ICR Plan 1 loan sale interaction with Plan 2 loans

Brian Harrison made this Freedom of Information request to Department for Education

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Dear Department for Education,

1. If a borrower whose Plan 1 loan is sold either holds or subsequently takes out a Plan 2 loan (and therefore, depending on earnings, not all repayments go towards the Plan 1 loan) does the loan purchaser get all of the repayment or just the amount that is allocated to the Plan 1 loan? Is there anything about this set out in sale agreements?

2. Borrowers who hold a Plan 1 and a Plan 2 loan are affected by the recent decision to retrospectively amend the Plan 2 threshold from £21,000 when the loans were taken out to £25,000 (indexed to earnings) as this means more of their repayment goes towards the lower interest Plan 1 loan (9% of (£25,000 - £18,330), rather than 9% of (£21,000 - £18,330)).
https://www.moneysavingexpert.com/news/l...
Does the Government think this is fair and has any consideration been given to amending the division of repayment to put these borrowers back in the position they were in before the threshold was amended (i.e. paying down the higher-interest Plan 2 loan first)?

Yours faithfully,

Brian Harrison

ACCOUNT, Unmonitored, Department for Education

Thank you for contacting the Department for Education. We can confirm that
we have received the Freedom of Information request you submitted.

We will respond to you within 20 working days.

 

Dear Department for Education,

I should add on point 2, that I am getting increasingly frustrated and annoyed that people in my position are being put at an unfair disadvantage. This is because the division of repayment between plan 1 and plan 2 loans does not allow the repayment of either plan type loan to be prioritised, and the new division of repayment (where more goes towards plan 1) has the effect of making repayment overly onerous as it makes it practically impossible to clear either loan before write off, maximising cash receipts to government in return for unfairness.

E.g. for people with both plan 1 and plan 2 loans, plan 1 repayments are now capped at £600 (9% of the difference between the thresholds) and £600 x 25 = £15,000 (at 25 years plan 1 is written off for post-2006 loans) so repayments don't cover the original borrowing let alone the interest. Meanwhile the interest continues to rack up on plan 2 which gets much less of the repayment now the threshold has substantially increased and so repayments continue on that after plan 1 gets written off, until the 30 year period on that expires.

Alas, the freeze on the post-2012 threshold couldn’t be politically sustained and despite for all intents and purposes this retrospective rise in the threshold being meant to help borrowers – in the Prime Minister’s words – “with high levels of debt” (https://www.conservatives.com/sharethefa... ), I have a high level of debt but far from putting money back into my pocket, it takes money from me for longer!

And this is very much a retrospective change to my repayment terms (the threshold freeze wasn’t as it merely left the terms unchanged) with the following amendment regulations bringing it about:

http://www.legislation.gov.uk/uksi/2018/...

These make grim reading for me as this new policy leaves me in a worse position than I was before. Sadly the people that could see the problems with what the government has done in raising the post-2012 threshold, such as David Willetts, have ended up losing the argument and instead ill-thought through populist policy measures have won out over the evidence (which supported leaving the threshold at £21,000).

WHY THE POLICY OF SUBSTANTIALLY RAISING THE PLAN 2 THRESHOLD (RELATIVE TO THE PLAN 1 THRESHOLD) IS BAD FOR ME
It leaves borrowers like me in a worse position than would have been the case had it remained frozen at £21,000 due to how it alters the division of repayment (set out here http://www.legislation.gov.uk/uksi/2012/... ) which these latest amending regulations do nothing to mitigate.

David Willetts, who introduced the Plan 2 system described Plan 1 repayments as “front-end-loaded” in a recent Treasury Select Committee evidence session:

“Lord Willetts: Not quite. For a student, the repayment threshold and the percentage rate are what matters: the £21,000, now £25,000, and the 9%. One of the reasons for raising the threshold was that I was worried—going back to something else I have written, about fairness between the generations—about people in their 20s and 30s paying back at 9% above £15,000, which was the original Labour government formula. The repayments were front-end‑loaded at a time when I thought people were under maximum pressure.

