Autumn Statement Submission 1: Unfreeze the student loan repayment threshold...

MSE_Eesha

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 "Autumn Statement Submission 1: Unfreeze the student loan repayment threshold, stop the retrospective hike" Blog.

Please click 'post reply' to discuss below.

Ed-1

MSE_Eesha wrote: »

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 "Autumn Statement Submission 1: Unfreeze the student loan repayment threshold, stop the retrospective hike" Blog.

Please click 'post reply' to discuss below.

November's far too late to make a decision on thresholds to apply in April 2017. Software developers have to be told by August at the latest and indeed were notified by DfE in August and in the October employer bulletin that the plan 1 threshold is £17,775 and the plan 2 threshold is £21,000 in April 2017. Before they can be told, amending regulations would need to be laid in Parliament to change the threshold in the current terms and conditions (or add an uprating term to the current terms and conditions). Before that could happen, parliamentary time would need to be found to consider the amended regulations. Not going to happen. Look at when core terms were last changed in 2011 for existing students when amending regulations were laid in March 2011 to add an uprating term to uprate the £15,000 threshold from 2012 - it was necessary to change the then terms a whole year in advance so the necessary preparatory work could be done to implement the threshold change.

The earliest the threshold could now be changed is April 2018. But there is an expectation (and hope) on behalf of businesses that the plan 1 threshold can be merged into the plan 2 threshold at the end of the freeze period from April 2021. Administration's been a nightmare this year with 2 thresholds in operation for the first time. If inflation rises as forecast the plan 1 threshold would surpass £21,000 in April 2022. I expect that will be the point at which the plan 2 threshold is changed as the decision is to keep it at £21,000 for at least 5 years and that would be the most sensible way to proceed (particularly as there's no reason pre-2012 students should be paying more at a lower threshold - it was the fact that the £15,000 threshold had been frozen since 2005 that resulted in the £21,000 threshold been recommended in the first place! It was bizarre that they only applied it to new students).

Besides, an Autumn Statement is not a Spending Review. The 2015 Spending Review decisions apply for the next 5 years and Philip Hammond has already said that he will not be carrying out another Spending Review to overrule last year's. Departmental budgets have been set on the basis that the plan 2 threshold is not being uplifted for at least the next 5 years.

Ed-1

Interesting debate had regarding student loan regulation in the latest committee sitting of the Higher Education and Research Bill. Jo Johnson (the Universities Minister) rejected amendments to the Bill relating to Ministers' capability to amend the repayment regulations (and therefore the terms of student loans taken out under the Teaching and Higher Education Act 1998) as the processes are already in place to debate and vote on any changes to the regulations. As there have been no changes to the regulations to freeze the £21,000 threshold no changes to the current terms have been made so there can be no vote on the change as it was only a change to the intention to implement a threshold change. If a Government chooses not to implement something, the Opposition can't force them to!

Labour members (including Wes Streeting) tabled the following amendments (among others) to the Bill:

New clause 13—Student support: restricted modification of repayment terms—

“(1) Section 22 of the Teaching and Higher Education Act 1998 (power to give financial support to students) is amended in accordance with subsections (2) to (4).

(2) In subsection (2)(g) at the beginning insert “Subject to subsections (3)(A) and (3)(B),”.

(3) In subsection (2)(g) leave out from “section” to the end of subsection (2)(g).​
(4) After subsection (3) insert—

“(3A) Other than in accordance with subsection (3B), no provision may be made under subsection (2)(g) relating to the repayment of a loan that has been made available under this section once the parties to that loan (including the borrower) have agreed the terms and conditions of repayment, including during—

(a) the period of enrolment on a course specified under subsection (1)(a) or (1)(b), and

(b) the period of repayment.

(3B) Any modification to any requirement or other provision relating to the repayment of a loan made available under this section and during the periods specified in subsection (3A) shall only be made if approved by an independent panel.

(3C) The independent panel shall approve modifications under subsection (3B) if such modifications meet conditions to be determined by the panel.

