Dear Her Majesty’s Treasury,

Has the Government considered increasing the interest thresholds for plan 2 student loans - in line with UUK's proposals below?

“consider reducing the interest rate payable, not for all, but specifically for low and middle-income earners through changes in earning thresholds to which interest rates apply”.

It is troubling to read articles that suggests the Government is dismissing a reduction in the plan 2 interest rate just because it provides more relief for mid to higher earning borrowers:

There are 3 reasons why the level of the interest rate is unfair:

(1) Levels of plan 2 debt vary between individual borrowers so borrowers with lower levels of plan 2 debt (such as those who've taken short courses like PGCEs after doing a first degree under plan 1, been awarded tuition fee waivers or decided for whatever reason to borrow less, and are therefore within reach of clearing their loan account before write off, would benefit from having less interest applied even if they are a lower earner.
(2) It was based (Browne Review) on an assumption that the cost of borrowing to Government is RPI + 2.2% when the discount rate (now RPI + 0.7%) has been reduced to reflect that the cost of borrowing to Government is now much cheaper.
(3) The use of an inflation index (RPI) that is now discredited by the National Statistician.

I am also troubled by speculation that "the earnings threshold" may be raised. There are two repayment thresholds currently in operation - plan 1 (£18,330 from April 2018) and plan 2 (£21,000). By far the vast majority of borrowers currently repaying loans are repaying income at the plan 1 threshold. Therefore if the Government wants to help lower earning borrowers by raising "the earnings threshold" it would do well to raise the one that's lowest - i.e. the plan 1 threshold.

For atypical borrowers like me (although not an insubstantial group - there are over 200,000 borrowers in this category as of 2016 according to the Student Loans Company: ) who have loans under plan 1 and plan 2, where only income above the very high plan 2 threshold is currently used to repay the plan 2 loan incurring a high level of interest, far from helping me, raising the plan 2 threshold without increasing the plan 1 threshold to the same level, would hinder my repayments. This is because given the threshold of £21,000 is so high relative to average earnings, increasing it further simply reduces the amount of my repayments getting apportioned to my plan 2 loan without reducing my repayments which would still be calculated above a lower plan 1 threshold. This makes it onerous for any borrower - like me - who would benefit from repaying a plan 2 loan in full before a plan 1 loan reaches write off.

I decided to study a PGCE in 2016/17 having taken a first degree prior to 2012 under plan 1, on the basis that the plan 2 threshold would be frozen until the early 2020s (thus allowing the plan 1 threshold to 'catch up') and therefore allowing more of my repayments above £18,330 from April 2018 to go towards my plan 2 loan (9% above £21,000 goes to my plan 2 loan; 9% of (£21,000 - £18,330) goes to my plan 1 loan. I therefore warn the Government against hasty decisions to try to help students when the system of income contingent loans is so complex that some decisions could perversely hinder some borrowers despite the intention to help and trust the Government and Treasury will think through options exceptionally carefully? Raising the repayment threshold for plan 2 loans whilst continuing to collect above a lower plan 1 threshold for borrowers with both plan 1 and plan 2 loans would be extremely unfair for lower earning borrowers like me - not only does it not reduce repayments on an annual basis (due to repayments being collected at the plan 1 threshold) but also has the effect of keeping us in repayment for longer (due to making it onerous to clear the plan 2 balance which has the later write off) whilst all the time extracting repayments above a lower threshold.

