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In the UK, if you haven't paid back student loans within 30 years they are written off. Why would the government institute such a policy? As far as I can see, it results in most people not paying back a large proportion of their loans, but it's not clear to me that this incentive is obvious to most people, which makes me think that wasn't the purpose.

I am interested in both the reasons stated by the government who brought the rules in, as well as why these policies exist in the first place.

CDJB
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Thomas Richardson
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    Pedantic point: It's not 30 years, it's 30 years after your first payment. – J. Mini May 12 '20 at 00:46
  • It used to be the sooner of 30 years or you reaching 65 years old (I think). Has that changed? – Darren May 12 '20 at 07:35
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    @Darren it depends - new loans (Plan 2) are written off 30 years after the first April you are due to start payments. Plan 1 loans taken out before 2006 are written off at the age of 65. See here for full details. – CDJB May 12 '20 at 07:38
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    Extra pedantic, this is for England only. Scotland is free and NI still has 25 years period. – mega_creamery May 12 '20 at 12:39
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    @RedSonja middle earning graduates pay instalments for 30 years. High earners pay it off faster, accruing less interest – Caleth May 13 '20 at 13:34
  • @ItalianPhilosophers4Monica "if it ain't paid back after 30 yrs, it won't be." - Traditional debts persist after death and can be collected from the deceased's estate. It's quite conceivable (even common) that someone could have remained below the income threshold for repayment but still leave something behind when they die. – JBentley May 13 '20 at 14:32
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    @JBentley yes, but it's not meant to be a normal loan. it's important for social mobility, and a country's economy, that people can follow higher education. but you don't want to subsidize the rich. so you package a loan that only really gets paid back (automatically) if the investment paid off and you don't overburden low earners for whom it never did. a 30yr delay avoids most of the moral risk of people shirking the debt on purpose. not making it free means people mind that money and dont do BasketWeaving 101. good system, all in all, esp considering median grad lifetime earning increase – Italian Philosophers 4 Monica May 13 '20 at 15:15

4 Answers4

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Writing the debts off after 30 years is a way of linking repayments to earnings, as well as negating the risk of the loan to the student.

Loan repayments are usually made automatically as part of tax on your income, and no payments are required unless your income is over a certain level, currently around £26,500 - there is no legal way to avoid paying back the loan if you earn over the income threshold. The current arrangements came into force under the Coalition Government in 2012, as a result of the Browne Report in 2010, an independent review of tuition fees undertaken by Lord Browne. Before this change, the loans were written off after 25 years, and were introduced by the Conservatives in 1990.

Browne's report does, however, give us some hint as to why the 25/30 year clause exists:

As we will show under the section on paying back the costs of learning, the loans that students take on for meeting these costs are risk free. No one has to pay back the loan unless they are earning above £21,000 per year. Payments are linked to income. Graduates on low incomes do not pay interest. Any loan amount that is not paid off after 30 years is written off by Government.

The financial risk on the loans is therefore borne by Government, not by the student. This is exactly what the principles that we have set out recommend, but the consequence is that institutions bear no risk either. They could set unrealistic fees, out of proportion to the employment returns from the courses they provide, and yet still receive all of the fee income.

So part of the rationale is that the Govermnent does not want the fear of a loan to put students off of going to university - they will have the assurance that the loan is 'risk-free', as the cost of the loan is borne by the Government should the student fail to pay it off. In addition, no collateral is needed to secure the loan.

This Working Paper from the OBR gives us more insight into this policy decision:

The design features of student loans in the UK that differentiate them from conventional loans reflect the fact that students lack the collateral necessary to take out conventional loans and will know better than lenders whether they are likely to embark on a higher or lower earning career. This implies levels of risk for both borrowers and lenders that would lead to lower take-up of higher education than successive governments have deemed desirable. To address this market failure, student loans need to be large enough to allow recipients to smooth their consumption over their student and graduate years, and also – for that to be effective – to offer an element of insurance against low incomes after graduation.

As a consequence, student loans involve a significant subsidy element. The loans carry an interest rate in excess of many commercial loans, but repayments are contingent on the borrowers’ income rather than how much they borrowed. And it is the policy intention that a significant proportion of the money lent out and interest charged on it will be written off rather than repaid. This can be for a number of reasons, most notably that a student’s earnings may remain below the earnings threshold for the 30 years after they graduate, or they may rise above it too infrequently or by too small an amount to repay both their principal and the interest on it before the loan matures. Other potential reasons include a borrower dying or becoming permanently unfit for work and receiving a disability-related benefit. Only 30 per cent of English Plan 2 full-time higher education entrants in academic year 2017-18 are expected to repay their loan in full.