It was a deliberate feature of the system for repayments not to be front-end‑loaded: to extend further over people’s working lives, so that you were not paying back, in your 20s and 30s, such a high proportion of the amount. That was a deliberate design feature. There are issues about exactly how high the threshold should be, but that was the argument for raising it, compared with the £15,000.”

http://data.parliament.uk/writtenevidenc...

Plan 1 borrowers had lower tuition fees so looking at Plan 1 in isolation, the repayments can be seen to be “front-end-loaded” but with greater potential to end sooner than for Plan 2 borrowers. However, this all changes if you then borrow under Plan 2 after also borrowing on Plan 1 as the potential for repayments to end sooner vastly diminishes (due to the massive increase in debt that borrowing under Plan 2 brings with it). So you’ve now got a situation where repayments are both front and back-end loaded which is expressly unfair. For some Plan 1 borrowers (who borrowed prior to 2006) it means paying 9% above the Plan 1 threshold until age 65 and never seeing the benefit of the “progressive” higher Plan 2 threshold despite suffering the same massive debt of Plan 2. This completely disadvantages such borrowers and is surely overly onerous. And borrowers have no choice in the matter: if they hold a Plan 1 loan it is unfair to effectively lock them out of further study by giving them none of the benefits that would ordinarily come with holding a Plan 2 loan. The government is extending loans to second degrees in STEM subjects by relaxing ELQ restrictions so the potential for borrowers who hold Plan 1 loans to borrow under Plan 2 extends to a greater number of graduates. At least such borrowers would know the division of repayment up front and could make decisions on whether to take a Plan 2 loan accordingly.

That cannot be said for me personally: I was grateful for the 2015 decision to hold the Plan 2 threshold at £21,000 as it was allowing me to repay my Plan 2 loan more quickly (so despite repayments being “front-end-loaded” they would have ended sooner). Now, with the division of repayment formula remaining unchanged, the retrospective increase in the Plan 2 threshold relative to the position I was in with it frozen means the same front-end-loaded repayments but more of them going on the Plan 1 loan while the Plan 2 loan continues to accrue interest at the higher rate. So after the Plan 1 period (which ends after 25 years for me as a post-2006 borrower) I then revert to “back-end-loaded” repayments on my Plan 2 loan. It creates one of the most onerous repayment journeys possible. The most frustrating part for me is that the change to the Plan 2 threshold was retrospective – I expected it to be frozen until at least 2021.

Moreover, the government publicy admitted in its 2015 consultation on freezing the Plan 2 threshold at £21,000 that given the slow growth in earnings over the last decade, raising the threshold annually with earnings “is unaffordable in the long term” (https://www.gov.uk/government/uploads/sy... ) and that was starting to uprate at £21,000, not £25,000. So for borrowers who hold both Plan 1 and Plan 2 loans who are lucky enough to see any benefit from the higher Plan 2 threshold at all before they retire, given how high it will be now at the start of Plan 2 borrowers’ repayments, there will be greater pressure on future governments to correct this in future by sharply lowering the Plan 2 threshold. And that just so happens to be when those with Plan 1 and Plan 2 loans would start to repay at the Plan 2 threshold (i.e. when it is much lower) so they are at higher risk of being hit both now and later in their repayment period, after their Plan 1 period ends after 25 years. Of course those whose Plan 1 loan doesn’t get cancelled until age 65 may never see the benefit of the higher Plan 2 threshold as the massive debt that Plan 2 loans come with means they never finish repaying either loan. This is because the division of repayment doesn’t allow either loan to be prioritised.

Prioritising more repayments on Plan 1 loans as a result of raising the Plan 2 threshold may well merely be an unintended consequence of the retrospective policy. Can you rule out that leaving the division of repayment between the types of loan unchanged has got something to do with granting more of the repayments to the purchasers of Plan 1 loans (i.e. point 1)? The government has of course started to sell off these loans. So much for protecting borrowers.

