Student Loan Repayments
Valerie Vaz (Walsall South) (Lab)
This debate comes against the backdrop of the tumultuous events that took place in the UK following the referendum last Thursday. I applied for the debate before that time, so I am grateful I was granted it and I am here today. I also want to thank the Library for providing timely responses to some of the queries I had.
Just before the historic vote on the EU, students were receiving statements of their loans with a total figure that left many of them in shock. On a loan of £27,000, the figure was £45,000. I want to acknowledge the fact that young people between the ages of 18 and 25 voted overwhelmingly—by 75%—to stay in the EU, so we need to make sure we do not forget them and their future.
I want to focus on the regulations, the threshold and concerns about the contract. The regulations that brought in the changes to the threshold and interest rates were enacted in 2012. They were the Education (Student Loans) (Repayment) (Amendment) (No. 2) Regulations, which came into force in June 2012, so the first students to take up the loans affected by these regulations have just graduated. In those regulations tuition fees were trebled, a higher threshold of £21,000 was established, above which the loan had to be repaid, and a new maximum rate of interest for the loans was set, using the retail prices index plus 3%. Not content to treble tuition fees, the Government in the summer Budget of 2015 froze the threshold of £21,000. I shall focus on that threshold.
In November 2010 the then Minister, David Willetts, made a statement in which he said:
“We will increase the repayment threshold to £21,000, and will thereafter increase it periodically to reflect earnings. The repayment will be 9% of income above £21,000 . . .raising the threshold will reduce the monthly repayments for every single graduate.”—[Official Report, 3 November 2010; Vol. 517, c. 924.]
Then in July 2015 the Government consulted on freezing the repayment threshold. In November 2015 the responses showed that 84% were against freezing the repayment threshold for all post-2012 borrowers, but the Government went ahead against the evidence to freeze the repayment threshold until April 2021.
Why did the Government do that in the face of all the evidence? Is that not a prima facie case of misleading Parliament? In his statement Minister Willetts said that he would increase the threshold, yet the Government acted against all the evidence and the consultation responses. The Government’s own figures on the repayments show the inequity of this. The new scheme is far from progressive, as some Ministers claimed. Graduates earning £21,000 to £30,000 will have to pay £6,100 more, those earning over £40,000 will pay only £400 extra, and those on £50,000 will pay only £200.
Mr Deputy Speaker (Mr Lindsay Hoyle)
I have absolutely no problem with the hon. Gentleman intervening, but he should wait a little longer, rather than walking into the Chamber to intervene. Come on, Mr Shannon—the night would not be the same without you.
Jim Shannon
You are most kind, Mr Deputy Speaker. I spoke to the hon. Lady beforehand. I want to put on record the fact that in Northern Ireland loans begin to be paid back when the student enters employment and earns more than £17,335 a year. The interest rate for loans is currently 1.5% and the more a graduate earns, the greater the proportion of their loan they repay, ensuring that those who benefit most from their degree pay the most, and those who do not benefit as much are not unreasonably punished for it. Does the hon. Lady agree that perhaps the Minister should look at the system that we have in Northern Ireland, which seems to be fairer?
Valerie Vaz
I thank the hon. Gentleman for his intervention. I can say in his defence that most of us were taken by surprise that the Adjournment started so early. I agree with him that the Northern Ireland system seems to be much fairer.
I do not call the figures that I have just given progressive, and nor does the Institute for Fiscal Studies, which found that the impact of freezing the threshold was that the largest increase as a proportion of earnings was among lower earners. Can the Government explain why they have chosen to make the student funding system less progressive by removing the central elements of the 2012 reforms?
What of women, black, Asian and minority ethnic and disabled graduates? They are most likely to be on salaries in the region of £21,000 to £30,000. The Government have acknowledged that. Let me give an example. In the 2013-14 cohort, 8,000 more women than men were paid in that range six months after graduation, and 51% of BAME graduates were employed on salaries in that range, compared with 45% of their white graduate counterparts. What measures have the Government implemented to mitigate the disproportionate effect on those on low incomes, women, disabled graduates and BAME graduates? Those groups earn less than other graduates, so they are more likely to be middle earners—those who face the largest absolute increase in repayments.