So according to the OBR, the policy intention from the outset was that a significant amount of loans would not be paid off. Nevertheless, the 25/30 year rule was included, firstly, to ensure that any repayments were linked to earnings - to ensure value for money and to prevent a university education only being economically viable as a pathway into well-paid jobs, secondly, to counterbalance the high interest rates compared to traditional loans, and thirdly, to pass loan risk onto the Government rather than the individual student, allowing individuals with zero collateral which would preclude them from taking out traditional loans to take advantage of the scheme.

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CDJB
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    The https://www.gov.uk/repaying-your-student-loan/what-you-pay website does not reflect the zero interest for low income graduates or zero income undergrads. And it is probably worth noting the interest rate is significantly higher than a commercial loan. While UK gov obviously is accepting some risk on default, part of the risk is borne by other students in the form of higher rates of interest. – Jontia May 11 '20 at 18:57
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    @Jontia well yes, the Browne report was just a recommendation, it didn't get implemented to the letter. The risk part of that quote relates to the write-off clause, which was implemented - you can set whatever interest rate you want, but as long as it's going to be written off eventually, the risk to the SLC remains near-zero, as the Government is effectively guaranteeing it. I do note that the interest is far higher than traditional loans in the second point in the last paragraph. – CDJB May 11 '20 at 19:03
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    @Jontia I should also note that while the loans of students on incomes lower than the £26.5k threshold do accrue interest, this is equivalent to RPI, so in real terms the loan amount remains roughly the same. – CDJB May 11 '20 at 19:20
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    Comments deleted. This is not a debate platform. Comments should be used to suggest improvements to the question, not to side-discussions. For more information on how comments should and should not be used on this website, please review the help center article about the commenting privilege. – Philipp May 14 '20 at 18:49
  • What happens if you move outside the UK? How does the government keep track of your income? – JonathanReez May 17 '20 at 06:26
  • @JamesK This is incorrect, see here for details about repaying while abroad. You don't repay through PAYE, obviously, but you are still legally obliged to repay your loan. If you don't provide details to the SLC then your loan accrues the maximum interest rate until you do, and if you try to avoid payments then you can be liable for the full loan amount. – CDJB May 17 '20 at 21:17
  • Thank you for the detailed response, and this answers partially answers my question of why the government introduced it, but the government's reason actually seems irrelevant to the 30 year rule. Considering you don't pay it back if you don't earn much, that seems sufficient on it's own to assure students they'll never be left poor because if their income dips too low they stop paying back the loan. – Thomas Richardson May 29 '20 at 11:25
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When student loans were first set up in the 90s, they were only to cover the cost of living (food, accommodation, clothes, etc.). At that point tuition was still free, and there was still some grant funding in place too. Students like myself graduated with £10k of loans or less. The government envisaged that some students would fail to pay it off, but they would be a minority, and the amount of loan per student was relatively low.

Then tuition fees were added. Now the amount of loans became high, but the government still thought that (a) only expensive courses in top-flight universities would be charged the full amount, and (b) that those courses would still lead to higher pay. What they failed to account for was the cynical manipulation of students by universities.

First of all, every university immediately charged the maximum fees for every course. The government had explicitly said that this should not happen, but they found (as they'd been warned) that mere guidelines are worthless.

And secondly, every university immediately devalued its courses. The number of places for courses was massively increased, and the number of courses available was increased too. One effect of this was that many people started university who simply were unable to keep up, so lost whatever fees they had paid when they failed in the first or second year. And the other effect was that whilst before there were generally suitable jobs available for graduates, now there were not nearly enough jobs for the number of graduates. In the 1980s less than 20% of people went to university; now it is at least 32% of 18-year-olds, and over half of young people in total. In the meantime the standard of tuition has been reduced, as demonstrated by the number of Firsts now awarded; although this is merely a continuation of the reduction in quality of school-level teaching and grading.

The result is that the university system is now designed purely to extract money from students, loaned to them by the government on terms which the majority will never be able to repay, for education which in the majority of cases does not prepare them for a career or increase their earning potential. It is not designed to educate students well, only to squeeze them well for money.

My personal favourite example is my hobby, music. The magazine Sound On Sound estimated that there were approximately 20 roles available per year in recording studios; whilst the combined output of all universities in the UK was thousands of music technology graduates per year. Of course the vast majority found on graduating that their degree was worthless after graduation.

Universities were not required to link their courses to the post-education success of their students though. For that matter, they still aren't. So long as they can continue to con students into paying, they will continue. It's notable that all universities strongly opposed any form of league tables on student outcomes or student satisfaction rates.

And so we are where we are today. Universities continue to fleece students, and the government is having to make provision for a bill which will come due eventually.