Now that the post-2012 threshold uprating formula is fixed into law, can I assume it’s unlikely to be lowered in future? David Willetts thinks the threshold should still be subject to regular public policy reviews. He said in the same Treasury Committee session I linked to earlier:
“What you are simply trying to do with the RAB charge is estimate, on a set of highly schematic assumptions, how much will be repaid over the next 30 years. It will depend on how things turn out, and it will depend, above all, on public policy decisions, which I very much hope this Committee will influence.”

All this chopping and changing to threshold policy in the last couple of years has left me incredibly frustrated, and with a worse set of terms than what I started with. Yet while people like Martin Lewis celebrate reversing the retrospective change to the terms that wasn’t (the threshold freeze) few realise that borrowers like me have been left to pick up the pieces of the REAL retrospective change.

I hope the government will look again (as part of their ongoing review of post-18 education funding) at the problems raising the plan 2 threshold creates for borrowers with both a plan 1 and a plan 2 loan, the fact this is retrospective, and probably an unintended consequence, and look at mitigating this to make it fairer (e.g. by introducing flexibility for borrowers to prioritise the plan type that would make their repayments less onerous and allow them to at least pay down the part of their borrowing that is accruing interest at the higher rate). I know borrowers like me are in a minority, but this shouldn't make it alright for us to be disadvantaged and have the worst of all words. Mitigating this can't be an unreasonable request.

Yours faithfully,

Brian Harrison

ACCOUNT, Unmonitored, Department for Education

Thank you for contacting the Department for Education. We can confirm that
we have received the Freedom of Information request you submitted.

We will respond to you within 20 working days.

 

ACCOUNT, Unmonitored, Department for Education

Dear Sir/Madam

Thank you for your recent enquiry. A reply will be sent to you as soon as possible. For information; the departmental standard for correspondence received is that responses should be sent within 20 working days as you are requesting information under the Freedom of Information Act 2000. Your correspondence has been allocated reference number 2018-0012262.

Thank you

Department for Education
Ministerial and Public Communications Division
Tel: 0370 000 2288

ACCOUNT, Unmonitored, Department for Education

Dear Brian

 

Thank you for your email of 8 March addressed to the department’s enquiry
unit about student loans. On this occasion, I have been asked to reply.

Although you have indicated that you wish to make a request for
information, further to your 'right to know' contained in section 1 of the
Freedom of Information Act 2000 (FOIA), your email does not contain a
specific request seeking access to information held by this department.
Where a 'request for information' contains an enquiry or an expression of
views, rather than a specific request for copies of information held by
this department, we deal with such requests as a 'normal course of
business' enquiry rather than a formal request for information under the
FOIA. Your correspondence has been dealt with in the normal course of
business. 

I would like to explain that pre-2012 (Plan 1) and post-2012 (Plan 2)
income-contingent student loans are separate products, with different
terms and conditions. However, all of these loan types have more
favourable terms than commercial loans. Repayments are linked to income
and not to the amount borrowed and borrowers are protected; borrowers
earning less than the repayment threshold repay nothing at all. In
addition, student loans are written off after a specified period of time
with no detriment to the borrower.

I note your concerns about the division of repayments between types of
student loan following the increase to the post-2012 threshold. For
operational reasons, it is not currently possible for borrowers to specify
which balance the repayments made through HMRC are allocated to. The
formula for allocating repayments of this type is set out in regulations
and an explanation can be found at:

[1]http://www.studentloanrepayment.co.uk/po...

As announced by the Prime Minister on 19 February, the Government is
conducting a major review across post-18 education and funding. The review
will ensure that the system is giving everyone a genuine choice between
high quality technical, vocational and academic routes, students and
taxpayers are getting value for money, and employers can access the
skilled workforce they need.

The review will be informed by independent advice from an expert panel,
chaired by Philip Augar and supported by five leading figures from across
post-18 education and academia. Further information on the scope of the
review and membership of the expert panel can be found at:
[2]www.gov.uk/government/news/prime-minister-launches-major-review-of-post-18-education.

The review will fully consider the available evidence and seek input from
a wide range of stakeholders, to develop a clear understanding of
priorities for any future changes to the system. Further details of the
programme of stakeholder engagement will be announced shortly, and we
would welcome and encourage you to contribute your views in due course. 

