Universities UK response to BIS consultation on freezing repayment threshold

Transcription

1 Universities UK response to BIS consultation on freezing repayment threshold October 2015 Q1. Please could you provide your views, stating reasons and providing supporting evidence, on; a) Keeping the threshold of 21,000 the same for all post 2012 borrowers until April 2021 Universities UK (UUK) believes that higher education should be available to all those who are able to benefit from it regardless of background. Therefore we strongly support the lifting of the cap on student places which allows institutions the flexibility to grow provision and innovate. We also recognise the need to ensure the financial sustainability of the student funding system. Recent changes to the student funding system which include the removal of student number controls in , the replacement of maintenance grants with loans and increase in the availability of maintenance support to students from have the potential to lead to a greater increase in government outlay on loans than was envisaged when current repayment parameters were set in Other potential reforms including inflationary increases in the fee cap for those institutions that can demonstrate excellent teaching and the provision of loans for postgraduate students may also result in increased loan outlay and associated long term costs to government. The independent student funding panel, established by Universities UK to assess the current student funding system and consider options for reform, felt that if there was a need to reduce long term costs in order to improve the sustainability of the funding system the freezing of repayment thresholds for a specified period of time was the most likely to achieve the optimal balance of outcomes for students, graduates, government and universities including: Retaining the strongly progressive features of the current system for graduates. Reducing the long term cost to government, including reduced future borrowing requirements and contributing to a reduction in national debt. Of the options considered, it was the most straightforward to communicate to students, graduates and other stakeholders. Universities UK believes that the freezing of repayment thresholds is preferable to alternative measures to reduce long-term costs of the student funding system, such as reducing student places or the level of funding per student, both of which would lead to a negative impact for students, the government and universities.

2 The specific advantages of the governments preferred option, which involves keeping the threshold of 21,000 the same for all post-2012 borrowers until April 2021, are: It contributes to government fiscal targets. As noted in the government s consultation document this option delivers an immediate and long-term increase in loan repayments, and in contrast to option 2, would contribute to the Government s fiscal objective of bringing down national debt during the current Parliament. It is more straightforward to administrate and results in a less complicated student loans system. In contrast to option 2, where repayment rates are frozen for new borrowers only, this option would be more straightforward to implement and requires no administrative changes in the allocation or collection of loans, reducing the complexity of the student funding system for students, graduates, universities and employers. In its assessment of the current student funding system and evidence collection from students, the independent student funding panel found that prospective and current student understanding of the funding system needs to be improved, and the description and communication of the system needs to be clarified and simplified 1. This would be more difficult under a system where repayment terms differed considerably across graduate and student cohorts. It reduces the long term cost of the student funding system for government. As with option 2, but to a greater extent due to its application to a larger student cohort, option 1 reduces the long term cost of the student funding system to government. Both options 1 and 2 reduce these costs in a way that broadly maintains an appropriate balance in the contribution to funding of higher education between the government and graduates. The impact of making no change in repayment thresholds is considered in more detail in our response to question 1 c. Retains the progressive nature of the current student funding system. Both options 1 and 2 maintain the progressive nature of repayments, as graduates with the lowest graduate lifetime earnings are still expected to repay less than those in higher earning groups. As noted by the IFS, freezing the repayment threshold for five years will bring down its value close to that of the pre-2012 threshold of 15,000 in real terms. Current forecasts for inflation over the period to suggest that under option 1 graduates who begin repayment in 2016 are likely to pay back less per month when compared to those borrowers under the pre-2012 funding system. For example a graduate with expected annual average lifetime earnings of 21,500 ( prices), who would not expect to fully repay their loan under both systems 3, would expect to pay back 45 a year ( prices) under the governments proposed option compared to 156 a year under the pre-2012 system. Some students will be more likely to repay loans. Both options 1 and 2 do not lead to an increase in graduate debt, but will result in more graduates paying off their loans. Those graduates who would have eventually paid off their loans under the current system would do 1 Independent student funding panel (2015) An analysis of the design, impact and options for reform of the student fees and loans system in England 2 OBR (2015) Economic and fiscal outlook 3 IFS (2015) Payback time? Student debt and loan repayments: what will the 2012 reforms mean for graduates?

