Interesting article by Martin Lewis on his blog from moneysavingexpert.com about Labour’s proposed tuition fee cut from £9,000 to £6,000. He highlights that it will only help well paid graduates, not those on low pay whilst costing millions pounds in the process.
It also highlights that all is not perfect with the current system. Although it was a step in the right direction what is actually needed is a progressive graduate tax which ensures vast amounts of student loans. loaned out by the government, are not written off.
Labour has long touted that it may cut English tuition fees to £6,000 if elected. Today university chiefs wrote a letter about the proposal that made the front pages, saying that they’d struggle to survive on such a drop of income. Yet as I explained a year ago when it was first mooted, the biggest problem with cutting tuition fees is that it helps exactly the wrong people – only affluent graduates will gain.
This all stems from an illiteracy about how student finance works. People worry about “how much I borrow” whereas what really counts instead is “how much I repay”, and changing the level of tuition fees doesn’t do much to change that. So I wanted to bash out a blog to explain.
PS: Before anyone thinks I’m taking a political side, that isn’t it, only a few weeks ago I attacked the Government for its student finance policy.
How much will you repay?
The amount that you pay on tuition fees isn’t dictated purely by what tuition fees are set at but more by what you earn after you leave university.
After leaving, students repay 9% of everything they earn above a £21,000 a year threshold. And this threshold is set to rise with average earnings from 2017 (see my‘don’t change the threshold blog’ for more on that).
A graduate would then continue to repay until they had cleared what they had borrowed plus interest, or until 30 years had elapsed since the April after they graduated – whichever comes first (for a more detailed explanation see my 20 student loan mythbusters guide).
In practice, of the graduates who earn enough to repay – which is most of them – all but the highest-earning after university will be repaying for the whole of the 30 years.
Reduce tuition fees to £6,000 and only high earners gain
So let’s examine the real impact of this policy. The only people who would gain from it are those who would clear their entire loan for tuition fees plus any loans for living costs, plus the interest, within the 30 years. To do this you’d need to be a high earner.
To see the exact amount, go to my student finance calculator and play about with different scenarios – watching the impact of reducing tuition fees. It shows that only those with a STARTING SALARY of at least £35,000 – and then rising by above inflation each year after – would pay less if you cut tuition fees (we have assumed the student also takes out £5,555 in maintenance loans per year).
That’s a very high amount, mainly only City law firms, accountancy firms and investment banks pay that much as starting salaries. Is that really who Labour wants to target with this plan? Worse still, by cutting tuition fees it will reduce the bursaries that universities can give to attract poor students.
Thus, while it seems counter logical, cutting tuition fees this way risks being a regressive rather than a progressive policy – in other words it benefits those with more rather than those with less. I suspect if any other party had a policy which in tabloid terms meant “student from poor backgrounds would subsidise City Bankers” – Labour would be up in arms.
NB. The student finance calculator makes some assumptions over future rates of inflation and average earnings growth, changing those changes the answers – which the calculator allows you to do. Yet I’m using some pretty standard assumptions here.
There is a psychological gain to cutting tuition fees
The one positive of this plan is that cutting tuition fees is likely to reduce fear among those who don’t understand the system. Yet instead of spending billions to do this, why not spend £100 million on financial education for potential students and their parents to fight unfounded fears?
This is something I did with the Independent Taskforce for Student Finance Information, which I chaired, and we achieved fantastic results explaining the system with less than £100,000, never mind £100 million.
If I were in charge I’d up the repayment threshold and change the name
Much of this whole issue centres around the confusion over who is “rich”. Who is more/less deserving of help: a student from a wealthy background with a low income after university, or a student from a poor background with a high income after university?
We should ensure those from non-traditional university backgrounds aren’t unnecessarily put off university by the fear of debt. Yet we shouldn’t be doing that by pumping in extra cash to hugely affluent graduates.
If you want a more progressive system – and to stop the marketisation of universities (ie, different courses, different prices) – then make them all £9,000 but increase the repayment threshold, for example to 12% of everything earned above £30,000 (that’s a rough example, not a fully worked figure). Though of course that’d cost the Exchequer billions too…
And just as importantly to fight off fear – change the name! Student loans are as much a tax as a loan, in fact they’re somewhere between the two, and as I’ve said before (see student loans aren’t a debt – change the name to avoid a national tragedy), calling it a graduate contribution would both be more accurate and promote better understanding.
Labour isn’t the only one who gets this wrong
Labour isn’t the first one to be financially illiterate over the tuition fee issue. The Coalition itself did it when it set up the new 2012 system. Not just because it fundamentally miscalculated how much people would repay, but also because it allowed universities to offer some poorer students a choice between a fee waiver and cash as a bursary.
Yet, for the same reasons as above, a fee waiver did little to help, only very high earning graduates afterwards would have gained from it, so in truth I was out there shouting vociferously: “Make sure you take the cash.”
Below is a link to Martin’s blog:
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