It is worth noting that this applies to universities in England and Wales. Tuition fees in Scotland have remained free for Scottish and European Union students. In Scotland, only 23% of 18-year-olds enter higher education. I can't readily trace outcomes for Scottish students, but it does seem clear that the same "grade inflation" from England has not taken place in Scotland. Without a basically-infinite supply of tuition fee money conned out of students, Scottish universities have to operate within budgets set by government, meaning that student numbers have to be lower. By making this more selective, and by ensuring all students have access to education regardless of background, Scotland has largely avoided the mistakes of the English system.

CDJB
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Graham
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    Having ~50% of young people attend university was a policy objective of the government that brought in fees. It's an intended consequence that so many people are attending university. – Caleth May 12 '20 at 13:18
  • @Caleth But only with the intention that there would be related jobs at the end of it. Although there is a view that putting young people into university artificially depresses the unemployment statistics to meet self-imposed government targets on those statistics, which certainly is a possibility. – Graham May 12 '20 at 13:55
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    While there are definitely problems inherent in the system, your example is a bad one. A lot of sound engineering jobs are freelance and only a small part of the work actually takes place in a studio anyway. Just as an example think about all the concerts and other live events that happen(ed, before corona) every given day. Each of them needs at least one person behind the mixing desk and nowadays most of those learned their trade in some music technology program. Those I know, who studied something in that direction, usually (used to) complain about too much work, not of trouble finding any. – mlk May 12 '20 at 14:54
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    @mlk That's kind of the point. As an ex spare-time sound engineer myself, music technology tuition is majorly studio-based and does not prepare its students well for live sound. And there still are way more students than places - consider that the UK currently has 94 universities offering 340 music technology courses. If we take a guess at 20 students per course (a reasonable average), that's 6000 new graduates a year. There really aren't 6000 new jobs created a year, not even 600. – Graham May 12 '20 at 16:16
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    the music example is a red herring. while it might be cynical of universities to provide courses that are ultimately likely to be of limited benefits to its customers, those same customers do not have to abdicate common sense in making their purchases. this is a pattern that occurs in many other countries and re. many, many different courses. in any case, that sits on the university vs students spectrum of things and does not explain the government's motivation in forgiving loans – Italian Philosophers 4 Monica May 12 '20 at 16:36
  • The last part about Scottish universities is not accurate- tuition fees are only free for Scottish students. This has the benefit of encouraging Scottish students to attend universities in Scotland, but the downside of meaning that a cap has to be placed on the number of free places available, so some Scots miss out because of the lack of available free spaces (Source: BBC). However, the number of overall spaces is not affected - Scottish universities (esp. Edinburgh & St Andrews) raise significant amounts from RoUK and international students. – CDJB May 12 '20 at 22:51
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    Not once does this attempt to answer the question at all. It is a rant against the system that exists, and regardless of how accurate or otherwise, does not belong here. – Nij May 13 '20 at 01:39
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    @Graham "with the intention that there would be related jobs at the end of it" No, I remember that was not the case. It was Tony Blair, and he was promising the "university experience" and implying that this would push millions of people automatically into the upper-middle class social group. I don''t suppose he believed it would really happen, and it didn't. A cynical, devious little man. – RedSonja May 13 '20 at 05:20
  • @Nij "as well as why these policies exist in the first place" if you missed that part of the question. – Graham May 13 '20 at 10:45
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    Not once does this answer address the reason for this policy either. It just bemoans the (actual or perceived or invented) failings and goes on to compare the current situations of various courses and countries. It doesn't answer the question in any way at all. – Nij May 13 '20 at 11:21
  • @Nij I believe it does, otherwise I wouldn't have written it. At least 16 other people seem to think it does too. YMMV of course. – Graham May 13 '20 at 11:31
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    You should well know already that votes on HNQ and on Politics SE are frequently a case of conformation with the voters' personal opinion, not relevance or accuracy, and that upvotes are both free and available to anybody, while downvotes are expensive and only given to a smaller group. For an example of what actually does answer the question, quoting sources (much from the horse's mouth no less), without irrelevant political commentary, look at the one with net +44. – Nij May 13 '20 at 11:46
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    "designed purely to extract money from students" and "the majority will never be able to repay" are directly contradictory. If a student does not repay the loan, then no money has been extracted from them. Also, this post suffers from the money tree fallacy. University tuition fees are paid for one way or another: if it isn't by loan repayment, then it's by taxes. There is no such thing as "free" tuition fees. All the loan system does is shift the payment burden to the person actually receiving the education. – JBentley May 13 '20 at 14:37
  • It's a piece of paper that says not only are you willing to wade through some serious bs, you are capable of doing so with the sole purpose of acquiring other, smaller pieces of paper that if you're lucky will someday amount to a higher value than what the original one cost. If not, thanks for playing. - Why? Because national security demands that we not all be idiots. – Mazura May 14 '20 at 09:34
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So that people starting university don't have to worry about how they are going to pay for it for the rest of their lives.