(3D) The approval conditions under subsection (3C) must include that—

(a) the modification is subject to consultation with representatives of the borrowers,

(b) the majority of the representative group consider the modification to be favourable to the majority of students and graduates who have entered loans, and

(c) there is evidence that those on low incomes will be protected.

(3E) The independent panel shall consist of three people appointed by the Secretary of State, who (between them) must have experience of—

(a) consumer protection,

(b) loan modification and mediation,

(c) the higher education sector, and

(d) student finance.”

New clause 14—Student loans: regulation—

“(1) Any loan granted under section 22(1) of the Teaching and Higher Education Act 1998, (“student loans”) irrespective of the date on which the loan was granted, shall be regulated by the Financial Conduct Authority.

(2) Any person responsible for arranging, administering or managing, or offering or agreeing to manage, student loans shall be regulated by the Financial Conduct Authority.”

New clause 15—Higher Education loans: restrictions on modification of repayment conditions—

“(1) A loan made by the Secretary of State to eligible students in connection with their undertaking a higher education course or further education course under the Teaching and Higher Education Act 1998 shall—

(a) not be subject to changes in repayment conditions retroactively without agreement from both Houses of Parliament;

(b) not be subject to changes in repayment conditions in the event of the loan being sold to private concerns, unless these changes are made to all loans, in the manner prescribed above;

(c) be subject to beneficial changes, principally to the repayment threshold, in line with average earnings.

(2) In section 8 of the Sale of Student Loans Act 2008, for subsection (1) substitute—

“(1) Loans made in accordance with regulations under section 22 of the Teaching and Higher Education Act 1998 (c. 30) are to be regulated by the Consumer Credit Act 1974 (c. 39).””

This new clause would ensure no retroactive changes could be made to student loan repayment conditions without agreement from both Houses of Parliament.

[...]

Wes Streeting

[...]

New clauses 13 and 14 are what I have dubbed the “Martin Lewis amendments”.

[...]

Jo Johnson

Turning to new clauses 13, 14 and 15, I share hon. Members’ desire to ensure that students’ interests are protected when they take out a student loan, and I am pleased to have the opportunity to set out how we will ensure that. The key point is that student loans are not like commercial loans. Monthly repayments and interest are based on the borrower’s income, not on the amount borrowed. Borrowers repay nothing if they earn below the £21,000 threshold. Repayments are affordable and the loan is written off after 30 years with no detriment to the borrower.

Hon. Members have suggested that an independent panel should consider terms and conditions, and that changes to repayment terms and conditions should be subject to the approval of both Houses of Parliament. However, the key terms and conditions governing the repayment of the loan—the repayment threshold and rate, and the interest charged on the loan—are all set out in regulations. The current procedure already allows Parliament to debate or vote on any changes to the repayment regulations. That is the appropriate level of accountability for the decisions.

Wes Streeting

The Minister has outlined his views on terms and conditions. Does he agree that the Financial Conduct Authority should regulate student loans on the basis that it looks not only at terms and conditions, but at the premise on which a financial product is sold? That is where the Government have come a cropper.

Jo Johnson

It has long been a feature of our system that we have a highly subsidised student loan, offered on a universal basis by the Student Loans Company, to all borrowers who can benefit from a higher education. It is massively different from a commercial product, which can cherry-pick who to lend to and charge market rates of interest.

Our student loan product is heavily subsidised, as hon. Members described earlier. It is income contingent, so borrowers only repay when they earn £21,000. It is written off altogether after 30 years. The interest rate ​charged would certainly be lower than that charged by commercial organisations when faced with a similar scenario.

[...]

You won’t goad me into giving way. The Chair has indicated that he wants us to make progress, and that is only fair to him after a long day.

The current procedure already allows Parliament to debate and vote on all this. New clauses 14 and 15 address the issue of the FCA. We do not believe that we need to change the arrangements, which, since the Teaching and Higher Education Act 1998, have enabled the loans to be exempt from consumer credit legislation. Parliament confirmed the exemption from regulation under consumer credit legislation in 2008, when the then Labour Government passed the Sale of Student Loans Act 2008. The factors that led Parliament to that decision remain valid today, and the current system of parliamentary oversight is the most appropriate for this statutory loan scheme.

