Martin Lewis, the founder of the MoneySavingExpert, is on the warpath. He is furious that the student loan repayment threshold is being fixed at £21,000. This means the terms on which student loans were taken out by today’s students have been retrospectively changed: previously it was said the threshold would increase each year.
- When the freeze was announced last year, Martin Lewis said it was: ‘a disgraceful move and a breach of trust by the Government that betrays a generation of students.
- He then hired lawyers to consider a judicial review and appealed directly to David Cameron for a change of heart.
- He also supported the recent debate in Westminster Hall (an offshoot of Parliament) on the issue – indeed, the Labour MP Wes Streeting was ticked off for noting his presence.
No one likes it when the cost of something goes up, especially when it goes up after agreeing to purchase it. The Government’s consultation on the freeze met strong opposition – there were 410 negative responses and 26 positive ones. It is clearly the job of a website providing financial information to highlight such things, especially when the website is headed up by someone who helped the old Coalition Government publicise how the post-2012 student loans were meant to work. I am not comfortable about the change either, even though I think the abolition of maintenance grants should attract more fire.
Responses to the Government’s consultation on freezing the £21,000 student loan repayment threshold
But there are also strong reasons why Martin Lewis and the other opponents of the change are on less secure ground than has been implied – and not just because the Student Loan Agreement which new students sign allows for such changes.
- First, the MoneySavingExpert says the Government has broken a promise. But the annual increases to the repayment threshold that were promised were the hobbyhorse of the minor party in the Coalition Government in office between 2010 and 2015. Governments cannot bind their successors and that Government left office in May 2015. As the new Government was made up of only the major party from that Coalition, which had never liked the freeze policy, it was always likely to reverse it and was breaking no constitutional niceties in doing so because it was a different entity to the one that had made the commitment.
- Secondly, the increases to the threshold were never more than a verbal commitment: they were not agreed by Parliament even though they had to be to take effect. It was therefore naïve to give them the same sort of weight as things already passed into law – or to assume a new Government that did not like the policy would devote parliamentary time to implementing it. I am no lawyer but starting a legal process against a policy only ever spoken about rather than acted upon seems an odd thing to do (and, indeed, the judicial review went nowhere).
- Thirdly, Martin Lewis has been saying for years that ‘a student loan isn’t really a debt like any other, in fact it acts far more like a tax than a loan.’ Quite right. But taxes change each year. If a student loan is a capped graduate tax, as many people claim, then it is unwise to assume that all its features will be fixed for evermore.
- Fourthly, if (and it is a big if, I admit) the current student loan scheme is deemed to be unaffordable, then it does not make sense to load all the extra costs onto those who have yet to go to university because those who have already entered cannot be affected. Martin Lewis has claimed that the threshold freeze will put people off going to higher education. But if more savings have to be delivered from within the system, they can only come from past, present or future students. Hitting future students even harder than past and present ones could be more likely to affect future demand than sharing the pain.
- Fifthly, we are told the ‘Retrospective changes haven’t happened before’. This is not true (and explains the title of this blog). They have happened before both in the UK and abroad. For example, when the UK repayment threshold rose from £10,000 to £15,000 during the 2000s, it affected all borrowers with income-contingent loans. When New Zealand abolished a real rate of interest on student loans in the mid-2000s, that too affected past and current as well as future borrowers.
Finally, even if you accept that retrospective changes have occurred before, you might well point out that they have tended to help students rather than hamper them. Increasing the repayment threshold (as in the UK) and abolishing a real rate of interest (as in New Zealand) eased the financial position of graduates rather than loading costs on them – the costs were loaded onto taxpayers instead.
But, as we show in a new paper we are publishing today, there are precedents for harsher terms being imposed retrospectively too. In New Zealand the rate of repayment above the threshold rose from 10 per cent of earnings to 12 per cent in 2012. We are not recommending the UK follows but the result, as with the freeze in the repayment terms, was not all bad as it meant debts are now extinguished more quickly, which some evidence suggests many students prefer.