3 so more quickly and incur less interest. The IFS has estimated that under a similar option whereby the lower and upper repayment thresholds are frozen in nominal terms, there would be an increase in the proportion of graduates who pay off their loans in full from 28% to 38% 4. Research by University Alliance 5 suggests that, by a margin of two to one, students and parents would rather a student loan was paid back quicker, with a higher monthly repayment, than longer with smaller repayments. Surveys and focus groups conducted as part of this work showed that parents were more concerned about the size of their child s student loan (64%) rather than the terms of repayment (29%). Universities UK also recognise that there are a number of disadvantages related to the governments preferred option. These include: Repayments will increase for current borrowers. As noted in the consultation document option 1 would result in an increase in repayments for the cohort of students that are expected to start repayment in April For an average borrower earning 27,000 per year this would result in additional repayments of 6 a week in 2021 in nominal terms or 730 across the five years that the threshold is frozen, than if the threshold was raised in line with earnings growth as previously indicated by government. Figures in the consultation document also suggest that the distributional impact on repayments differs according to expected lifetime earnings of borrowers. Middle to lower earning graduates are expected to see larger proportional increase in repayments over the life of their loan, compared to smaller increases or decreases for higher earners who are more likely to repay their loans earlier as a result of the change. However, as noted earlier, analysis by the IFS shows that freezing the threshold still retains the progressive nature of the repayment system, with the lowest earning graduates still expected to repay significantly less than those with higher earnings 6. As noted above monthly repayments will also remain affordable, particularly in comparison to the pre 2012 system. Change may impact on confidence in the student loan system. Option 1 results in a change in previously indicated plans for uprating of the repayment threshold. In 2010 the Secretary of State at the time committed to increasing the 21,000 repayment threshold by average earnings from onwards, with the initial plan to do so every five years subsequently changed to an annual uplift. Despite this publicly stated commitment, the terms and conditions that students sign up to as part of their contract with the Student Loans Company when taking out loans state that You must agree to repay your loan in line with the regulations that apply at the time the 4 IFS (2015) Estimating the Cost to Government of Providing Undergraduate and Postgraduate Education 5 University Alliance (2014) H.E.L.P. UK: A new higher education loan programme adding to the debate on funding. 6 IFS (2015) Analysis of the higher education funding reforms announced in the Summer budget 2015

4 repayments are due and as they are amended. The regulations may be replaced by later regulations 7. In feedback received from UUK member institutions concern was expressed regarding the impact that retrospective changes to repayment terms may have on student confidence in the loan system. It was felt that clearer communication was needed regarding how the funding system worked, and that the government needed to be more upfront and transparent regarding the potential for repayment parameters to vary in the future (as outlined in the terms and conditions of the loan), particularly in response to fiscal, social, economic or policy changes, and to ensure the financial sustainability of the higher education funding system. b) For borrowers starting in September 2016 (and subsequent intakes), from April 2020 keeping the threshold at the same level as existing borrowers for a further five years Many of the advantages and disadvantages related to freezing the repayment threshold are applicable, in varying degrees, to both options 1 and 2. Specific advantages associated with Option 2, freezing the threshold for new borrowers only, are: It allows time to inform prospective students of repayment terms, in a clear and transparent manner. One of the disadvantages of option 1 is that it involves a change to the government s previously indicated plan to uprate the repayment threshold by average earnings from In its assessment of the student funding system, the independent student funding panel found that student understanding of the repayment system needed to be improved. In feedback from UUK member institutions, it was felt that the government needed to be clearer and more transparent regarding the financial contribution that graduates will need to make under the current funding system, and how this relates to ensuring that the system remains sustainable in the long term. Repayments will increase for a smaller number of borrowers. Compared to option 1, applying a threshold freeze to new borrowers only would lead to increased repayments for a smaller number of borrowers. The number of borrowers becoming liable for repayment in 2020, subject to their earnings, is estimated to be around 350,000 per year rising to 400,000 per year within a few years, and is expected to be at a similar level for the following years. This compares to Option 1 where an estimated 0.9 million borrowers would be affected in 2017, rising to 2.1 million in Specific disadvantages associated with option 2 include: It does not contribute to government s medium term fiscal targets. Although this option would also deliver a reduction in government debt in the medium to long term, as it defers the freeze to those who begin repayments in April 2020, it will not contribute to the government s fiscal target of bringing down debt during the current Parliament. It makes a smaller contribution to reducing the long-term costs to government associated with loans. As this option is only applicable to new borrowers, its contribution to 7 _digitalassets/@dg/@en/@educ/documents/digitalasset/dg_ pdf

