budget, but questions whether the April 2019 deadline for completing this work is ambitious enough. HMRC told the Committee that it could perform the administration of student loans, though it would need additional capacity in order to do so. The Government’s major review should consider the case for transferring responsibility for the administration of student loans to HMRC, along with a commensurate increase in resource.

106 Q183

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109 MoneySavingExpert (STL 0046)

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112 House of Lords Select Committee on Economic Affairs, The Economics of Higher, Further and Technical Education, Evidence Session No. 2, Tuesday 7 November2017

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119 MoneySavingExpert (STL 0046)

120 MoneySavingExpert (STL 0046)

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123 HM Treasury, Summer Budget 2015

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