Student loan repayment threshold(s) and real interest rate

The request was refused by Her Majesty’s Treasury.

Dear Her Majesty’s Treasury,

The Browne Review of Student Finance in 2010 ( , page 35) recommended that:

(a) "As the threshold has not been increased since 2005, there will be a one-off increase at the start of our new system from £15,000 to £21,000."


(b) "The interest rate will be equal to the Government’s cost of borrowing (inflation plus 2.2%). Students earning below the repayment threshold will pay no real interest rate. Their loan balance will increase only in line with inflation. Those earning above the threshold whose payments do not cover the costs of the real interest will have the rest of the interest rebated to them by Government."

The original student loan repayment threshold of £10,000 was increased to £15,000 in April 2005 ( )
"32. Raising the repayment threshold from £10,000 to £15,000 will apply to all borrowers from April 2005, regardless of when they took out their income contingent student loans. Those with student loan debts who earn less than £15,000 will no longer be making repayments through the tax system."

And despite the Browne Review subsequently basing its recommendation to increase the threshold on the fact the threshold had been frozen at £15,000 since 2005 (despite the threshold originally being intended to be indexed to inflation from April 2010 - "37. Raising the threshold from £10,000 to £15,000 will increase the cost of student loans to Government. From April 2010 it is intended that it should increase in line with inflation. However, since the cost of the current loans is assessed on the basis that the threshold will rise in line with earnings growth, there are offsetting savings associated with uprating by inflation instead. The combined effect of the two is expected to be a small net saving in cost to Government over the period during which variable fees will be introduced") it was only increased to £21,000 for new borrowers starting from 2012. The £15,000 threshold remained until April 2012 when it finally was belatedly indexed to inflation.

As the former universities minister David Willetts pointed out in his policy pamphlet on the student finance system in 2015 ( ):

"When the Coalition government brought in new fees and loans, we wanted to reduce graduates’ monthly repayments and so increased the repayment threshold from £15,000. It was announced that the first graduates under the scheme would start repaying when their earnings were above a threshold of £21,000 in 2016. When fixed in November 2010, the proposed £21,000 threshold represented about 75 per cent of projected average earnings of £28,000 in 2016. Since then, earnings have not grown as rapidly as the OBR forecast and are now expected to be more like £26,000, which means that the £21,000 threshold has in effect risen to about 80 per cent of projected earnings ... The repayment threshold would have to be about £19,500 to have the same value relative to average earnings as was expected in 2010 when it was set."

So not only was the threshold for students that started courses before 2012 (i.e. the majority currently repaying loans through the tax system) left LOWER than intended due to implementing the uprating late, but the threshold of £21,000 implemented for students starting courses from 2012 ended up being HIGHER than intended due to very weak earnings growth in the intervening period between being set in 2010 and coming into force in 2016. A 5 year freeze was rightly imposed on the new threshold in 2015 to gradually bring it back to the intended level relative to average earnings, with a review set for 2021.

1. (i) Please provide any information on why the threshold for students starting courses before 2012 was left lower than intended (it seems futile to complicate an already badly understood income contingent repayment system further by operating separate repayment thresholds for different cohorts of graduates and is particularly messy to administer);
and (ii) what percentage of average earnings the £21,000 threshold stands at as of now (David Willetts pointed out that it was set at £21,000 to be around 75% of average earnings which is the basis of the current freeze until 2021).
(iii) Please also explain how it can be justified for students who have graduates from courses that started both before 2012 and after 2012 to have repayments collected at a lower threshold than £21,000 when they face the same high debt and high interest (and ultimately the same write off date if they are unable to clear their later 2012+ loan and some even have a later write off at age 65 if they hold loans from before 2006 and after 2012) as those who only hold loans from courses starting from 2012. Surely, given all of this, it is completely illogical and over-complicated to run two repayment thresholds? Surely it would make sense to equalise the repayment threshold for all graduates with income contingent loans (the Browne Review clearly assumed the increase from £15,000 to £21,000 would apply to all borrowers regardless of when they took out their loan, as £21,000 was based on the fact £15,000 had been frozen since 2005).

Indeed David Willetts recommended this in 2015:

"The government could freeze the £21,000 threshold ... continue to up-rate the £15,000 threshold, which some forecasts suggest would then reach £21,000 in perhaps six years ... up-rate the new single threshold."

And the issue of equalising the repayment thresholds was also raised in 2010 by Duncan Hames ( ):

"I did not believe that it would be fair, come 2015, for today's students to have to make payments from the substantially lower threshold of £15,000, while the most recent graduates would be able to earn up to £21,000 before beginning their contributions. I have made that point on the Floor of the House to the Minister for Universities and Science.

Therefore, I truly appreciate the movement that the Government showed yesterday in announcing the annual uprating of the repayment threshold for existing students and graduates, not just for those starting their studies from 2012 onwards. The measure should not be underestimated. It calls a halt to repayments for more than 100,000 graduates on modest salaries, and it cuts the contributions asked of 2.5 million graduates by hundreds of pounds each over the course of this Parliament. However, I hope that when the new system is in place, the gap between the existing repayment threshold and the £21,000 level can be closed entirely. At the very least, under the existing system recent graduates should be offered the option of transferring to the new system, with whatever outstanding contribution they have left at the time. In that way, they could indeed benefit from the increased threshold."

(and )
"If raising the repayment threshold is to benefit every single graduate, in the Minister's words, can he confirm that current students-and indeed, current graduates-will see their repayment threshold raised also?"

2. The Browne Review recommended the interest rate be linked to the Government cost of borrowing (which it based on the discount rate, then RPI+2.2%) with lower earnings receiving a rebate of real interest over and above their repayments. However, the discount rate was reduced in 2015 to RPI+0.7% precisely because the cost of Government borrowing is lower than was assumed in 2010. But perversely (and a major reason why it is so politically toxic) the interest rate for many borrowers is even higher than the Government cost of borrowing assumed in 2010, let alone the current discount rate of RPI+0.7%. The majority of 2012+ borrowers (even lower/middle earners) are currently accruing interest at a rate above the discount rate and Government cost of borrowing. It can be justified to levy a rate marginally higher than the Government cost of borrowing on higher earning graduates as a progressive measure to provide subsidies to lower earning borrowers. However, it is not fair, nor justifiable to levy a rate above Government cost of borrowing on lower/middle earning graduates. It can't be justified on the grounds that lower/middle earning borrowers won't repay the interest and therefore it doesn't impact them because some lower/middle earning graduates who have lower 2012+ loan debt would otherwise repay their loan within 30 years if they had a fair interest rate applied. Graduates who hold loans from before 2012 and after 2012 are particularly penalised by an excessive rate on their 2012+ debt and the fact that the repayment thresholds aren't equalised as their repayments are higher than if they only hold a 2012+ loan. Again, if they are unable to repay their 2012+ loan by the time their loan from before 2012 is written off, they continue repayments for several more years on their 2012+ loan. This is unfair. Quite why real interest has to start being levied on lower/middle earning graduates above £21,000, rather than just for higher earning graduates seems absurd.
In light of this unfairness inherent in the system, please explain:
(i) why the interest rate is so high for these borrowers and why the maximum interest rate was not brought down when the discount rate was brought down;
and (ii) what the current Government cost of borrowing is (is the discount rate of RPI+0.7% based on the cost of borrowing to Government?)

Yours faithfully,

A Fletcher

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