There are 2 normal ways to fund Universities:

  • Students pay for them with fees
  • The government pays for them with taxes

The problem with the first is that only rich people can afford the fees.

The problem with the second is that the people who benefit the most from university (who, on average, come from better-off backgrounds and end up richer than the rest of the population) pay no more relatively than people who don't go to university for whatever reason. So in both cases, the poor lose out to the rich.

The student loan system in the UK means that anyone can afford to go to university - the loan is automatic and guaranteed, and you don't need to worry about crippling debt in later life because you only have to make payments if you make more than the threshold each year, and only by a percentage of your income above the threshold.

The threshold is set at a rate that is more than enough to generally live on - no one is going to be made poor having to pay off their loans. So if you go to university, but still end up getting an average paying job, it costs you nothing. If you go to university and end up very rich, you pay in full.

Abolishing tuition fees would be using the taxes paid in by everyone to subsidise the few that go to university, and on average end up richer.

Personally I would increase the upfront fees and lower the interest rate to a commercial rate so that rich people can't avoid the interest by paying off early, but people seem to be scared that [more fees] = [more loan] = [worse]. I'd have no problem taking on a loan of hundreds of billions of pounds if I knew I didn't have to pay it off in full unless I'd somehow become easily able to.

I might also make universities buy insurance against some of the risk that students never pay their loans in full so that it becomes more expensive for them to run courses that don't lead to well-paying jobs.

CDJB
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rjmunro
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    +1, but one remark/caution about courses leading to well-paying jobs. When I started university, as an electrical engineer, the senior class had a large cohort of chemical engineers. They'd all gone in 4 yrs earlier because there was a scarcity of chem. engs. Guess what? 4 yrs later, after everyone and his dog had the same idea, there was a glut of chem engs and the percentage of seniors with a job offer was around 10-20%, for a quite prestigious engineering college which normally had good placement rates. No excuse for starting as a Psych major w great expectation, but... – Italian Philosophers 4 Monica May 12 '20 at 17:30
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    @ItalianPhilosophers4Monica I agree, that's why I said they should "buy insurance". The insurance industry is very good at figuring out risk and taking account of things that could happen in the long term. If they see thousands trying to take similar courses, they are going to increase the premium they charge for that course (or devalue the loans attached to the course). – rjmunro May 12 '20 at 22:06
  • If a tax system is fair, a high income earner should pay more tax. If the degree enabled the high income, this pays for the degree as would a loan repayment. If your income exceeds certain sensible limits your taxes go to the benefit of society as you subsidise others. At the same time, a low income earner (irrespective of degree) would pay less tax and would not pay off the loan anyway. Thus there is no problem with funding education through tax. The advantage of funding education through tax is that it removes the financial worries that the loan brings, even with the special conditions. – DetlevCM May 14 '20 at 16:01

  • The problem with the second is that the people who benefit the most from university …pay no more relatively than people who don't

    A reasonably progressive tax system offsets that, because it is rare for anyone to be a net taxpayer without some sort of subsidised start to their career, be it a degree, a sports or arts grant (and there's too few of the latter), trade training, or the like. The problem is that the subsidies are not linked to industrial strategy or public benefit, and that the different forms of career-establishment funding are completely inconsistent.

     – user1567459 May 15 '20 at 14:06
  • This does not answer my question, because it does address why the loan is forgiven in 30 years. I feel like all the advantages and purposes of the system you describe are met with a system that never writes off loans. – Thomas Richardson May 29 '20 at 11:18
  • @ThomasRichardson If the loans are never written off, people are afraid to start a course because they will be saddled with debt for the rest of their lives, even if the course they took ends up not leading as high a paying job as they were expecting when they took it. – rjmunro Jul 10 '20 at 11:29
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You need to understand the context of the introduction: prior to the late 1980s students got a government grant for living expenses, which was means tested based on their parents' income. Government wanted to increase the number of people going to university whilst reducing expenditure (this was the Thatcher/Reagan era).

There was a strong feeling that a more conventional loan scheme would disincentivize the children of blue collar workers. Even today, there are people who take (say) law degrees late in life so that they can do pro bono charity work.

Most of this is personal recollection (I was a student at the time) but here is the best supporting quote I can find from Hansard. Apologies for reproducing the rather dated views on gender roles - "the past is a foreign country".

Mr. [Kenneth] Baker ... The obligation to repay the loan should spend on the income of the graduate. That is to say that a student who has a low-paid job on graduation should have his obligation to repay the loan suspended until he reaches a certain pay level. ... That is particularly important for women graduates who get married and have no source of income.

Secondly, the loan will be written off and cancelled either 25 years after it has been incurred or if the person has reached 50.

Hansard report of the debate

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richardb
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