Thursday, 20 September 2012

Students and the new 2012+ loans system: Who loses?

I have the same discussion every time Clegg comes out. Clegg will say something, like that he's sorry and that he did something wrong, and those who don't understand or don't want to accept reality will come out and say "You bastard! We will never be satisfied, you ruined Higher Education funding, everything is ruined, the world is ended" or something to that ill-conceived effect.

They are wrong. The changes to the HE fee's system are not only a net positive, they are overwhelmingly positive...so long as you agree that the wealthy should pay more relatively than the poor for the upkeep of essential services in the UK....and so long as you agree that accessible Higher Education is an essential services.

Let's quickly revisit the old situation and the new situation.

pre-2012:

People racked up loans of £3k per year plus a maintenance loan if they took it.
This was repaid through a fixed rate based on income above ~£16k, or via advance repayment.
Any loan remaining after 25 years is wiped out
The loan increases by inflation only.

post-2012

People can rack up loans of up to £9k per year plus a maintenance loan if they took it.
This is repaid through a fixed rate of income above ~£21k, or via advance repayment.
Any loan remaining after 30 years is wiped out
The loan increases by an interest amount, set above inflation.

So as you can see, fundamentally similar systems, with some key differences. For a start the new system introduces a situation where some may be repaying more than they actually took out as a loan. however the change to income boundaries mean that people will pay less each year than they used to to repay the loan. The amount of the loan, obviously increases.

It's not a debt:

But the key to remember here is that it's not a debt. It's an obligation to pay a percentage of your income as a graduate, up to a threshold that is marginally variable.

With a traditional loan, the loan:
Counts towards your credit rating and ability to take out other loans
Is paid back REGARDLESS of ability to pay (though lenders may come to agreements with you)
Remains until it is fully paid, after interest, even if you die
If a fixed term, repayments on it can vary based on a varying interest rate

A tax, on the other hand:
Is paid based on income or transaction
Never ends unless special conditions are reached
Leaves no legacy cost for next of kin to pay (unless in relation to taxes that occur due to actions after your death)
Has no set amount to be paid, no threshold to reach.

So as you can see, this system is a mishmash of a tax and a loan...for the benefit of the student as it happens. You see it has all the hallmarks of a tax, meaning no liability for the "debt" to pass to others, no variation in repayment amount that isn't linked to your increased income, doesn't affect your credit rating or ability to borrow, and has a threshold on ability to pay. It also has the benefit of a loan...being fixed term rather than never ending it means the amount may never be, fully repaid (For many this is actually the likely outcome). Also being a loan it has the downside of collecting interest, though this becomes largely irrelvant when compared to how a tax operates.

So then, how has Nick Clegg ruined the system for students?

Short answer: He hasn't.

Those who argue against the current system are either arguing that it's worse than the old system (because it's higher fees!) or that it's worse than a hypothetical "better" system (because we shouldn't pay for HE outside of general taxation!)

The former are ill informed, or perhaps just aware that finally the system is rigged not to help those who are better off, but to finally make them pay a fair share in to the system. The latter are people better off ignoring in a political debate like this, since ideals are just that.

What we can discuss is the current vs the former system. What better way than to work out who's better off, or not?

Part-time students:

Let's get this easy one out of the way. Part time students used to have to find the money up front to pay for their courses. Given their likely reduced income to be able to take time to study, this kind of upfront cost was entirely prohibitive to re-skilling in an academic sense.

Now they get to take out fee loans the same as everyone else. Some may end up paying more than they would have up front, however since the original situation was prohibitive to the poor, and only those who then go on to increase their income will be worse off, I think we can call this an extremely progressive move, can't we?

ELQ students:

Thanks to Rob Fay ‏(@Arathrael) for having me consider this one. Equivalent or lower qualification (ELQ) students are students that already have a degree, whether from abroad or not, and are going for a different degree to the same or lower level.

So, for example, a masters student won't get any help (unless going for a specific course that the government is happy to help fund) doing a different subject undergraduate or masters course. Someone who has an undergraduate degree in law but decides they want to be an English scholar won't get any help either.

How the new system affects them is varied from institution to institution. Like with foreign student fees, this is an area where different institutions have a more free reign on charges. Some simply add a supplemental fee to the existing course fee, others charge as if you are a foreign student, some match the cost of the undergraduate degree as if you weren't an ELQ student, and others wildly vary depending on the course.

The change in fee structure has done little to change this situation. For a few this system will be no different as it was already expensive and remains so. for other their fees may increase by a small or large amount. Those worse hit as ELQ students are ones that would have been getting the "best" deal a year ago at their institution as the margin of change is greater for these institutions that are matching their fees to the full time cost of course of non-ELQ students.

