HEPI Director Nick Hillman takes a look at the continuing row over whether student loans are turning out to be fair for graduates.
The weekend media were full (yet again) of the perceived unfairness of Plan 2 student loans. These are the loans taken out by undergraduate students who started their studies in England between 2012 and 2022. They cover both tuition fees and maintenance costs.
Graduates with Plan 2 loans face a high-ish variable interest rate (6.2% if they are on a salary comfortably over £50,000) and a 30-year payback period before the loans are written off. Plan 2 remains the norm in Wales, where Labour chose not to copy England’s shift to Plan 5 loans (which have no real rate of interest but a 40-year repayment term).
The first students who took out Plan 2 loans are now graduates in positions of influence, including in Parliament and in the media. They are using this influence to complain about how much money they are having to pay to the Government through income tax, National Insurance and student loan repayments combined – often 51% of salary.
Many people will feel sympathy for them, both for the large debts detailed on their student loan statements and for the wider ‘failure to launch’ challenges faced by younger people, given the ups and downs of the graduate labour market and high housing costs. But much of the rhetoric on Plan 2 is overblown.
Some – I stress not all – of the complaints are nothing more than successful graduates wanting someone else to cover their own debts. Intriguingly, given how progressive the loans are, the loudest complaints come from the left – for example, from Oli Dugmore of the New Statesman, Zarah Sultana MP, Nadia Whittome MP and Chris Curtis MP.
What is to be done? Policymakers tend to work by the rule of three, meaning a tricky policy challenge may only have three possible big solutions. The Pensions Commission, for example, responded to the pensions crisis of the early 2000 by claiming the only options were: later retirement; higher taxes; or more saving.
The same goes for Plan 2 student loans. There are just three options for tackling the perceived problems, and each is as unattractive as those three pension options. Yet we don’t know which one the complainants would prefer. In other words, those unhappy about Plan 2 loans need clearer answers on how they think the system should be fixed.
- One option is to hide the issue by no longer giving access to student loan balances. New graduates don’t worry they will pay hundreds of thousands of pounds in income tax over their careers, as no one ever rolls the total number up. Yet they do worry about comparable student loan payments. We’ve had stealth taxes; in this scenario, student debt would become stealth loans.
- Another option would be to reduce student debts. By tweaking the features of Plan 2 loans, such as the repayment thresholds or the interest rate, policymakers could reduce current monthly repayments and / or cut outstanding balances. But someone would have to pick up the tab, including – presumably – those who have not benefited from higher education.
- A third option, and the one that has been favoured by policymakers in the past, is to hit graduates harder, so the loans get paid down faster. While comparisons are not always easy, it is thought other countries with student loans have typically had lower repayment thresholds (see page 31). But if you currently dislike watching your total debt grow despite making repayments, you might really hate the larger payments necessary to reduce the total debt even more.
If policymakers are to fix the supposed problems faced by those with Plan 2 loans, they will have to choose one of these options or a mix of them (or something like them). To me, the first option seems unwise, the second seems unaffordable and the third seems unpalatable. All three seem unfair. It is time for the campaigners to say which they prefer.
To return to pensions, the Plan 2 protests resemble the failing WASPI campaign by those who say the equalisation of State Pension Ages was so badly communicated that billions in compensation should now be paid. Whether it is WASPI or Plan 2 student loans, people are trying to unwind policies that were specifically designed to aid the bulk of taxpayers.
Nick Hillman’s previous blog on the row about Plan 2 loans can be read here: Why the current campaign on student loan interest may be misguided, misunderstood and misdirected