5 reducing long term costs of the student funding system to government is less than option 1. The government estimates that freezing repayment thresholds for existing students will result in 3.2bn of additional repayments (net present value) which would not be available under option 2. It constitutes a new student loan plan. Option 2 would require the Student Loans Company to introduce additional borrower plan types to reflect the differing repayment terms compared to current students, resulting in increased operational demands and administrative costs. Having multiple repayment parameters across different loan plans also increases the complexity of the student loan system for students, graduates, universities and employers, and may lead to increased confusion in understanding repayments due and total outstanding balances. c) Allowing the threshold to rise with earnings Although this option involves no change to initial government plans to uprate the repayment threshold by average earnings, and also maintains the highly progressive nature of the current student funding system, Universities UK believes it leads to a number of disadvantages in relation to the long term sustainability of the student funding system, particularly as the commitment was made in a different fiscal, economic and policy environment. When the original commitment to uprate fees by earnings was made in late 2010, the proposed 21,000 threshold represented about 75 per cent of projected average earnings of 28,000 in Since then, average earnings have not grown to the same degree as was forecast at the time and are now expected to be in the region of 26,000, which means that the 21,000 threshold has in effect risen to about 80 per cent of projected earnings. The repayment threshold would have to be about 19,500 to have the same value relative to average earnings as was expected in 2010 when it was set 8. Following the original announcement in 2010, there have also been a number of changes which are likely to result in increased outlay on loans and associated long term costs to government, including the removal of student number controls, the replacement of maintenance grants with loans and increase in the overall level of maintenance support to students and inflationary increases in fees for those institutions which can demonstrate excellent teaching. The Office for Budget Responsibility has estimated that the replacement of maintenance grants with loans and increase in available support to students will lead to an additional outlay on maintenance loans of 3 billion by The Policy Institute at King s (2015) Higher education: Who Pays? Who benefits? 9 OBR (2015) Economic and Fiscal Outlook: July 2015

6 The important role that repayment parameters, particularly the level of the repayment threshold, play in determining the long term costs of the student funding system has been noted by a number of commentators: In its assessment of the current student funding system the independent student funding panel felt that, if there was a need to reduce long-term costs to ensure the sustainability of the student funding system, the preferred option of the panel was the threshold freeze model where the lower and upper income thresholds for repayment are frozen in nominal terms for a period, meaning their real value declines with inflation. The repayment threshold has played an important role in recent increases in the estimated long term cost of the student funding system to government. Of the 18 percentage point increase in the RAB charge between 2010 and 2014 half was directly related to changes in policy and forecasts associated with the repayment threshold. 10 o 5 percentage points were due to the repayment threshold being higher relative to earnings than was expected and then being fixed at this level relative to earnings in the future o 4 percentage points were due to the change from initial plans to uprate the repayment threshold by average earnings every five years to uprating by earnings annually Professor Nick Barr has argued that the raising of the repayment threshold from 15,000 to 21,000, and indexing to earnings, has made the system more unsustainable in the long term, and at minimum the repayment threshold should be frozen 11. Universities UK supports a sustainable funding system that encourages entry to higher education for all students who have the qualifications and ability to succeed, provides stable and sustainable funding for teaching and learning in universities, and is affordable for students, graduates and government. Ensuring the sustainability of the funding system for these stakeholders will require some element of flexibility to the system to adapt to fiscal and economic changes (as experienced during and following the economic downturn of 2008), policy changes (for example as announced in the 2015 summer budget) and social changes. Q2. What risks and impacts do you think that holding the threshold at the same level for five years would have for; a) Current students / borrowers? As demonstrated in the consultation document and in analysis by the IFS and Sutton Trust, freezing the repayment threshold will lead to an increase in average repayments for current students. 10 The Policy Institute at King s (2015) Higher education: Who Pays? Who benefits? 11 The future of higher education: Supplementary written evidence by Professor Nicholas Barr (2010)