For what it's worth, policy decisions to help me as a student loan borrower that would, in my view make the system as a whole fairer and sustainable for taxpayers would be:

Given the 'real rate of interest' recommended by the Browne Review in 2010 was meant to reflect the cost of borrowing to Government and the rate on plan 2 loans and postgraduate loans is now far higher than this, and given what I've written above, I'd make 3 changes staged over this parliament:
(1) In line with Universities UK's proposals and given the criticism that slashing the maximum rate would mainly help the highest earners, I'd keep the RPI+3% formula for the time being but change the interest rate thresholds so that more lower-mid earners only have RPI applied. So for example, instead of the rate increasing between £21,000 and £41,000, all borrowers earning up to (say) £31,000 could have RPI applied and that could increase to RPI+3% linearly between (say) £31,000 and £61,000. That way, the very highest earners still contribute proportionally more towards the subsidies for lower-mid earners.
(2) As announced and consulted upon in 2015, continue to freeze the plan 2 threshold at £21,000 until the plan 1 threshold (which had been frozen for 7 years since 2005 after being increased from £10,000) catches up (which could be April 2022, just in time for a general election). This continues to ensure that it is at a fair level relative to average earnings and continues to support short-term deficit reduction fiscal consolidation by getting cash in now and gradually bringing the amount of repayments back to the expected level when the threshold was set in 2010 (much weaker earnings growth since 2010 than forecast made the plan 2 threshold much higher than intended in real terms).
(3) To correct the unfairly high rate of interest relative to the rate on Government borrowing (for the highest plan 2 earners and for those with postgraduate loans who face RPI+3% regardless of earnings), I'd make a long overdue switch from using the discredited (by ONS themselves) RPI across the student loan system to CPI from 2022 at which point the repayment threshold (which has been going up by RPI for plan 1 borrowers so it would be unfair to depart from RPI before that) would change to an annual CPI uprating for all borrowers - plan 1 and plan 2 - who would all now be under a single repayment threshold, reducing administrative burden, ensuring sustainability and making the system clearer presentationally.

To sum up my policy priorities would be:
- Change interest thresholds at earliest opportunity from between £21,000 and £41,000 to say £31,000 and £61,000 for plan 2 loans (e.g. to come into force from September 2018) together with possibly an accompanying easing of the maximum rate (to e.g. RPI + 1%) to bring it more into line with Government's cost of borrowing (which is even lower than RPI at present) so it is fairer for higher earners now and all borrowers with postgraduate loans.
- Switch RPI to CPI so maximum rate is CPI + 1% on plan 2 and postgraduate loans (and CPI or base rate + 1% on plan 1 loans) from September 2022.
- Switch inflation uprating of repayment threshold (covering all income contingent loans, plan 1 and plan 2) from RPI to CPI from April 2022 (as soon as RPI uprating of plan 1 threshold raises the threshold above £21,000).
These 3 changes staged over this parliament would make the system fairer for all borrowers and clearer for everyone (including businesses who would only have to consider one repayment threshold for graduates, rather than the 2 in operation at present) and sustainable for taxpayers.

If the plan 2 threshold is raised without bringing the plan 1 threshold up to the same level (and therefore reducing repayments for the majority who are in the tranche of borrowers under plan 1) then - given how high the plan 2 threshold would be in relation to earnings - the Government MUST give borrowers who hold both 1 and plan 2 loans the flexibility to decide which loan balance (plan 1 or plan 2) they want their repayments to go towards if no change is made to the policy of collecting above the plan 1 threshold, rather than regulating only for repayments above the excessively high plan 2 threshold to repay the plan 2 balance. Anything else would be disproportionate, counter-intuitive and unfair.

The vast majority of borrowers currently repaying student loans have plan 1 loans - whether they realise it or not (as all they hear in the media is "you repay 9% above £21,000" despite seeing higher repayments taken than that) so please be aware when considering any policy changes that those voicing concerns are not all voicing concerns about plan 2. The repayment side of plan 2 - other than the interest rate as currently levied - is accepted as fair for now and the threshold for plan 2 is scheduled by DfE for review in 2021 which will ensure it remains fair into the future. No changes are needed to the plan 2 threshold policy at present.

Yours faithfully,

Dan Gibney

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Dear Mr Gibney

Thank you for your email of 18 September to HM Treasury regarding student
loan repayments. As higher education is the policy responsibility of this
department your email has been forwarded and on this occasion I have been
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