When is a loan not a loan? When it’s a student loan…

The use of terms like ‘loan’ and ‘debt’ to describe student finance are completely misleading, argues Professor Dorothy Bishop

In February 2018, the House of Commons Treasury Committee published a remarkable report entitled ‘Student Loans’. A response by government, added on 11 May, reveals little engagement with criticisms raised by the committee, though it does note that the Department for Education (DfE) has embarked on a major review of the system, which will report to government early in 2019.

It’s clear that those involved in the review will have their work cut out for them. Among the numerous issues raised by the committee report, the misleading use of terminology was of particular concern.

Usually, when someone takes out a loan, they receive money up-front, which they are subsequently obliged to repay on agreed terms of interest. However, the student loan system is intentionally designed so that a substantial amount of debt will be written off. Repayments are due only when the graduate’s income exceeds a certain level, with the debt in any case written off after a period of years.

As the committee notes, this is unlike any other kind of loan, and could indeed be viewed instead as a system of grants coupled with a graduate tax.

A point that is omitted by the Treasury Committee is that, whereas a graduate tax would be expected to apply to everyone with earnings above a certain threshold, the current system ensures it is paid only by those who took out a student loan: graduates whose parents were wealthy enough to pay their fees and maintenance costs up front would not be liable. It is not easy to find figures on what percentage of students this applies to: this report gives current figures in aggregate sums loaned, though it notes that in 2011-2012, 79% of full-time English-domiciled students had taken out a tuition fee loan, and 73% a maintenance loan.

The terminology of loans puts potential students off studying

A point made by one of those advising the committee was that even experienced economists find the current system complex and confusing, and use of the term “loans” is a barrier to comprehension. It’s worth quoting in full the advice to the committee from Martin Lewis, who runs Money Saving Expert:

“The Government must get rid of the language of debt. It is simply misleading. Calling the current system a ‘loan’ makes it more difficult to explain and puts potential students off. Using the language of debt means people unnecessarily fixate over the total amount they borrow and interest rates, rather than the rate of repayment which is arguably most important. […] Reforming the language to a graduate contribution system would help prevent people being put off from studying, or making ill-informed financial decisions, such as using savings to pay their children’s tuition fees to ‘save them from a lifetime of debt’.”

In a similar vein, Lord Willetts remarked:

“Saying, ‘If you are in a well-paid job, you will be paying back the cost of your higher education’, is not like a student getting into debt and having to service it. We are all trapped in that language, and I very much regret it. It is a very misleading picture.”

Maintaining the fiscal illusion

So why is the term “loan” used? One reason is presumably that many voters may find the idea of a “graduate tax” unpalatable. But there is more to it than that. It seems that the confusing language was deliberately selected to make the government’s finances look better than they are: what the report refers to as a “fiscal illusion”. This is because in the National Accounts, a loan is treated in a different way from other forms of spending, meaning that the unpaid debt – which is a design feature of the system – does not count in the deficit. As the report notes:

“Due to the National Accounts accounting rules, there is no impact on the deficit when student loans are issued. As such, shifting the vast majority of all higher education spending into loans that are written off in 30 years has shifted nearly all higher education spending out of the deficit. ……. Based on the current RAB charge, £6–7 billion of annual write-offs are missing from the deficit. This figure is approximately equivalent to excluding the entire NHS capital budget from the deficit.”

In their response to the report, the government simply reiterate information already contained in it, and state: “In … the accounting treatment of student loans, we trust that we have given a full account of the rationale for our approach.”

In a brief blogpost it is possible only to scratch the surface of the report: it covers a wide range of topics, including the collapse in part-time students, the distinction between loans for fees vs maintenance, and the creation of perverse incentives in our higher education system. Let’s hope that the complacency that comes across in the government’s initial response to the report is replaced by some serious recommendations for change in future, to ensure both that our universities are funded in a sustainable manner, and that students can get a fair and comprehensible deal.