Dear Department for Education,
In 1998 the Government introduced Income Contingent Student Loans. Existing borrowers holding Mortgage Style Student Loans were given the option of choosing which loan they preferred to pay first if they went to take out an Income Contingent Student Loan for a PGCE:
1. Please release any submissions made to Ministers at the time that covers this PGCE option and explains why this flexibility was granted.
Since then, another type of Income Contingent Student Loan has become available - a "Plan 2" or "Post-2012" Student Loan. Yet borrowers holding a "Plan 1" or "Pre-2012" Student Loan who went on or go on to take out a Plan 2 Student Loan were not and are not currently given the option of which loan to pay first.
I have seen the submission on this (https://www.whatdotheyknow.com/request/2... ) and can see the rationale for continuing to collect repayments using the Plan 1 repayment threshold where a borrower continues to hold a Plan 1 loan (although whether Plan 1 should have a lower threshold than Plan 2 is a different matter), but how the repayments above this threshold are divided between the loans is not flexible enough which leads to unfairness.
The problem with the current division of repayment approach is made abundantly clear following the recent Government announcement to increase the Plan 2 threshold from £21,000 to £25,000. In 2018/19 without any changes to the current division of repayment, this would mean £360 being redirected from paying off the higher interest Plan 2 loan to paying off the lower interest Plan 1 loan instead. Given that Plan 2 loans are not written off for 30 years while Plan 1 loans (if taken out from 2006 onwards) are written off after 25 years, directing less of the repayment to paying off the Plan 2 loan can lead to a longer lifetime of repayments. So every time you increase the Plan 2 threshold you are benefiting borrowers with a Plan 2 (but not a Plan 1) loan while worsening the repayment conditions of borrowers with a Plan 2 and a Plan 1 loan. This is nonsensical. It would not be such a problem if the threshold levels were fixed for the lifetime of repayments, but the Plan 2 threshold has been bouncing around all over the place. Some borrowers expected it to go up with earnings annually from 2017 starting at £21,000 (so it would now be approaching £22,000), others expected it to be fixed at £21,000 until at least April 2021, and now borrowers expect it to go up with earnings starting at £25,000. If that did not have an impact on borrowers repaying Plan 1 and Plan 2 loans then there would be no problem with it, but it does because it changes the division of repayment, which can lead to borrowers unnecessarily incurring higher costs as a result.
As two common examples:
(a) If I took out Plan 1 loans for a first degree in 2009-2012 (totaling £28,000) and then a Plan 2 loan for a PGCE in 2012-13 (totaling £15,000) then the Plan 1 loan is due for write off in April 2038 (i.e. 25 years from April 2013 when it enters repayment), but the Plan 2 loan is not due for write off until April 2046 (i.e. 30 years from April 2016 when it enters repayment - note that no Plan 2 loan entered repayment before 2016), 8 years later. This borrower expected that 9% of earnings between around £17,500 and £21,000 would be used to pay off the Plan 1 loan and everything from earnings above £21,000 would be used to pay off the Plan 2 loan.
(b) If I took out Plan 1 loans for a first degree in 2011-2014 (totaling £29,000) and then a Plan 2 loan for a PGCE in 2016-17 (totaling £18,000 - note maintenance loans replaced maintenance grants so the borrowing is larger) then the Plan 1 loan is due for write off in April 2040 (i.e. 25 years from April 2015 when it enters repayment), but the Plan 2 loan is not due for write off until April 2048 (i.e. 30 years from April 2018 when it enters repayment), 8 years later. This borrower expected that virtually all repayments would pay off the Plan 2 loan first as the Plan 1 threshold would be very near to catching up to the Plan 2 threshold by April 2021 when it was due for review.
The more repayments that are used to pay off the Plan 2 loan, the greater the opportunity to clear this part of the borrowing and therefore end repayments by the earlier loan write off. The less repayments that are used to pay off the Plan 2 loan, the more diminished the opportunity to clear this part of the borrowing and therefore more likely repayments would continue to the later loan write off.
If the Plan 1 loan was taken out before 2006 in the above examples then the situation is likely to be reversed as the Plan 1 loan would not be due for write off until age 65, which is likely to be the later of the two write offs.
Clearly there merits to introducing some flexibility here. I note the submission above mentioned that taking a flexible approach was considered but administrative burden made it less appealing. But there is a way of minimising operational burden while at the same time not imposing unfair retrospective changes on borrowers with the unintended consequences changing the Plan 2 threshold level has on the division of repayments.
A borrower holding a Pre-2006 Plan 1 loan and a Plan 2 loan (and therefore with more chance that the Plan 1 loan has the later write off) is very much the exception. According to figures released below from the Student Loans Company, there were only 20,150 borrowers in this position as of 28th September 2016 whose Plan 2 loan was taken for a short course (and therefore would have entered repayment before April 2016 had Plan 2 repayments not been delayed to that date). Compare that to the much larger number of borrowers (62,100) who hold a Post-2006 Plan 1 loan and a Plan 2 loan for a short course and therefore are more likely to have the Plan 2 loan as the later write off (if they don't also hold a Pre-2006 Plan 1 loan).
There were 223,400 borrowers in total holding both a Plan 1 loan (whether Pre-2006 or Post-2006) and a Plan 2 loan whose Plan 2 loan was not for a short course, as of 28th September 2016 (note that this is notably higher than the rough estimate of 100,000 in the submission made to the Minister in 2011). Given the time gap between 2006 and 2012, the majority of these 223,400 borrowers are likely to have a Post-2006 Plan 1 loan and a Plan 2 loan with large debts across both Plan 1 and Plan 2 and so would rather have their repayments go towards the loan that is due to be written off latest and is incurring the higher interest (i.e. Plan 2).
Given the lower levels of debt prior to 2006, there are likely to be a minority of these 223,400 borrowers that would want their repayments to pay off their Plan 1 loan first (to get rid of higher monthly repayments at the Plan 1 threshold and move to the Plan 2 threshold).
The vast majority of borrowers holding both Plan and Plan 2 loans would therefore want their repayments to go to paying off their Plan 2 loan first. Only a minority would want to depart from this and have their repayments go to their Plan 1 loan first. So surely, to avoid unintended consequences and unfairness from raising the Plan 2 threshold on the division of repayment between Plan 1 and Plan 2 loans, the default position should be to allocate all repayments first to the higher interest Plan 2 loan, while giving borrowers the option to have their repayments be allocated first to their Plan 1 loan. The latter is in a small minority so any operational burden is minimised as most borrowers would not want to depart from the default position.
2. Please pass my observations and comments on the division of repayment policy to the relevant Minister/policy team for consideration.
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