The Regressive Nature of UK Student Loans

Earlier this year, the LSE blogged a guest post by Ron Johnston, a geographer at Bristol University. Johnston, along with his colleague Tony Hoare, is the author of an important 2010 paper which found that “students with high A-level scores are more likely to get first-class degrees, but students from state schools with such high scores are more likely to achieve the highest degree grade than are students with similar scores who attended independent schools“.

Here, Johnston is talking about the new student loan structure, and his post is framed in terms of falling recruitment to postgraduate courses. Will Hutton had previously written about student fees leaving graduates too skint to consider a taught masters, and Johnston notes the picture is actually much grimmer than Hutton painted.

While I fully agree that the new undergraduate fee structure could hurt postgraduate recruitment further (at least on those courses leading to public sector professions), I was more intrigued by the figures put forward by Johnston about the regressive nature of the fee repayment system.

Naturally, I knew that the more a graduate earned, the quicker s/he would pay off the debt and the less interest s/he would therefore be charged. I was also aware of the coalition horse-trading that foreshadowed the decision to allow wealthier graduates to repay all of their  fees immediately after graduation. But what I hadn’t fully understood was just how much difference the power of compound interest made to total repayment. On this issue, the numbers really are quite staggering. Just look at the how a graduate’s starting salary affects their total repayment (figures based on fees-only borrowers of £27,000):

If your starting salary is £25k, total repayments are £57,526.

If your starting salary is £30k, total repayments are £50,943.

If your starting salary is £40k, total repayments are £44,354.

All projections about future graduate repayments are, of course, subject to assumptions about inflation and annual pay rises. However, according to Johnston, “the conclusion is clear: the less well-paid you are when you enter the labour market, the more your degree costs, both relatively and absolutely.”

Incidentally, for students who take out a full maintenance loan (£7,675 per year) on top of the £27,000 fee loan, it’s a similar story. If your starting salary is £30k, your total repayments are £135,914. But if your starting salary is £40k, total repayments are only £104,105.

It should be noted that the regressive nature of these repayment totals are partly the result of assumed starting salaries being relatively generous. For ‘fees + maintenance’ borrowers on lower starting salaries, the debt-wipe concession kicks in after 30 years.

It is this concession, of course, that allows the BIS website to brag that “under our new more progressive repayment system, around a quarter of graduates, those with the lowest lifetime earnings, will pay less [than under the previous system]”. The 2010 Institute of Fiscal Studies report, Higher Education Reforms: Progressive but Complicated with an Unwelcome Incentive, makes similar claims, and Vince Cable even argues that the new system is a “progressive graduate tax in all but name.”

But how progressive is a repayment system that squeezes much more from middle-earning graduates than it does from high-earning graduates? Martin Lewis’s Independent Student Funding Taskforce  reckons that fee levels are “irrelevant to most people – they’ll just keep paying the same proportion each month and if they don’t earn enough, they won’t come close to paying back what was borrowed (never mind the interest).” But once real graduates find themselves repaying different levels of debt over different lengths of time, I wonder whether they’ll be quite so blasé?

Johnston’s excellent blog (and startling graph, reproduced above) warns that unprecedented levels of debt will put further study beyond the means of most graduates. However, once the unfairness within the repayment structure begins to bite, it may not only be aspiring postgrads who feel aggrieved.

Thousands of graduates may wonder why their bill is so much greater than fatter-salaried friends who took the same degree at the same time.

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4 thoughts on “The Regressive Nature of UK Student Loans

  1. Pingback: Why lowering tuition fees may not be the answer | H.E. Watch

  2. Pingback: Are counter-arguments to a Graduate Tax wearing thinner with every new RAB estimate? | H.E. Watch

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