Student Loans Are a Mess, Says Former Government Adviser

The student loans system is a “mess” that consecutive governments have tweaked “purely for short-term political gain”, one of the economists behind tuition fee reforms has said.

The latest changes, which lower the income threshold at which graduates begin to pay back their loans and extend the period of repayment before the loan is written off, are just “cherry-picking” without an overall strategy for improving the system, according to Nicholas Barr.

Barr is a professor at the London School of Economics who, along with Iain Crawford, a professor at the University of Oxford, advised Tony Blair’s government on the student loan reforms of 2006, which raised tuition fees from £1,000 to £3,000 a year.

Tuition fees were first introduced in the UK in 1998 under Blair. They trebled in 2006 before being trebled once again to £9,000 a year under the Conservative-Liberal Democrat coalition government of David Cameron and Nick Clegg in 2012.

Students studying in England are entitled to take out loans to cover tuition and living costs, which they pay back at a rate of 9 per cent of earnings above a certain threshold each year. The debt is cleared after several years so students who do not make significant earnings will never repay the full amount.

This year the period of repayment was extended from 30 to 40 years to reduce the burden of student loan defaults on the public finances. The income threshold for repayment was lowered to £25,000 from £27,295, meaning graduates starting university next year will have to begin to repay their loans earlier. The overall effect of the changes is that more graduates will pay back more of their loans. Before the reforms, only a quarter of graduates were expected to repay the full amount.

The government is mainly concerned with making the student loans system “less leaky” so it looks better on the public finances, but the reforms failed to tackle student loan interest rates, which should have been brought down to match the government’s cost of borrowing, Barr said.

At 4.5 per cent the interest rate on student loans, which is linked to the retail prices index measure of inflation, is higher than the average interest paid by homeowners on mortgages and is set to rise further as inflation soars. Interest rates will be capped at the RPI rate of inflation, which is about 10 per cent, for students starting next year.

“They’ve cherry-picked because they’ve only done those things which reduce how public spending appears in the national accounts,” Barr said. “They didn’t address the interest rate. And I think the reason was that this was the Treasury saying: ‘Get as much money back as you can.’.

The government needs to develop a strategy for funding higher and further education that covers all the education choices made by students after the age of 16, rather than tweaking the existing system of student loans, he added.

“What you’ve got is short-term politics in tripling the fee, short-term politics in raising the repayment threshold, and what they’re now trying to do is to recoup the situation,” Barr told The Times.

“It’s the right system but with the wrong parameter . . . If I were asked to advise the secretary of state [for education] I would say fees are too high. There needs to be a division between the graduate repaying tuition fees and the taxpayer. The repayment threshold is too high and needs to be lowered. The interest rate is ridiculously too high.”

About 1.5 million students a year take out a loan to study in England. The reforms could deter some students from going to university, or it could deter some of those who go from moving away from home while studying, Barr said.

“The Treasury are assuming people are rational and therefore grabbing as much money as possible and not taking account of the fact that this has behavioural effects on people. Even if it doesn’t change what university and subjects they do, it lowers people’s welfare and it shouldn’t be that way.”

The government said monthly repayments for students will not increase because they are linked to income, not interest rates. “The government will confirm the level student interest rates will be set at in the coming months,” it said.

“For future students the government has cut interest rates so from 2023-24, graduates will never have to pay back more than they borrowed in real terms.”

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Student loans are a mess, says former government adviser