What of prospective students in the nursing profession, who could be deterred by high levels of debt? The Royal College of Nursing is concerned about the change to a loans-based system, which will leave many nursing students with debts of £60,000 for a three-year degree. We are desperately in need of nurses from this country who are trained and qualified in this country.
The National Union of Students, which represents more than 95% of all higher education and further education unions and more than 7 million students, has expressed concerns. First, the repayment threshold will not increase in line with earnings, so students have to start repaying their loans on a lower income. Secondly, those on lower incomes pay more than they otherwise would. Thirdly, the NUS is concerned about the Government being able to change terms retrospectively and about the impact that that would have on existing borrowers, which the union says sets a terrifying precedent.
Patrick Grady (Glasgow North) (SNP)
I congratulate the hon. Lady on securing the debate. I declare an interest because, despite having graduated in 2001, I am still paying off student loans, although I fall under the old system, where the threshold is the median wage. However, that means that payments can go up or down, depending on someone’s earnings. I have paid off student debts for a while, gone back down below the median and then re-accumulated interest, which has negated the payments I previously made. However, does the hon. Lady share my concern about the Government’s continual selling-off of student loans? It seems to be a never-ending chain, and it is not entirely clear who benefits, other than the private companies that own these loans.
Valerie Vaz
I absolutely agree with the hon. Gentleman. I am coming to an aspect where student loans are treated differently from any other ordinary loans.
Let me turn to the contract. The Government are asking 17 and 18-year-olds to look at contract terms and understand them. These young people are not financial advisers or lawyers—they are going to university so that they can become financial advisers and lawyers. The role of teachers is to encourage students to go to university, not to give financial advice.
Under the new 2012 system, however, interest rates can vary across the lifetime of a loan, with one rate while the student is studying, another rate when they graduate but are under the repayment threshold, and another rate when they are over the threshold. That is a complicated system, unlike the one described by the hon. Member for Strangford (Jim Shannon), which is much clearer. How can a 17 or 18-year-old be expected to understand these terms, particularly when the table of circumstances is not set out in the contract or attached to it, and students receive no financial advice?
We are told that the guidelines and terms are set out in a separate publication, and the students are told to look at the documents online. The information that is provided and the representations that are made that lead them to sign the contract could be a form of mis-selling. The contract terms could be described as unfair or as “void for uncertainty” because it is not clear on the face of the contract what the student is signing up to—there are no clear terms regarding exactly what they have to repay.
Nor is any financial information provided—for example through a financial adviser. When we take out a mortgage, we have someone sitting down in front of us explaining everything. The students are not given that, but they are expected to sign up to paying back a loan—in some instances, of £45,000. We need to be able to protect our young people.
Worse still, student loans are not subject to financial regulations and consumer protections, as is the case with other loan agreements. That must change, and I say to the Minister that there is an opportunity in the Higher Education and Research Bill to add that extra regulatory protection.
What assessment have the Government made of the exemption of student loan agreements, unlike other loans, from consumer credit protection? Why do the Government not want to protect our young people? Can the Minister confirm whether there are any plans to alter other terms and conditions of the student loans given to existing borrowers? It cannot be right that the Bank of England base rate is 0.5%, when students are paying RPI plus 3% on their loans. How can we treat our young people, who are the future, in this way? No wonder they are bewildered, confused and upset.
A Minister comes to the House to say that there will be an increase in the threshold, and the Government ignore it; the consultation gives an 84% response and the Government ignore it and press ahead with the proposal; and a young person has to sign a form with contract terms in another document online, with three rates of interest. Students should not be burdened by debts but should enjoy the benefits of their hard work and achievements.
The Minister for Universities and Science (Joseph Johnson)
I congratulate the hon. Member for Walsall South (Valerie Vaz) on securing this important debate. Student loans are an important means of ensuring that higher education is open to all. I am glad to have the opportunity to respond to her points and others made in the debate.
