Understanding student finance

14 May 2019

Senior Policy Analyst David Thompson explains how the student finance system works.

Ask most people, whether they’re students, graduates or parents, how teaching at university is paid for and the response will be anything but clear.

Many will have heard that students graduate with “£50,000 of debt” and that their loans attract a high interest rate. You’d need to have really done your reading to know that student loans are subject to repayment thresholds, forgiveness periods and are “income-contingent”. A recent report suggested that just two-fifths of students think they properly understand how student finance works. The interest rate applied to your loan – RPI+0-3% – has no impact on the actual monthly payments you will make. Eighty-three percent of graduates will never repay their loans in full. This is an intentional feature of the system.

All clear? Hardly. This is mind-bending stuff, which is a problem. Widespread misunderstanding of student finance obscures the positive features of a loan system which is for the most part progressive and affordable, subsidising those who can least afford to pay. While the system may not be perfect, it has been designed deliberately to try and ensure any young person with the ability and desire can attend university, irrespective of their background. This is primarily because you only make repayments on anything you earn above £25,725, with the outstanding total written off after 30 years no matter how much, or how little, you have repaid. Higher earners contribute most.

So why does the government present student loans as akin to conventional debt, like a credit card or a bank loan, when they are in reality very different? At present, graduates are sent annual loan statements topped with a despairingly large number to repay and listing interest accrued each month, despite these figures usually having little bearing on the sum they’ll actually part with. Why?

There are few decent policies that have been so badly communicated as student loans. At the individual level, this means students and graduates are less equipped to make informed financial decisions. For instance, we’ve heard some graduates use inheritance or parental loans to pay off their loans prematurely, even though they may be in low-earning professions that make it unlikely they would ever pay off the total debt.

And politically, confusion around the terms of the current system impoverishes debate around a key issue for any government: how we pay for higher education, and how the bill is split between graduates and taxpayers.

Whatever your view on tuition fees, we should all be able to agree on the need for more accurate information. At the Russell Group, we have worked closely with Money Saving Expert’s founder, Martin Lewis, to develop a brand new loan statement for graduates, which explains the system much more clearly and moves away from the unhelpful and misleading language of “debt”.

We have a developed a way of estimating the total amount a graduate might expect to repay over the lifetime of their loan, based on their earnings. Our statement will show how much a graduate is actually likely to repay, given that the majority will have at least some of their loan written off after 30 years. In an online survey of 6,000 people, 90% gave their support. Also popular were other new features such as the inclusion of the final date the loan can run to and a breakdown of monthly contributions.

We are now calling on ministers to adopt the revamped statement. The government’s current review of post-18 education and funding provides the perfect opportunity. When the prime minister launched it last year it was clear that, even if the level of tuition fees is revisited, she does not intend to do away with student loans. It is time, then, to build public confidence in the design of the system. Our new statement is only one part of this wider project. But more transparency, meaningful numbers and a considered effort to change the way we talk about student finance could take us part of the way.

Previously published by The Guardian