New clause 15 relates to equal treatment for borrowers whose loans have been sold. I am glad to be able to reassure the Committee that borrowers whose loans have been sold are protected by the Sale of Student Loans Act 2008. I can also confirm that for the planned sale of pre-2012 income-contingent loans, purchasers will have no powers to change the loan terms in any way and will have no direct contact with borrowers.

New clause 15 would also require the repayment threshold for all income-contingent student loans to increase in line with average earnings. The precise value of the repayment threshold is a key factor in determining the long-term sustainability of the loan system, and in particular the extent to which taxpayers—many of whom are not graduates—subsidise loans. Any Government have to be able to balance the interests of taxpayers and graduates in the light of the prevailing economic circumstances. The decision last year to freeze the threshold was taken precisely because economic circumstances had changed, with the result that the taxpayer would have had to pay substantially more to subsidise the loans than was originally intended.

The full committee session can be read here:

https://hansard.parliament.uk/commons/2016-10-13/debates/114ee0a5-469f-4256-83f3-c97587d4e0ae/HigherEducationAndResearchBill(TwelfthSitting)

The Minister's view is that:

• The repayment terms and conditions for income-contingent student loans made under the Teaching and Higher Education Act 1998 are set out in regulations (these are The Education (Student Loans) (Repayment) Regulations 2009 as amended by further amending regulations in 2010, 2011, 2012, 2012, 2013 and 2014).
• Parliament already has the power to debate and vote on any amendments to these repayment regulations so in theory it can vote down any retrospective changes to the regulations that worsens borrowers' repayment terms and conditions.
• There is therefore no need to add clauses to primary legislation which would restrict Ministers' ability to change the regulations to the detriment of borrowers (or to the benefit of borrowers) or regulate the loans through the FCA or have any other independent body consider changes to the repayment regulations.

It is worth noting:

• No changes to the key repayment terms set out in the repayment regulations have ever been made to the detriment of borrowers so Parliament has never had the chance to block the change.
• Three positive retrospective changes have been made to the repayment regulations: the threshold changed from £10,000 to £15,000 in April 2005 and an uprating term was implemented in 2011 to increase this threshold annually from April 2012 (this was at first only up to and including April 2015 but the 2014 amendment removed this time-limit and allowed the threshold increases to continue in April 2016 and beyond which is the third positive change). It is also worth noting that if the RPI is negative the threshold would go down as there is nothing in the regulations to say that the threshold can only increase, only that it will change by RPI, so the Government were careful to introduce this term at a time of high RPI so it could only be seen as a positive change.
• There have been several instances of intentions to change the regulations (i.e. promises made to borrowers at the time they took out loans) later not been carried through (which is arguably just as bad as making a retrospective change to the regulations to the detriment of borrowers as it is effectively dropping a positive change to the regulations that had been promised). These are namely the promise from Labour in 2007 to implement the option for post-2008 borrowers to take a repayment holiday from 2012, which was dropped in 2010 (long after 2008 and 2009 starters had taken loans expecting this option in their repayment terms); Labour's promise to uprate the £15,000 repayment threshold from April 2010, which was postponed in 2009 as a result of negative inflation (but this later would see the amending regulation uprating the threshold not delivered until 2012 in the 2011 amendment above - i.e. the threshold would have been higher if Labour had kept to its original promise to adjust the threshold annually from April 2010: it would have gone down by 0.4% in April 2010 because of an RPI of -0.4% in March 2009 but would have gone up further in April 2011 because of an RPI of 4.4% in March 2010); the Coalition's (more Lib Dems') promise to uprate the £21,000 repayment threshold from April 2017. Parliament are powerless to do anything about a Government not carrying through on intended changes to the regulations as there is no amending legislation to debate/vote on.
• There has been one 'dodgy' retrospective change to the regulations relating to setting interest which was made in 2009 when the 2000 regulations were revoked and re-enacted with a new regulation on interest rates for existing borrowers “...if the Authority determines that student loans will bear interest...” which allowed the Government not to set a rate in 2009/10 instead of setting a rate in line with the March 2009 negative RPI (previously the interest rate had been changed in the student support regulations every year rather than the repayment regulations. This is described in more detail by Brian in response to the WonkHE piece below).
• Section 8 of the Sale of Student Loans Act 2008 as amended makes it clear that student loans made under the Teaching and Higher Education Act 1998 are not regulated by the Consumer Credit Act 1974 (previously they were exempt anyway by virtue of the low interest cap but this clause ensured that if the low interest cap was taken away - which it was for post-2012 loans - the loans would continue to be exempt from consumer credit legislation) or by the FCA.