7 The consultation document notes that this will lead to an increase in repayments of 730 over the five years to In terms of affordability, it should be noted that even with the freezing of the threshold for five years, it is likely that current borrowers will still pay less per month compared to borrowers under the pre-2012 system. Borrowers under the pre-2012 system will have less overall debt due to the lower fee cap at the time, but for the 32 per cent of lowest earners that are expected to have some debt written off 12 repayments are likely to be higher compared to current borrowers, even if the threshold is frozen. For example a graduate with expected annual average lifetime earnings of 21,500, who would not fully repay their loan under both systems, would expect to pay back 45 a year in compared to 156 a year under the pre-2012 system. Freezing the repayment threshold would also result in current borrowers being more likely to repay their loans. The IFS has estimated that under a similar option whereby the repayment threshold is frozen in nominal terms, there would be an increase in the proportion of graduates who pay off their loans in full from 28 per cent to 38 per cent. Research by University Alliance 13, including surveys of students and parents, has shown that by a margin of almost two to one, undergraduates and parents would rather a student loan is paid back quicker, with higher monthly repayments, than longer, with smaller monthly repayments. Feedback from UUK member institutions has noted the potential risk that recent trends towards increasing costs to students and retrospective changes to repayment parameters may have on undermining student confidence in the loan scheme. It has been suggested that a greater understanding is needed of the potential impact this may have on current students and their perception of higher education as they graduate, begin their repayments and develop in their careers. b) Prospective students/ new borrowers? Holding repayment thresholds at the same level for five years will lead to an increase in repayments for prospective students compared to the current system. However there is no conclusive evidence that in isolation this is likely to be a significant deterrent to participation in higher education. Evidence has shown that the introduction of higher tuition fees has had a minimal impact on the decision of most groups, including those that are under-represented in higher education, to apply to university. Initial concerns that debt averseness would be a major barrier to HE progression have not yet been confirmed for the current student funding system. On its own, freezing the threshold does not lead to an increase in the overall debt that students face and involves an increase in repayments that may occur later in a student s working life. This suggests that how students view future payments will be an important 12 IFS (2015) Payback time? Student debt and loan repayments: what will the 2012 reforms mean for graduates? 13 University Alliance (2014) H.E.L.P. UK: A new higher education loan programme adding to the debate on funding.

