'Stop early redemption penalties on student loans...' blog discussion

Former_MSE_Helen

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.

Read Martin's "Stop early redemption penalties on student loans: the MSE consultation feedback" Blog.

Please click 'post reply' to discuss below.

tagq2

The loan may be cheap, but it is not free. If you don't impose a repayment penalty then you're making the loan cheaper for someone who can pay it off early, i.e. for those with the highest income. It thus becomes a form of regressive taxation.

All the stuff about rewarding success and teaching people to be responsible with debt is irrelevant. An SLC loan is to help a student finance an undergraduate higher education - it is not a high price state-financed lesson per se. If people desperately want a hands-on education in how commercial loans work then they're welcome to ask private lenders to help finance their education.

setmefree2

Thanks ML.

I think Labour finally have the Coalition on the back foot with regards to Student Loans. The coalition would have to be mad to try and intoduce redemption penanlties.

setmefree2

tagq2 wrote: »

It thus becomes a form of regressive taxation.

It's already regressive. Rich people pay their kids fees upfront.

John_Pierpoint

setmefree2 wrote: »

It's already regressive. Rich people pay their kids fees upfront.

You mean the family trust (Kate Middleton style?) has already paid 50% income tax; so it then pays out to the penniless student, who can reclaim the 50% against his/her £7475 personal allowance.
That is almost half of the £9,000 reclaimed.

Then buy the lad or lass a property (perhaps at bit cheaper than Sheri Blair's outrageous investment) and that is another £4,250 tax free rent-a-room.

How about a holiday job (woops might have to pay 20% tax on that now).

Get a foreign holiday job?

Get a gap year foreign job in (say) rich Australia?

Work the system: save up your paper round money.

Might concentrate the mind of students who try to drink their loan in freshers' week.

setmefree2 wrote: »

It's already regressive. Rich people pay their kids fees upfront.

Can you blame them - hopefully it might be a worthwhile investment in a country that is levying a 5% taxation by inflation on its fiat currency to offload the debts. Not to mention the reduction of savers interest to 0.5%.

jamesd

Part of the problem is social justice and reduced cross-subsidy if high earners can repay early and lower earners in socially worth jobs can't. One possible approach to solving this is:

1. Allow overpayment at up to 12% or perhaps 15% of income and can opt to do it even if not required to pay the basic 9%.
2. No penalty only for those making less than say 30,000.
3. Percentage allowance of a spouse or carer can be used by their partner if they aren't working, perhaps if raising children. To address a gender and disability inequality issue with a system that may make repaying more beneficial.

This allows those on lower earnings to choose to overpay but caps the available benefit for high earners. I'm assuming that the penalty is of the sort in the Consumer Credit (Early Settlement) Regulations, not anything more punitive.

A penalty free lump sum overpayment after graduation is a gift to wealthier parents and students. Parents mortgage property for student to live in at university, fund the education with loan. After graduating sell the property and pay off the loan with no penalty. The potential for this can be reduced by allowing overpayments at say one fifth of the loan amount a year.

wozearly

jamesd wrote: »

Part of the problem is social justice and reduced cross-subsidy if high earners can repay early and lower earners in socially worth jobs can't.

I'm not sure I agree.

We don't apply this concept to any other type of loan. Higher earners don't have to pay higher interest rates on their mortgages to subsidise lower earners, for example...

I know that we've got something that looks a lot like a graduate tax, but am I just being a purist in wanting it to be more like an actual loan? To my mind, its purpose is to ensure that up-front finances and future earning requirements do not become a barrier for people choosing to go to university, irrespective of their personal or family wealth.

Beyond that point, does it matter whether higher earners can pay off the loan sooner? Lower earners are protected by having it written off under both the new and old systems - is it actually necessary or all that desirable to have graduates cross-subsidising each other based on how much they earn? Isn't that ultimately what the income tax system is designed to do on a much wider scale?

John_Pierpoint

Interestingly, there was a bloke on the radio this morning, explaining that what was really cost effective was "summer camps" for potential students from backgrounds with no history of further and higher education.

He also went on to say that the anti academic attitude towards higher education amongst such potential students was costing the country potentially 4% of future GDP.

http://www.publicfinance.co.uk/news/2011/09/quarter-of-universities-miss-target-to-recruit-poorer-students/

http://www.telegraph.co.uk/education/universityeducation/8738383/Students-preparing-to-flock-to-cheaper-foreign-universities.html

Maastricht University in the Netherlands is fast becoming a hotspot for school leavers turning their backs on the British university system for its winning combination of lower course fees and grants available from the Dutch government if undergraduates work 32 hours a week while they study. Maastricht University has been sending representatives to sixth-form careers days over the past year and is installing a fast-track admissions scheme for prospective UK students this summer.

http://www.telegraph.co.uk/education/universityeducation/8738155/University-life-how-to-make-the-most-of-extra-curricular-opportunities.html

http://www.yorkshirepost.co.uk/news/at-a-glance/education/bid_to_help_students_look_for_university_overseas_1_3792009

jamesd

Might also be of interest to use pre-university background to decide in part on who's being socially mobile and provide some explicit benefit for that group to foster the social mobility objective.

wozearly wrote: »

We don't apply this concept to any other type of loan.

We do, though not so explicitly. The costs for a typical loan are added to the APR and those who borrow more are more likely to be high earners, who end up cross-subsidising the lower earners who borrow less within each loan size band. We see the same cross-subsidy in fund investments where the annual management charge is a percentage so at platforms like Hargreaves Lansdown with no explicit fee the higher earners/investors are paying to subsidise those with less invested.

wozearly wrote: »

I know that we've got something that looks a lot like a graduate tax, but am I just being a purist in wanting it to be more like an actual loan? To my mind, its purpose is to ensure that up-front finances and future earning requirements do not become a barrier for people choosing to go to university, irrespective of their personal or family wealth.

I agree with the purpose, just dealing with what's being proposed and trying to benefit the group that most needs the benefit. The purpose of the penalty is to discourage repayment to create that cross-subsidy, so it's what we have to deal with.

wozearly wrote: »

Isn't that ultimately what the income tax system is designed to do on a much wider scale?

That applies based on earnings while this is having the users pay, not the people who got to that level of earnings without going to university. So this plan potentially reduces the cross-subsidy of university graduates by non-graduates.

wozearly

jamesd wrote: »

We do, though not so explicitly. The costs for a typical loan are added to the APR and those who borrow more are more likely to be high earners, who end up cross-subsidising the lower earners who borrow less within each loan size band.

I agree with the purpose, just dealing with what's being proposed and trying to benefit the group that most needs the benefit. The purpose of the penalty is to discourage repayment to create that cross-subsidy, so it's what we have to deal with.

That applies based on earnings while this is having the users pay, not the people who got to that level of earnings without going to university. So this plan potentially reduces the cross-subsidy of university graduates by non-graduates.

Fair points - cheers.