There are also extremely interesting comments on previous retrospective changes to student loans in response to these pieces:

http://wonkhe.com/blogs/comment-my-word-is-my-bond-freezing-student-loan-repayment-threshold

http://www.hepi.ac.uk/2016/07/28/why-the-moneysavingexpert-is-wrong

It is interesting that Martin's view is:

• Retrospective changes are against good governance ... This decision backtracks on a promise made to students by the Government and effectively changes the terms and conditions of the loan agreement long after it has been signed. This means millions of students who started their university education from 2012 onwards will pay thousands of pounds more in total over the lifetime of their loans. A negative retrospective change like this is quite simply wrong. It goes against all forms of natural justice and good governance.
• Lack of transparency around the decision and its communication ... At the very least, every student who has taken out a loan since 2012 should have been written to, to explain the threshold will no longer increase with average earnings as per the original arrangement and what that means for them in a practical sense. The communication should have been clear, transparent and provided clarification of the revised terms and conditions of the loan.

On lack of clarity, at least a decision to drop the intention to uprate from April 2017 was communicated. I can't find any official announcement anywhere that informed anyone (let alone borrowers) that the Government had dropped the option for post-2008 borrowers to take repayment holidays. This "term" was on page 14 of the 2008/09 and 2009/10 SLC guides to terms and conditions. It changed from 5 years to 2 years on page 18 of the Labour version of the 2010/11 guide and disappeared altogether in the Coalition version of the 2010/11 guide, with no official announcement whatsoever that borrowers would no longer have this option to take a repayment holiday. But it wasn't a retrospective change to terms and conditions as it was dropped before being implemented into the repayment regulations (although of course well after 2008 and 2009 starters had taken loans out and after several 2010 starters had also had loans approved expecting to be able to take a repayment holiday when their loan entered repayment).

And the problem with Martin's view above is that there hasn't been a change to the regulations so in turn there hasn't been a change to the current terms of the loan. Detrimental retrospective changes to legislation could be said to be bad governance (but retrospective changes to - i.e. amendments to - legislation happens across Government all the time). As there have been no changes to the legislation which set the threshold at £21,000, this argument doesn't hold. On the other hand, Governments break promises to what they say they'll do all the time. The Lib Dems said they'll abolish tuition fees. They didn't. The Coalition said they'll uprate the threshold from April 2017 (they didn't include it in the terms). This Government (it's not the Coalition anyway) haven't. Saying something doesn't put it into the terms of the loan until regulations are passed by Parliament that implements it. Of course, you can say that that is mis-selling. Well in that case, every political party is mis-selling themselves before every general election! They don't write to everyone every time they break a promise. On the other hand if the Coalition Government had already legislated for the £21,000 threshold to be uprated from April 2017 and therefore if this had already been in the terms, it could be argued that borrowers should have been written to (and indeed they would have to have been if the loans were commercial loans regulated by consumer credit legislation), but Parliament would have been able to block the change in that case anyhow. Of course it could also be argued that it would have been equally irresponsible for the Coalition Government to legislate for an uprating from 2017 when they had no idea what the economic situation would be by now back then; and indeed the threshold has ended up far higher than was budgeted for/assumed by the Coalition; in other words they would not have announced the uprating from 2017 in the first place had they known the economic variables (earnings etc.) what they know now.