8 factor affecting any change in participation resulting from freezing of the threshold. Relevant evidence includes: Evidence collected from students by the independent student funding panel through a survey and focus groups 14 found that a majority of current students particularly those who had researched the repayment system in detail were not overly concerned about the prospect of repaying loans. These students felt that the more immediate concern after graduation was repaying debt that they had accumulated during their time at university (for example, in the form of overdrafts or credit card debt). A study by the National Education Opportunities Network 15 suggests that costs are not a driving factor in prospective student decisions to enter higher education. Amongst prospective students, course content (49%), employability (36%) and university reputation (42%) were found to be more important in considering entry to higher education when compared to fee levels and other costs (12%). The same research also found that communicating the benefits of higher education played a particularly important role in a student s decision to enter higher education, particularly amongst those from disadvantaged backgrounds. Research into parent and student views of repayment levels suggests that there is a preference for larger repayments over smaller ones, which result in a longer time needed to pay back loans. On the specific issue of the repayment threshold students had mixed views on whether a lower ( 15,000) or higher ( 21,000) threshold for student loan repayments would be preferable with 44% in favour of each option. Parents on the other hand would rather their children began repayments at 15,000 (44%) rather than 21,000 (36%). 16 However, there is evidence to suggest that some groups may be more likely to be more averse to changes in repayments. One such group are mature learners particularly those that may be considering part-time study. Research conducted by BIS 17 suggests that prospective part-time students, who were concerned with the financial implications of study, were more likely to be debt averse. This was influenced to some extent by these learners tending to be older and therefore experiencing other financial commitments at the same time (e.g. mortgage, family). Research has also shown that understanding of the student funding system varies significantly. Prospective students from areas with the lowest level of participation in higher education and those claiming free school meals, tended to have a lower level of understanding of how the student funding system works 18. Reponses from UUK member institutions noted the importance of clear communication of any changes to these 14 Independent student funding panel (2015) An analysis of the design, impact and options for reform of the student fees and loans system in England 15 NEON (2015) Does Cost Matter? Students understanding of the higher education finance system and how cost affects their decisions 16 University Alliance (2014) H.E.L.P. UK: A new higher education loan programme adding to the debate on funding. 17 BIS (2015) Perceptions of part-time higher education 18 NEON (2015) Does Cost Matter? Students understanding of the higher education finance system and how cost affects their decisions

9 students as a key factor in avoiding the risk of any potential impact on participation due to a lack of understanding in how the system works. Despite the lack of conclusive evidence on the impact of increased repayments on student participation, feedback from a number of UUK member institutions noted that it is difficult to tell what impact the proposed reform would have in isolation due to the implementation of other changes to higher education funding which are due to occur over the same period, primarily the replacement of maintenance grants with loans, the increase in total maintenance support and the potential increase in fees for those institutions that can demonstrate excellent teaching. In its analysis of these changes the IFS 19 noted that in combination they will lead to an increase in repayments for prospective students, with an average graduate earning around 23,000 a year in their early 20s and 34,000 in their early 50s, seeing their annual repayments increase from 900 under the current system to 1,100. Over their working life the average graduate would expect to repay 33,000 compared to 27,000 under the current system. The IFS have also noted that: It is unclear what the impact on participation may be, particularly in combination with other changes announced in the summer budget. The increase in long term costs may be offset by availability of increased support during study. The combined impact is likely to depend on how forward looking individuals are and whether they discount the future highly, face serious credit constraints whilst studying or are reasonably certain to have low lifetime earnings (smaller impact of changes) Feedback received from UUK member institutions noted that the approach taken by the media and government in communicating the changes to higher education funding, including freezing of the repayment thresholds, will have a significant impact on how these changes are perceived by students. It was felt that clearer communication was needed regarding how the funding system worked, and that the government needed to be more upfront and transparent regarding the potential need to vary parameters of the repayment system in the future (as outlined in the terms and conditions of the loan). c) Employers of borrowers with loans? - Not answered d) The Student Loans Company (SLC) and HM Revenue and Customs (HMRC)? Of the two options for holding the threshold at the same level for five years, option 1 would have no impact on the SLC or HMRC as it represents a continuation of the current repayment plan. As Option 2 leads to a change in repayment parameters for a specific particular cohort of students, a new repayment plan would be required, resulting in direct operational and administrative implications for both organisations. 19 IFS (2015) Analysis of the higher education funding reforms announced in the summer budget 2015

