Later this month (March), I will finally pay off the student loans I took out in the 1990s. These were maintenance loans: I graduated before the introduction of what were called ‘topup’ fees (at first £1 000 per year), and amounted to just under £5 000 when I finished. It has taken me nearly 14 years to repay that debt.
I enjoyed the protection of the Consumer Credit Act, a low interest rate set in statute, and a generous repayment threshold. In 2009/10, my interest rate was -0.4% – that’s right, I received credit on my outstanding balance. This is because interest was calculated at RPI minus 1 percentage point and RPI had been 0.6% in September 2008.
In 2001, the repayment threshold was £20 696, by 2005 it was £22 764. I was thus able to defer repayment. Once the threshold was crossed, 60 equal monthly repayments were made to clear the outstanding balance. Repayments were tied directly to the amount borrowed.
The advantages and protections of these pre-98 loans persisted even after the balances were sold to the company that became Thesis Servicing.
Since 1998, we have seen many changes in the loan scheme – all affecting new cohorts. The most obvious is the introduction of income contingent repayment loans which means that the monthly repayments are relative to income, rather than initial amount borrowed. The original debt taken can limit the total amount repaid, though it is more likely for most that the debt will be written off (after 25 years after graduation for those with recent loans, 30 years for those taking out the new loans in 2012/13).
What concerns me is not simply the complexity of income contingent repayment loans, but that many of the protections I enjoyed have been removed.
The new loans are not covered by the Consumer Credit Act and interest rates can be set at the discretion of the relevant Secretary of State using secondary instruments, as can the other details of the scheme, such as the repayment threshold (and percentage determining level of repayment). Although the current government has stated its intention to set real rates of interest (ie above inflation) it has given itself powers to set rates much higher than that.
The 2011 Education Act, which received Royal Assent last November, Education Act now allows governments to set up to market rates of interest on student loans using statutory instruments (rates must be “lower than those prevailing on the market, or no higher than those prevailing on the market, where the other terms on which such loans are provided are more favourable to borrowers than those prevailing on the market.”)
Having recognised this lack of statutory and legal protection, what do the terms and conditions of the student loan agreements say?
The clause that currently appears in the 2012/13 “STUDENT LOANS – A GUIDE TO TERMS AND CONDITIONS” allows future administrations great leeway to change terms and conditions.
“You must agree to repay your loan in line with the regulations that apply at the time the repayments are due and as they are amended. The regulations may be replaced by later regulations.” (p. 8)
It is clear that the loans are not merely income contingent, but future-policy contingent.
With such long lifetimes, much higher debt and higher interest rates, this kind of contingency is unacceptable.
Borrowers should not face such a potential liability. Especially when we recall that student loans can be sold they can be sold to third parties without consultation and without consent (2008 Sale of Student Loans Act).
I believe that individuals should sign up to loan agreements where the terms and conditions are fixed for the lifetime of the loans (interest rate taper, repayment threshold and percentage of income repaid above the threshold). Future governments may be required to change the terms of the scheme for new cohorts, but those who have taken out loans already should not face the risk of a future government extracting additional levels of repayment.
Who can say what the economy will look like in 15-20 years’ time? With such high levels of government, corporate and household debt in the UK, it is difficult to be confident. Might we in future face problems similar to that of Italy and Greece? If so, we should avoid having a class of citizens, graduates, from whom a technocratic administration can tap extra cash.
Whether such a scenario is likely or unlikely is beside the point – the possibility should be excluded as far as practicable. It would be too easy for a future government, faced with pressing financial difficulties, to return to this group of citizens and extract more repayments from them. Primary legislation would not be needed.