Blog: Understanding student finance

07 September 2018

Dr Tim Bradshaw, Russell Group Chief Executive, says we need a better understanding of student finance ahead of Government review.

At this time of year, university freshers need to look beyond warnings that they will amass, on average, £50,000 of debt. These headlines do not reflect the way our student loans system really works. The first thing to understand is that there is no upfront cost for tuition. Everyone can access a loan for at least some of their living costs.

How much you pay back after graduation then depends on what you earn, not how much you owe. Stick with me: this calculation makes the point. Once a graduate’s income reaches £25,725 they have to start paying something back. The contribution is 9 per cent of earnings above that threshold, irrespective of how much was borrowed from the Student Loans Company in the first place. Someone earning £28,600 will pay just £19.97 a month, regardless whether they have £30,000 or £50,000 of nominal debt.

In fact, most people will never pay back their loan in full thanks to the repayment threshold and the fact that, after 30 years, any outstanding balances (of any size) are written off. These are important and deliberate features of the current income-contingent loan system, not a sign it is failing.

Cost is split 50:50 between taxpayer and graduate

Ultimately this means the overall cost of higher education is now split roughly 50:50 between taxpayers and graduates, with higher earners paying a bigger share. It has also been possible to remove the arbitrary cap on student numbers. Since 2012, anyone with the ability and desire to attend university can. Record proportions of young people are now entering higher education, including from disadvantaged backgrounds.

For universities, the system is also starting to provide a more sustainable footing after years of under-investment by previous governments. There is no way of avoiding the fact that a university education is expensive and costs have to be covered one way or another, but we need an informed debate about cost and value.

Few people realise that, even with tuition fees, Government has to provide a top-up to universities for teaching high-cost subjects, such as medicine and engineering. Without this, such courses wouldn’t be viable.

‘Political polarisation has left many within the sector on tenterhooks, but it is an opportunity to build a better understanding of how student finance really works.’

Yet public confidence in the system is low. The Government is reviewing the English student finance system, along with the wider post-18 education and funding landscape, largely in response to Labour’s promise to scrap tuition fees altogether. This political polarisation has left many within the sector on tenterhooks, but it is an opportunity to build a better understanding of how student finance really works.

Credit to those already trying, including consumer champion Martin Lewis who has rightly argued that the language of loans and debt is misleading and should be junked in favour of “graduate contributions”. You will also get straight answers from university websites and open days, but there is still a long way to go in terms of changing perceptions.

How a ‘living wage’ grant would help

Alone, however, better communication will not be enough. If we want to get a hearing for the best features of the present system, those which cause the greatest concern will need to be reformed.

This is why the Russell Group has called on the Government to look again at maintenance grants for disadvantaged students. There are often real fears about families taking on debt, or anything that looks like debt, and so access to a non-repayable grant could help break down barriers.

A “living wage” grant of around £8,200 a year for English students previously eligible for free school meals, for example, would target such a move to the people who need it most. The Government should also look at how this type of support might help reverse recent sharp falls in part-time and mature students at university.

How the Government treats student loans is changing

Perversely, such an investment may become more acceptable to the Treasury following a change to government accounting rules anticipated this autumn.

Currently, student loans do not count towards today’s expenditure by Government – it’s actually the opposite, as the interest they expect to receive on the loans is counted as income. This anomaly largely explains how Government can afford to underwrite the student loan system.

The Office for National Statistics is, however, widely expected to bring student loans onto the books, thereby increasing the deficit. This will cause a major headache for the Exchequer, but it will also remove much of the bias towards providing loans over grants.

The other issue the Government will need to address is the rate of interest on student loans. Again, there is a communication problem here. The current system is, technically, progressive in that it shifts more of the cost onto higher earners. But it is not difficult to see why headline rates north of 6 per cent cause such consternation, particularly when they are based on the widely discredited RPI inflation measure, rather than CPI.

By taking steps to meet concerns over living costs and the interest rate, while transforming the way we explain income-contingent student debt, we should be able to build confidence in the system and preserve its best features. It’s time student finance is properly understood.

Originally published by iNews

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