This Government have done more than any other to put the financing of higher education on to a secure and sustainable footing. England has some of the finest universities in the world, and it is vital for our future economic prospects that they remain well funded. Total funding for the sector has increased from £22 billion in 2009-10 to £28 billion in 2014-15, and it is forecast to reach £31 billion by 2017-18. We must ensure that our universities have the resources they need and that every student receives a high-quality experience during their time in higher education.
When we reformed student finance in 2011, we put in place a progressive system of student loans that means that higher education is accessible to all who have the potential to benefit from it, irrespective of their ability to pay—and the system is working. Students from disadvantaged backgrounds are going to university at a record rate—up from 13.6% of those from the most disadvantaged backgrounds in 2009 to 18.5% of those same groups today in 2015. Someone from a disadvantaged background is now 36% more likely to go to university than they were under the previous Labour Government. The reforms have supported an increase in participation in higher education across the country. In the hon. Lady’s own constituency, participation has increased from 25.1% in 2010 to 31.4% in 2015. Walsall South now sends a higher proportion of 18-year-olds into higher education than the English average—a reversal of the situation that existed under the previous Labour Government.
The student loans system is fair and sustainable. It removes financial barriers for anyone hoping to study and is backed by the taxpayer, with outstanding debt written off after 30 years. Students get a fair deal. Graduates pay back only 9% of earnings above £21,000 and enjoy an average wage premium of £9,500 per year over non-graduates.
Jim Shannon
In my intervention on the hon. Member for Walsall South (Valerie Vaz), I mentioned that the system we have in Northern Ireland is much more manageable than the system here on the mainland. Has the Minister had a chance to look at how the Northern Ireland example works and gives a better response to students when it comes to repayment?
Joseph Johnson
Yes, of course. Higher education has been devolved in Scotland and Wales since 1999 and in Northern Ireland since 2007, and we continue to look at how other nations within the United Kingdom choose to allocate public funds to the higher education system to see what lessons are to be learned from that.
In England, we now have a fair and sustainable system of funding our higher education system. The £21,000 threshold is higher than the one we inherited from Labour, and is fairer on lower earners. The system is also more progressive. Interest rates after graduation increase with income so that higher earners repay more. For someone earning £21,000 or less, the interest rate is set at RPI—the loan balance does not increase in real terms. For graduates who earn more than this, the interest rate increases to a maximum of RPI plus 3%. It is only fair that the graduates who have benefited most from their education should pay the most back into the system.
Student loans are very different from a mortgage or credit card debt. Repayments are determined by income, not the amount borrowed. Graduates are protected; if at any point their income drops, so do their repayments. The loans are income-contingent, so borrowers will repay only if they earn above the threshold, and, as I said, the loans are written off after 30 years, meaning that many graduates will not repay the full amount. This is a crucial part of the taxpayer’s investment in our country’s skills base.
Our approach is based on the fundamental principle that a borrower’s contribution to the cost of their education should be linked to their ability to pay. Graduates generally benefit from higher earnings than those who do not go to university, and we must ensure that we maintain a fair balance between taxpayers and graduates in the costs of higher education.
It is clearly important that students know what they are signing up to when they agree to take out their loans. All students are provided with clear information to help them understand what financial support they may be eligible for, as well as the interest rates and the repayment terms that will apply. They must also confirm that they understand the information before they are granted the loan. All of the information that the Student Loans Company provides to students is reviewed regularly to ensure that it is both accurate and accessible.
Let me turn to the threshold freeze, which the hon. Member for Walsall South has mentioned. To put higher education funding on to a more sustainable footing, we must ask graduates who benefit from university to meet more of the costs of their studies. It is clear that graduates benefit hugely from higher education. On average, graduate earnings are much higher than those of non-graduates. In 2015, graduates’ salaries averaged £31,500, compared with a non-graduate average salary of £22,000. The only alternative to asking higher-earning graduates to support higher education is to ask the taxpayer, who on average will earn much less than those graduates.
