I set out below why I believe the current system of student loans is fundamentally flawed:.
1. First ,there is a tacit assumption built into the student loans that the government will need to write off 46% of all new lending on the grounds that it will never get its money back. Some students will reach the end of the thirty year shelf-life for student loans having repaid some or none of the amount borrowed. This gets written off. There is also an inbuilt assumption of interest rate subsidy which is not actually born out by the facts. The current costing model, nonetheless, assumes a 46% write-off
2. Second, there is what can only be described as profiteering on interest rates. The charges levelled on students are a formula based on retail price index plus a premium. This is supposed to cover the cost of Government borrowing the money to lend to students. The current costing model used by the government is RPI+2.2%. OBR found that government was actually paying less interest than this and was therefore profiting each year on interest collected. This is will always be a problem when you rely on formulae that re disconnected removed from the source of capital and the interest rate that came with it.
3. Third, modelling the future cashflows associated with student loans is hampered by the need to make assumptions about future earnings of those students over their careers. There is no sure way of testing the accuracy of those assumptions given that student loans have not been round that long. One area of concern that leaps of the page is the level of write-off that the Government expects to have to make. This has risen from 32% in 2011 to 46% in 2014 and, as the OBR puts it,
“These changes mainly reflect updated assessments of the economic outlook, in particular lower earnings growth(linked with much weaker than expected growth in productivity)”
I take that to mean that the model has priced in an expectation that an increasing number of graduates will never muster above the lower earnings quintile in the economy and will not therefore be in a position to repay their loans. There may be other interpretations to the above statement but that’s what I inferred from it.
4. Fourth, I would like someone to explain to me why British taxpayers are subsidising undergraduate studies for EU nationals given all of the above? Apparently, EU students are fully entitled to the same student loans as British nationals. Surely, therefore, we are subsidising this loan to the extent of the 46% write off that all new lending attracts. I would also query whether the Student loan Company has the wherewithal to collect repayments over thirty years on EU. This situation is even more perverse when the position of Scotland is considered. EU nationals registered for degree courses in Scotland will not pay anything and so are entirely subsidised by our Treasury. How’s this come about?