10 e) Learning providers? Responses from UUK member institutions noted that, as holding the threshold for five years was likely to occur in combination with other changes to student funding, it was difficult to determine what the impact may be on recruitment. A number of institutions felt that as the combination of changes resulted in increased debt and repayments for students there may be a risk that recruitment of some groups may be affected, primarily those which may be more debt averse or less aware of how the student funding system works. This included prospective mature, part-time students with other financial and social commitments, and students from disadvantaged backgrounds. More broadly, institutions felt that the large number of changes to student funding occurring at the same time made it increasingly difficult to plan in the medium term. For example the combined impact of changes to student funding, particularly the replacement of maintenance grants with loans, may require institutions to adapt the investment that they make in relation to access, outreach and financial support to counteract the risk of any potential impact on recruitment. Some institutions also expressed concerns about what information they will need to provide to existing and prospective students about the range of changes to student funding and whether support will be provided by the government. It was felt that a key factor in the continuing increase in participation following the increase of fees, was communication of the income contingent nature of the student funding system and this message would need to be continued with the upcoming changes. Despite concerns related to the potential impact on recruitment, most institutions supported freezing the repayment threshold over the risk of alternative measures to reduce long-term costs to government, such as reducing student places or the level of funding per student. These last two measures would lead to negative impacts for students, government and universities. Responses reiterated the importance of protecting the removal of the cap on student numbers, as a first priority, which allowed institutions the flexibility to grow provision and innovate. f) The Tax payer? On its own, holding the repayment threshold for five years would result in a reduction in the long term cost of the student funding system to government and reduce national debt. In addition option 1 would contribute to the government s target to reduce national debt over the current parliament, and also lead to a greater reduction in long term costs to government of around 3.2 billion. As noted earlier many of the changes announced in the 2015 summer budget are likely to result in increased outlay on loans, and associated long term costs to government. In light of these changes, holding the repayment threshold for five years would have an important role in ensuring that the long term costs of student loans for the taxpayer remains within current limits and ensures a fair balance in the funding of higher education between taxpayers and graduates.

11 In its assessment of the impact of policies announced in the summer budget the IFS noted that the replacement of maintenance grants with loans increases their estimate of the long term costs to taxpayers of outlay on student loans from 39.2% under the current system 20 to 43.8%. Holding the repayment threshold for five years reduced this to 35.7%, with maintaining resources to institutions in real terms by increasing fees by inflation subsequently increasing this to 36.3%. Other options for controlling the long term costs of the student funding system for the taxpayer that have been used by the government in the past reductions in the unit of funding and controls on the number of places available to students both led to a negative impact on the opportunities available to individuals, the sustainability of universities and the delivery of skills required by the economy. Q3. Can you identify any equality issues introduced by these possible changes? Feedback from UUK member institutions noted that, to fully understand the potential impact on equality, the proposed changes would need to be considered within the broader changes in the higher education system (for example changes to the Disabled Students Allowance, changes to maintenance support etc.). It is therefore difficult to determine the impact that holding the repayment threshold for five years would have in isolation. Q4. Do you think the Government could mitigate the impact of the proposed changes for borrowers? If so, what do you consider those actions might be? (Please indicate all that you consider to be relevant) Do you have any other comments that might aid the consultation process as a whole? Please use this space for any general comments that you may have, comments on the layout of this consultation would also be welcomed. Feedback received from UUK member institutions was strongly in support of clearer communication regarding how the funding system worked, which could mitigate any impact of the proposed changes. It was also felt that the government needed to be more upfront and transparent regarding the potential need to vary repayment parameters in the future (as outlined in the terms and conditions of the loan), particularly in response to fiscal, social, economic and policy changes to ensure the financial sustainability of the higher education funding system. UUK supports a more transparent process of reviewing parameters and the sustainability of the student funding system. This process should consider affordability of study for students and of repayments for graduates, the long term costs to government and the provision of stable and sustainable funding to higher education providers for teaching and learning. Other suggestions for mitigating the impact of the proposed changes for borrowers included: 20 The current government estimate of this long term cost is 45%

12 Clearer communication with borrowers regarding their financial commitments with greater information made available on repayments and a much simpler process offered to allow students to make early repayments. A better understanding of the impact of repayments on graduates as they move through their careers, and face other financial commitments. Feedback from institutions suggested that the views of these individuals towards higher education will play an increasingly important role in the public perception of benefits of higher education in the future.