It's a definite blow to the idea of taking a second degree if you want to change direction, but while part-time students above make up a significant number of students that will benefit, ELQ's are much smaller in number. It's an area of the policy I'd sorely like to see changed, however we may be talking about less than 1% of the student population being negatively affected.

Postgraduate student:

Postgraduates are unchanged from previous years, where tuition fee loans aren't available to them.

Undergraduate students:

The main body that are effected are the undergraduate students, students taking their first degree. While their fees go up to £9k a year, the effect for anyone that doesn't make the average graduate wage, or has poor wage progression, is that they will pay less for their education than they did with the old system.

Let's outline some assumptions I shall be making from hear on in.

1) Tuition fees are £9k.
2) Everyone is taking a maintenance loan of £5500
3) courses are three years long
4) RPI will be around 3.5% and stable (hah!)
5) The cut off income for paying contributions starts at £21k and rises with RPI
6) Interest rates will remain as currently defined (complicated, RPI only < £21k, RPI plus a variable rate based on salary between £21k and £41k, and RPI + 3% on over £41k)
7) UK salary growth only grows with inflation

What this should signify is your general university goer, taking advantage of the money up front in loan form, on a standard course. The country is stable, prices are rising, but so are salary expectations. The interest rates mean you have to be doing well on salary progression to escape the interest rate, once passing the 2012 equivalent of 6.5% or thereabouts on your unpaid loan! That is, until you've been paying it for 30 years.

So, let's make some strawmen. How about Terry, he graduates into a good graduate job earning £22k, securing a good pay rise in his third year of employment, and his sixth, but otherwise stagnant on pay rises in line with RPI. In year 11 he makes a career jump, a promotion or moving to another company to a higher position, still attaining only modest RPI level wage increases. After his 20th year he gets another big promotion which sees him coasting along on RPI level wage increases until his 30 years are done.

Terry ends up on a salary of around £56.6k in today's money, he's done pretty well for himself. Still, he hasn't paid off all his debt remaining AND he hasn't actually paid back in to the system what he took out when accounting for inflation. However he would have paid off his smaller debt in the old system in about half the time.

Situation: Strong earner
Comparison to old system: not favourable
Paid off debt: No
Paid off amount borrowed initially: No


How about June. She is unemployed out of uni for 3 years before taking a low paid job around £16k at the wages of the time. Her wage progression is only bouncing along at RPI, but she sticks at the job. After a few years she's had enough and decides to start her own business. It starts slowly, but she soon makes a success of it.

She builds up her business to a stable level, taking regular above inflation pay rises for herself, after 30 years sitting on a reasonable salary around £47.5k in today's money. The loan didn't stop her from being able to get a business loan or any such necessity to make her business work, and ends up not only not paying very little of her debt before it's wiped out, but she doesn't pay what she put in AND she just about doesn't pay as much as she would under the old system.

Situation: Unemployed to entrepreneur
Comparison to old system: slightly favourable
Paid off debt: No
Paid off amount borrowed initially: No


Gary. He starts strong, straight in to a highly paid job at £35k. The job has a structured salary progression for 10 years after which progression drops off to just 1% above RPI. Good pension though. He repays his loan 3 years before the 30 year mark, but ends on a salary around £55k in today's money.

The result is that he pays much, much more than he would have under the old system, pays slightly more than he took out originally after inflation, but pays it all off.

Situation: Great job for life
Comparison to old system: very unfavourable
Paid off debt: Yes
Paid off amount borrowed initially: Yes


Kelly isn't one of the lucky ones, she remains unemployed for most of her life, except for the odd part time job, spending most of her time raising her children instead.

Situation: "Full time mother"
Comparison to old system: Same/Marginally favourable for those who get a low paid job for a period of time.
Paid off debt: No
Paid off amount borrowed initially: No


Bobby manages to get a £26k job out of uni, however he never really applies himself as much as he should, he goes from job to job, but never manages to attain a pay rise above RPI. He ends, obviously, on £26k in today's money...but at least he's not had to pay too much. Under the old system he would have fully repaid his debt, under this one he's not even paid half of that amount.

Situation: coasting along
Comparison to old system: very favourable
Paid off debt: No
Paid off amount borrowed initially: No


Then we have Felix. He starts out from the bottom but he is extremely capable of working his way up. He's got the right skills, he has the right industry, and after a steady and consistent pay progression he finishes his 30th year with a £150k salary.

The progression means that he's able to pay the debt off early, saving some money on what he would have had to have paid if he was forced to keep up payments for the full 30 years. But he does pay roughly what he borrowed, and paid significantly more, perhaps double the amount, than he would have done under the old system.