The relevant regulation is 29(8) of the Education (Student Loans) (Repayment) Regulations 2009 which was inserted via regulation 11 of the Education (Student Loans) (Repayment) (Amendment) (No. 2) Regulations 2012:
http://www.legislation.gov.uk/uksi/2012/1309/regulation/11/made

It states “(8) The repayment threshold for a borrower with a post-2012 student loan is an amount of £21,000.”.

Where in the above does it say anything about that threshold being uprated? It doesn't so it isn't a change of the terms and conditions! The threshold is still £21,000!

The Labour Government legislated for these loans to be exempt from consumer credit legislation (which means among many other things they don't have to write to borrowers every time they amend the regulations and the loans aren't regulated by the FCA) and the current Government are also justifying this exemption on the basis that the loans are massively different to commercial loans because they are income-contingent. Of course, whilst Parliament can block changes to these regulations which are to the detriment of borrowers (for example such a change would be amending the above regulation 29(8) to say instead “(8) The repayment threshold for a borrower with a post-2012 student loan is an amount of £18,000.”) they can't do anything about a Government that refuses to change them. So it leaves borrowers with little protection as in theory the Government could leave them unchanged for the entire 30 year repayment period and so in 30 years the threshold would still be £21,000. Of course, this won't happen as there is also a regulation 29(7) which does have an uprating term:

“(7) Subject to paragraphs (8) and (9) the repayment threshold is—

(a) for any repayment threshold year ending on or before 5 April 2012, an amount of £15,000;
(b) for any repayment threshold year ending after 6 April 2012, an amount equal to X + (X x Y%) and rounded up to the nearest £5 where—
X is the repayment threshold for the previous repayment threshold year,
Y is the percentage increase between the retail prices all items index published by the Office for National Statistics for the two Marches immediately before the commencement of the previous repayment threshold year”.

This has raised the £15,000 threshold to £17,775 in April 2017. So this threshold essentially provides protection against the threshold for post-2012 borrowers staying at £21,000 for longer than it takes for this threshold to reach £21,000 as the regulations would have to be amended when this happens or else the regulations would be nonsense. E.g. Regulation 18A (http://www.legislation.gov.uk/uksi/2012/1309/regulation/6/made) says:

“18A. Division of repayment

Where a borrower has a post-2012 student loan and a student loan which is not a post-2012 student loan and it is time for the borrower to repay both loans in accordance with regulation 15, the repayment will be divided between the loans so that—

(a) the part of the repayment relating to income above the repayment threshold in regulation 29(8) is to reduce the outstanding balance of the post-2012 student loan; and
(b) the part of the repayment relating to income above the repayment threshold in regulation 29(7) up to and including the repayment threshold in regulation 29(8) is to reduce the outstanding balance of the student loan which is not a post-2012 student loan.”.

The above assumes the threshold in Regulation 29(7) (£17,775 from April 2017) is lower than the threshold in Regulation 29(8) (currently £21,000).

Ed-1

Just thought I'd illustrate to everyone once and for all that Martin is wrong in saying the terms of the loans have changed. They haven't but they will change in the future; that much is guaranteed. At least, the repayment terms will, not the terms of the loan contract which remain fixed for the loans' lifetime.

We need to make a distinction between the agreement declaration ("loan contract") which sets out the terms and conditions borrowers must agree to when applying for a loan - THESE TERMS ARE FIXED - and the terms of repayment - THESE TERMS ARE SET IN REGULATIONS AND THESE ARE CERTAINLY NOT FIXED.

The loan contract borrowers signed for a 2012/13 academic year's loan is below (it's very similar for subsequent academic years' loans). You'll notice that borrowers agree to paragraph (c) which states:

I acknowledge and agree that any loan(s) made to me by the Secretary of State for Business, Innovation and Skills, ‘the lender’ (which includes any persons exercising functions on behalf of the Secretary of State pursuant to section 23(4) of the Teaching and Higher Education Act 1998 as amended from time to time or successor legislation, ‘the Act’) will be on the terms set out in these declarations and in Regulations which are made under section 22 of the Act as amended from time to time.

The Regulations which set the repayment threshold are available here. You'll notice that Regulation 11 of these Regulations states:

“The repayment threshold for a borrower with a post-2012 student loan is an amount of £21,000.”

