WIREDGOV

Policy Exchange has published a Research Note by Nicholas Barr, Professor of Public Economics at the London School of Economics, which outlines a new way to run student loans that will save taxpayers’ money while making sure that everyone equipped with enough talent and ambition can go to university.

The proposals would see interest repayments on loans match the actual cost of borrowing by the Government.

Other suggestions include:
* Low earners would still be protected thanks to an exemption on repayments for earning under a set figure, currently £15,000 pa.

* Those on low lifetime earnings would still have their loans written off after 25 years. There would also be subsidies to prevent the “real” level of individual debt rising for those unable to make repayments.

* As well as a more realistic interest rate, extra cash would also come for an extension of up to a year in repayments – at 9% of income - for those managing to repay their loans quickly.

* This extra set of repayments would effectively amount to the so-called “graduate contribution” but without the disadvantages of a full graduate tax.

* To avoid unduly punishing high earners, the extra cash could be limited to a maximum of 120% of the original loan in present value terms.

* The entire system could be financially self-contained, with higher earners effectively subsidising lower earners but eliminating the current loan subsidy of around £1,000 per student.

* Echoing work by Professor Neil Shephard, the note suggests that loans for fees and for living expenses could be split, with a higher threshold for the fees loans. That would mean no one earning less than £30,000 would ever be asked to repay the cost of tuition.

Professor Barr writes:
“Low earners are entirely unaffected: the higher interest rate has no impact on monthly repayments, protecting people with low monthly earnings; and people with low lifetime earnings qualify for forgiveness after 25 years.

“The extra years are at the end of the repayment period, when a person’s earnings are typically considerably higher than earlier in his/her career. 

“Thus the extra income to the loan system is substantial. Higher earners pay more in additional repayments than lower earners; and the lowest earners pay no extra because of the 25 year rule.”

Policy Exchange director Neil O’Brien added:
“At the moment the loans system runs at a loss. One way this could be fixed is by asking graduates to carry on paying 9% of their income after they have paid off their original loan, for up to three years or a maximum total of 120% of the cost of their loans.

“This would increase the amount we pay for university, but the structure Professor Barr outlines would also mean redistributing some income from those who do well following their university career to who don't – avoiding the problems of a full-blown graduate tax while keeping the advantages of fees.

“The most important advantage of fees is that they help create a proper market between different courses and institutions, rewarding success and penalising under-performers.”

ENDS

A full copy of the research note can be downloaded here:

www.policyexchange.org.uk/assets/Student_loans.pdf

Nicholas Barr is Professor of Public Economics at the London School of Economics and the author of numerous books and articles including Financing Higher Education: Answers from the UK (with Iain Crawford), and Reforming Pensions: Principles and Policy Choices (with Peter Diamond).

He spent two periods at the World Bank working on the design of income transfers in Central and Eastern Europe and Russia and has been a Visiting Scholar at the Fiscal Affairs Department at the International Monetary Fund.

Since the late 1980s, he has been active in debates about pension reform and higher education finance, advising a number of governments.

For further information, please contact Gabriel Milland on 07860 552 621 or gabriel.milland@policyexchange.org.uk