I hope that this information is helpful and would like to thank you for
writing to the department.

Your correspondence has been allocated reference number 2018-0012262. If
you need to respond to us, please visit:
[3]https://www.education.gov.uk/contactus and quote your reference number.

As part of our commitment to improving the service we provide to our
customers, we are interested in hearing your views and would welcome your
comments via our website at: [4]http://www.smartsurvey.co.uk/s/Y6LFA/

Yours sincerely

Amanda Christian 

Ministerial and Public Communications Division

Web: [5]https://www.education.gov.uk
Twitter: [6]https://www.twitter.com/educationgovuk
Facebook: [7]https://www.facebook.com/educationgovuk

 

References

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2. http://www.gov.uk/government/news/prime-...
3. https://www.education.gov.uk/contactus
4. http://www.smartsurvey.co.uk/s/Y6LFA/
5. https://www.education.gov.uk/
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Dear Department for Education,

Please pass this on to the person who conducts Freedom of Information reviews.

I am writing to request an internal review of Department for Education's handling of my FOI request 'ICR Plan 1 loan sale interaction with Plan 2 loans'.

While my second point has been answered to an extent, my first hasn't. Please answer my first point, which I copy below for your reference:

"If a borrower whose Plan 1 loan is sold either holds or subsequently takes out a Plan 2 loan (and therefore, depending on earnings, not all repayments go towards the Plan 1 loan) does the loan purchaser get all of the repayment or just the amount that is allocated to the Plan 1 loan? Is there anything about this set out in sale agreements?"

A full history of my FOI request and all correspondence is available on the Internet at this address: https://www.whatdotheyknow.com/request/i...

Yours faithfully,

Brian Harrison

ACCOUNT, Unmonitored, Department for Education

Thank you for contacting the Department for Education. We can confirm that
we have received the Freedom of Information request you submitted.

We will respond to you within 20 working days.

 

ACCOUNT, Unmonitored, Department for Education

Dear Mr Harrison 

Thank you for your further enquiry of 20 March, regarding student loans.
On this occasion, I have been asked to reply. I apologise for the
oversight in not responding to your previous enquiry in full.

Although you have indicated that you wish to make a request for
information, further to your 'right to know' contained in section 1 of the
Freedom of Information Act 2000, your email contains an enquiry rather
than a specific request seeking access to information held by this
department. Therefore, it has been dealt with in the normal course of
business.

For further information on Freedom of Information requests, may I direct
you to the GOV.UK website:
[1]https://www.gov.uk/make-a-freedom-of-inf...

Ahead of the first sale from the English plan 1 (pre-2012) student loan
book in December 2017, HMG excluded borrowers with both a Plan 1 Loan and
a Plan 2 Loan from the portfolio for sale.

 

If a borrower whose plan 1 loan has been sold subsequently takes out a
plan 2 loan, the plan 1 loan will remain in the portfolio and the
borrower's repayments will be allocated between the plan 1 loan and the
plan 2 loan according to their different repayment terms as set out in the
Repayment Regulations.

 

This was set out clearly in the prospectus issued to potential investors
ahead of the sale.

 

I hope this response is helpful.

Your correspondence has been allocated reference number 2018-0014309. If
you need to respond to us, please visit:
[2]https://www.education.gov.uk/contactus and quote your reference number.

As part of our commitment to improving the service we provide to our
customers, we are interested in hearing your views and would welcome your
comments via our website at: [3]http://www.smartsurvey.co.uk/s/Y6LFA/

Yours sincerely

M Ingle 

Ministerial and Public Communications Division

Web: [4]https://www.education.gov.uk
Twitter: [5]https://www.twitter.com/educationgovuk
Facebook: [6]https://www.facebook.com/educationgovuk

 

References

Visible links
1. https://www.gov.uk/make-a-freedom-of-inf...
2. https://www.education.gov.uk/contactus
3. http://www.smartsurvey.co.uk/s/Y6LFA/
4. https://www.education.gov.uk/
5. https://www.twitter.com/educationgovuk
6. https://www.facebook.com/educationgovuk