Please tell me how freezing the threshold changes that term? What has changed is the Government's intention to change that term which borrowers also agreed to under paragraph (c) as they agreed to the “...Regulations which are made under section 22 of the Act as amended from time to time.” The last bit makes the terms of repayment variable (note the crucial distinction: it doesn't change the loan contract) and means the Government could remove the threshold completely if they want to. But Parliament have the option of praying against Regulations laid before them if they wish and to force a vote on them. So changes to the repayment terms have to be approved by Parliament (like Article 50 apparently!). Martin fails to understand/appreciate that the repayment terms actually haven't changed in this case, but in any case, this threshold freeze decision has cast the spotlight on the fact that that the repayment terms of these loans (which are set out in the Regulations) are not fixed at the time you sign the agreement, which Martin gave much too little weight to. Only the terms on the below piece of paper (which form the contract) are fixed and they say that the Regulations (that determine the rules of repayment) may be amended from time to time. As it happens, the Government chose to leave them as they are, which leaves the threshold at £21,000 until they decide to amend them.

The loan contract also rubbishes Martin's insistence that student loans are not a debt. The loan contract couldn't be clearer. Paragraph (e) states:

I agree that any loan(s) made to me as a consequence of the acceptance of my application by the lender is a/are contract(s) between me and the lender which binds me from the payment to me of the first loan advance and that the repayment of any such loan(s), together with all and any interest, penalties and charges which apply, will be due by me to the lender as a debt.

It may not act like a debt under the current repayment regulations, but it very much could do if these repayment regulations set different terms and conditions in the future (or leave the threshold fixed for extended periods), such as removing or extending the cancellation provisions in the regulations etc.

Borrowers should certainly be made aware of Regulation 78, that if they fail to make a payment when it is due, the full loan balance (i.e. the £50,000+ which Martin claims is irrelevant) can be demanded in full and immediately: http://www.legislation.gov.uk/uksi/2009/470/regulation/78/made

“Foreclosure
78. If a borrower does not pay an instalment or other amount when it is due, the Authority may require the borrower to repay the loan in full immediately.”

If the loans get sold on to a private entity with the tactics of debt collection agencies such as Erudio, there wouldn't be a need for a change in the terms and conditions for this clause to be enforced all too readily. It only takes one missed payment to allow this clause to be enforced, and there is no FOS that could adjudicate (like there is with the pre-98 mortgage-style loans and Erudio). Then borrowers face being liable for a lump sum payment of the full loan balance immediately, not 9% of earnings above a threshold.

Clearly, there would then be debt collectors knocking on your door (contrary to Martin's mythbuster) as the full loan plus all interest accrued is recoverable as a debt through the civil courts and borrowers lose their right to loan cancellation. However, I am encouraged that it looks like if (when?) the loans do get sold, borrowers will have no contact with the new debt owner and the debt owner will have no contact with borrowers. All contact will still be with the SLC.

Martin also said he wants student loans to come under the FCA's remit, meaning they'd look at marketing and how the loans are sold etc. This would mean being regulated by the Financial Services and Markets Act 2000 and means amongst other things that loan balances could then be reported to credit reference agencies (which is another thing Martin's mythbuster makes a big point about - the fact these loans can't be reported to CRAs) and debt collectors and all the other things Martin claims in his mythbusting makes these loans different to commercial loans. Is this really want you want? You can't say on the one hand they're different to commercial loans and then say they should be like commercial loans!



NOTE TO MARTIN: Is it not worth illustrating this loan contract more prominently in your mythbusting guide to student loans to draw future students' attention to the fact that although the terms on this loan contract are fixed, one of them states the repayment terms are to be set out in Regulations and the Regulations are certainly not fixed which is where retrospective changes can come in. But for heaven's sake stop saying the threshold freeze is a retrospective change to the terms. It's not! Although it is a retrospective change to what the previous Government intended on doing (i.e. they intended to change the Regulations, and have instead left them unchanged), it's not a change to the repayment terms that were in place since 2012 which simply set the threshold to be £21,000.