UK student loans a subsidy for the low paid
REUTERS/ Peter NichollsDemonstrators stand in Parliament Square in front of the Houses of Parliament during a protest against student loans and in favour of free education, in central London November 19, 2014.The Labour Party’s idea to cut university tuition fees as part of the UK’s student loan system from the current cap of £9,000 to £6,000 doesn’t actually achieve what it’s intended to do: help low-earners after graduation.
The lower-tuition proposal is actually a move back to the old student loan system, which was was replaced by the current one in 2012.
Under the new system, tuition fees are capped at £9,000, compared with the £3,000 upper-limit of the previous system. Students who started their courses in September 2012 will have loans accrue interest at the rate of inflation, as measured by the Retail Prices Index, plus 3%.
Also, the threshold at which students must begin paying down their debts was raised to £21,000 from £15,000. So, even though tuition is now higher, more low-earners will not have to repay part or all of their loans because they likely won’t hit the £21,000 mark.
It’s true that students leave university with more debt under the current program. The average student will now graduate with around £44,000 worth of debt compared with an average of £24,754 under the previous system, according to the Institute for Fiscal Studies (IFS).
This means students will, on average, pay back substantially more than they did under the old system. The IFS estimated that it would be in the region of £66,897, compared with £32,917 under the old system.
While those numbers are intimidating, a better understanding of how the current system works shows that it’s both more sustainable and better for people at an economic disadvantage.
As the BBC’s Chris Cook explains, the greatest opposition to the student tuition increase was that it would dissuade people from poorer backgrounds from applying to university. But that hasn’t happened.
Well, in part this is because the loans are income-contingent (that is, repayments are tied to how much you earn in future). As a consequence if people take on the debt to go to university but can only find low-paid (below £21,000 a year) work to do afterward, they will not have to pay back that debt.
As the IFS states: The lowest-earning graduates, whose income rarely exceeds £21,000 a year, will, however, pay back less under the new system, mainly because of the higher level of earnings required before repayments are made.”
As a result, cutting tuition fees helps higher-earners most, as they are able to pay back their loans faster.
But there’s something else. In both the old and new program, the government writes off debts if the loans aren’t repaid within 30 years. The IFS study estimated that under the current system (where students graduate with more debt), up to 73% of students will have some debt written off at the end of the repayment period, with an average of around £30,000 wiped out.
Critics argue that this proves that the new system is worse than the one it replaced, where only 32% saw any debt written off. What they forget is that in the new scenario, most low-earners will have their debts written off anyway, since it will take them much longer to hit the earning threshold.
Ultimately, making university funding more regressive won’t help the people who need it most.