Situation: Tipped for the top
Comparison to old system: unfavourable
Paid off debt: Yes
Paid off amount borrowed initially: Yes


Finally let's look at Kacey, she has a good job but also puts her kids first...applies herself when they get towards university age themselves revs up the career. For almost 20 years she gets an ok set of pay rises, some years not getting more than RPI as her small business employers struggle with the times. But as they expand she is later able to make moves up the ladder and command greater salaries. She ends up on almost £76k after 30 years with most of the salary earned in the later years.

She ultimately pays just over half her loan. She would have, under the old system, almost paid her loan after the 25 year cut off, but the amount she has paid into the system only exceeds the old system debt by £2k, while at the same time saving her significant money each year as the payments are lower.

Situation: Late bloomer
Comparison to old system: marginally favourable
Paid off debt: No
Paid off amount borrowed initially: No



There are many more "types" I'm sure, feel free to ask me to model one. These represent, I feel, the main types of salary progression; from the unemployed or low earner, to the high flier, with those who make salary gains early or late in their career in between.

It's clear to me who the winners and the losers are. The people rich enough to pay off early need to be significantly rich before they gain any "benefit" and even then are worse off than under the old system. Those who stagnate around the average salary will win, as will those who have low paid regular jobs. People who achieve later in life will also be winners, while those that start strong but fail to progress their salary will perhaps be worse off...though being someone earning an average of £47k per year over 30 years is debatably never so "worse off" to be animated about.

The reality is that unless you're doing well in life, compared to everyone else in the country, you're going to be better off if you go to university now compared to in previous years.

Shouldn't the fees be less?

NO! Labour floated a plan to move the fees to £6k instead of £9k, playing on student's fears and trying to cynically move in on a territory that they have no right to occupy given their place in the creation of very real student debt.

The effect of this plan would be that Felix is much better off, while people like June are no better off. Reducing the "burden" actually helps the rich and doesn't help those on lower incomes at all. If anything, the fees should be increased from 9k to something higher, to ensure that those graduates that progress hard and fast in their salary always pay in to the system!

Is it regressive?

Well, yes...if you take the letter of the meaning the fact that very wealthy or high earning individuals can pay off all they owe before they accrue any interest, while less well earning individuals may have their "debt" increase and the amount they pay back end up larger than they initially borrowed.

But the old system is also regressive. The same rich people can pay off their loan early, and easier. The old system is technically more regressive than what we've got now...and while I'd rather see an out and out graduate tax rather than this weird loan, I also welcome progress.

Progress...

We can't let the best be enemy of good. It happens over and over again that we have people that scupper positive steps forward because their too hard headed to take a compromise. Whether it's Lords Reform, or Common's reform, or this hear change to HE fees...there is granularity in what is good and not. The situation is that the old system clawed back money from people that barely had enough to pay their rent, and completely ignored the large proportion of part-time students in the UK.

This system redresses that, and while it leaves ELQs out in the cold (for shame) it helps many, many other people in to not being penalised for their degree not working out for them the way they thought it would, for their industry collapsing around them, or for choosing to do more altruistic but low paid work.

Why not a graduate tax?

So this is the puzzling thing. If it's like a graduate tax, and is paid like a graduate tax...why isn't it just a graduate tax. It'd be interesting to find an official line, but with the SLC set up and the loan book available at some point to be picked up by private interest, there is a money saving to be had for the government by keeping it as loans. In theory.

Also a graduate tax opens up a Pandora's box. How do you deal with the fact you have people with loans who would now have a graduate tax, and how about all those students from the 60s through to current day who never signed up to go to university with a graduate tax in mind.

Wiping people's slates clean is easy, convincing everyone who's graduated they should be paying a graduate tax on the other hand...I would like to see the politician brave enough.

General taxation

Of course my preferred route is general taxation paying for Higher Education, including second degrees (those ELQ students). Creating a world where re-skilling and re-educating is accessible and free to anyone who wants to do it is necessary for a free society and to break down the barriers to social mobility. University as an experience changes and matures people (in general) and provides them with life experiences and scenarios far richer than they could find without it.

This isn't to say HE is perfect, it needs to reform before people could begin to be confident enough in it to not be disgruntled at paying for it in their taxes, but equally I believe that where the tax is found for HE doesn't have to come from the pockets of shop workers and bin men. Businesses should play their part more than individuals, especially if they can target where their tax funding goes in a more direct manner, and an additional few percentage points of income tax should be put on the higher earner bracket. After all, high earning graduates will now be effectively paying a 49% tax rate, spreading that cost to everyone that is successful in their earnings to help create more successful workers seems to me to be a fair thing to do.

[Note: This has been put together in a rush, I hope to get the references, etc, together soon...unless you're reading this in a few months, in which case I totally forgot. Prod me.]