We did not take the decision to freeze the repayments threshold lightly. We consulted on the changes before they were announced last November and conducted a full equalities impact assessment. The changes will mean that graduates earning more than £21,000 will repay about £6 per week more than if we had increased the threshold in line with average earnings. The threshold is higher in real terms than the one we inherited from Labour, meaning that graduates under this system keep more of their earnings before they start to repay.
A sustainable student finance system enabled us to abolish student number controls, lifting the cap on aspiration and enabling more people to receive the benefits of a university education. That is essential if we are to maintain our place as a country with a modern, highly skilled economy. We still send proportionately fewer people to university to study at undergraduate level than our main competitors. Between now and 2022, more than half of job vacancies will be in occupations most likely to employ graduates. If we are to continue to grow our economy, we must equip our young people with the skills and qualifications they will need to fill those roles.
Valerie Vaz
I thank the Minister for his response, but he has not answered my questions and he seems to have ignored the breakdown evidence I have given him, including the fact that those who receive £40,000 pay less. I agree with him that it is very important that more people are going to university, but that does not address the issue of the loans. Moreover, would someone be able to apply for a mortgage with a student loan debt against their name?
Joseph Johnson
The critical thing is that we have put our higher education finance system on a sustainable footing. In order to do that, we had to take some difficult decisions. Freezing the repayment threshold was certainly one of them, but it was rooted in an underlying fairness, which is that graduates, who will go on in their lifetimes to earn significantly more than non-graduates, have to make a contribution towards the cost of running a big, expanding and successful higher education system. If they do not make a bigger contribution, the cost of funding that system will fall back on many of the hon. Lady’s constituents who did not go to university and did not get a chance to have a higher-earning career path over their lifetimes as a result. I am sure she will appreciate that fundamental fairness.
Valerie Vaz
This is about a difference in ideology. I was lucky to benefit from a free education. I went to university without having to pay for anything. In fact, because I stayed at home, I actually saved on my grant, which is slightly unusual. The taxpayer does not have to pay, because graduates will pay a higher rate of tax when they graduate, so they will be putting more back into the economy. Burdening students with a debt of £45,000 when they start their lives is not the right way.
Joseph Johnson
The hon. Lady was fortunate, in that she went to university at a time when the country had a much smaller system. As a percentage of the 18 and 19-year-old cohort, when she went to university, I imagine that a very much smaller proportion went to university at all. Now, we are in the mid-40s as a percentage of that cohort. It is a big system to run.
If we make the cost of that system fall solely on the taxpayer, we will put a much bigger burden on those who have not benefited from the higher earnings path to which being a graduate gives access. For women, as the hon. Lady will be aware, the lifetime earnings of a graduate are likely to amount to some £250,000 more than those of a woman who did not go to university. For a man, the difference is something like £170,000 more over their lifetime. Going to university puts people on a significantly higher earnings path, which makes the amount of debt that they might take on, on an income-contingent basis, look relatively small by comparison. When we think about this, it is important to set the huge lifetime gains from higher education against the sums of debt that people take on to generate them.
England is not unique in grappling with these problems. However, according to experts in the financing of higher education systems, such as the OECD, we are one of a very few countries in the world to have found what is deemed to be a sustainable solution to funding a mass higher education system. That has been recognised internationally. The OECD has praised our student loan system in England as that of
“one of the few countries to have figured out a sustainable approach to higher education finance”.
The hon. Lady mentioned bursaries and funding for health students. The present system is simply not working for patients, for students or for the universities that train them. To deliver more nurses and other health professionals for the NHS, a better funding system for health students and a sustainable model for universities, we need to move health students’ grants and bursaries on to the standard student support system, as we have for all other degrees. That will allow us to move away from centrally imposed student number controls and financial limitations. As a result, the Department of Health expects the measure to enable up to 10,000 additional nursing, midwifery and other health professional training places over this Parliament. That is just one example of why we have one of the best and most sustainable higher education systems of anywhere in the world.
Question put and agreed to.