How do student loans work and are the recent changes ‘reasonable and fair’?| BBC Radio 4

Students dressed as sharks gathered outside Parliament.

Their protest was against the latest changes to student loans in England.

There are growing calls for a redesign of the student loan system.

The debt is going up as fast as the payments are going in, it's just horrible, horrible to see that.

It's frightening if you're trying to get a loan to go down.

It's not like a mortgage where my payments are fixed every month, it's a payment that is dependent on how much I'm earning.

You have to get back to, is this system fair?

Hello, I'm Sarah Montague from The World at One.

And I'm Evan Davis from the PM program.

Now Evan, look, this whole thing.

We are, I mean, it's obvious really, it's fiendishly complicated.

Yes.

We're going to have to talk, I mean there are so many different plans.

But in a way, I thought one of the things that just illustrates the problem for me was the example of the case of Martha.

Martha is our colleague who pulled together this research for us.

And I was saying, I want an example.

And she said, use me.

In her case.

She graduated in 2018, she had a loan of 27,000.

Which was just the tuition.

In 2021, she hit the threshold for paying it off.

Last week she checked and she now owes 35,000.

Now that's just one example for so many students that you see.

That their situation is so much worse.

So what we have in this country, and we've got two different systems.

There's the Plan 2 system, so called, that applied for people starting in England up to 2022.

So the people have just graduated.

And the new Plan 5 system, which is slightly different and been been been been tweaked quite significantly.

Which is from 2023.

Which is, which is from the, the more recent graduates.

Now Martha is on Plan 2, and that's where you get, uh, it's, it's a, it's a sliding scale depending on your income.

But broadly RPI plus 3%.

Correct.

After 30 years, it gets written off.

Correct.

The Plan 5, which is the more recent adjustment, you're actually only playing RPI.

Lower rate of interest, but 40 years.

40, yeah.

More people will pay off Plan 5 than pay off Plan, Plan 2.

Um, so they've gone to a system that is just a little bit more like a loan.

Because for people who are going to pay it off, it operates more like a loan.

For people who are never going to pay it off, it's more like a, it is more like a tax, if you see what I mean.

But the government is not coining it in from the overall loan system.

So these are the, the key facts.

The government's not making a lot of money out of it.

Or sometimes might make a bit and sometimes not.

But richer students, those who are earning more, have been subsidizing within the loan system the less well-off students.

Because in order to make the loan system not a a massive loss maker for government.

Given that a sizable number of students are never paying the loans back in full.

You've been making money out of richer students.

So the distribution in the system has been from richer graduates to poorer graduates.

And that has meant that the university system overall, if you like, the loan system pays for itself.

More or less.

But some people are paying more than they should.

They're paying more than a loan would be.

But it's, it is worth saying just two things.

First of all, it's expected that about half of graduates will pay off their loan.

And when you talk about richer, of course, the richest don't even need to take it out in the first place.

So they do rather well.

They, they, their parents or they pay it out of their savings.

They give up those savings, they give up the interest they would be making on those savings.

So there's a cost to them, but they don't have to go through all the hassle.

But it is also the case that it's the, it's the sort of middle of the earning group who are actually paying more over their lifetime of earnings.

They get particularly hard, rather than those who end up doing very well.

Earning a lot.

Right.

They don't pay so much.

Here's the, here's how it works.

The poorer graduates are subsidized because they're never going to pay the loan back.

The very rich graduates who never take out a loan don't have to worry about it, they just pay their fees and and and they borrow it from their parents or whatever.

The richer graduates on the loan system, often they will pay it back.

And they might even pay it back quite quickly, in which case they're not burdened with heavy interest payments.

That are kind of subsidizing the system.

The, the sort of middle upper middle graduates are the ones who are, as their, as a proportion of their lifetime earnings.

Are often paying more than than than others.

Than at either end.

And they're the ones who feel aggrieved.

Now, in terms of the proportion of your lifetime earnings that you'll be paying back to the government on these loan schemes.

Is something like two, two and a half percent of your lifetime earnings.

That's the cost of doing a degree.

And of course, doing a degree should earn you more.

And you should be earning more.

Now, here's the question.

I think this is the fundamental question about social justice of the loan scheme.

Do we want the university system to be paid for by people who go to university?

More or less, via a loan scheme that tries to break even.

Or do we want richer graduates to pay for themselves and their costs?

And for the overall tax system to pay for the poorer graduates.

So at the moment, richer graduates are subsidizing poorer graduates.

Yeah.

Do we want richer graduates to be, if you like, given not only having to pay for their university education.

But pay a bit more so that the system is kind of breaking even.

That I think is the, the fundamental question.

And it is richer graduates or the sort of upper middle who are saying, this is, I'm being stung.

And I, I feel I'm paying more than I really should for the education I got.

And for the, the costs I've incurred.

So, so that's a really big.

I mean, I, I would stress it, I, I think it is the middle who are getting hit particularly hard.

Rather than when you say richer, you mean.

Well, I, I, yeah, the, the, the, yeah, the middle.

And yeah.

I mentioned the loan sharks outside Parliament, the sort of sharks with the Rachel Reeves faces.

The protesters.

What they're angry about is the Chancellor's decision to freeze the threshold.

So that the point at which you have to start paying 9% of your earnings kicks in earlier.

That does look like she might have to move on that.

I mean, that could be another U-turn.

That could be a U-turn.

That is, it's made a lot of graduates very angry.

And it, if you were running a mortgage loan scheme, you wouldn't be allowed to change the terms retrospectively like that.

It's, you could say she's.

The loans have been mis-sold because you're not allowed to change terms of loans.

After you've, after people have taken them out.

On the other hand, we come back to this is not really a loan scheme.

This is a hybrid loan tax scheme.

And governments change taxes all the time.

And and and take money from people.

These are.

These are decisions that are going to cost over the lifetime of these graduates.

Probably several thousand pounds.

But isn't there an argument that there's a sort of mis-selling here, because if you take out a loan when you go to university.

And you have certain expectations of it.

If the deals then keep changing, that would affect the decision that you took.

And you're going to be pursued if you say, actually, do you know what?

I'm not going to pay.

Yeah, no, there, there is an argument.

That that that it's mis-selling.

On the other hand, I mean, the 18-year-olds going to university.

Won't be reading the, the, the sub-clauses.

Anyway.

It is said in the, in the conditions of the loan that the terms that they may, they, they reserve the right to change the, to change the terms.

To tinker with the terms, I think it would, you know, ideally you wouldn't be tinkering with the terms.

There would be a stability so people could make informed choices about the, about what they want.

But you have to remember that one of the things about our loan scheme, as opposed to offering people mortgage type loans.

With fixed payment terms.

Um, one of the things about our loan scheme, which has got this very tax-based thing in it.

Is one of the things you don't know when you go to university is whether you're going to be a rich graduate or a poor graduate.

You don't know what your earnings are going to be.

And so there's an insurance system built into our loan scheme.

If you are a graduate and you don't make money out of being a graduate.

You're not going to be shouldered with the burden of the, of the loan.

The amount of people you will have had this saying, if I can find a way to pay off my student debt, should I do it now?

And it's an impossible question to answer.

A really difficult question.

Because it depends on the individual and what is going to happen to them in the decades ahead.

In terms of earnings.

Exactly, if your earnings are going to collapse for reasons that you don't know about yet.

You'll probably regret having put some money in.

Because you're never going to pay it off.

So if you're never going to pay it off and you're throwing money at this thing.

You're just putting money into reducing the amount of subsidy you get from the government.

No point in doing.

No, it's a really complicated calculation.