By Trevor Clawson.
Student loans are in play again. In January of this year, the Prime Minister announced a review of student finance and the Higher Education Commission appointed to examine the issue has since reported back with a recommendation that fees should be capped at £6,500 per annum. That’s potentially very good news for the next generation of students who should also see a reduction in their borrowing, but it will mean little to those who are already committed to finance plans.
But some students are being offered an opportunity to clear their dates early. According to a report on the Money Saving Expert website, student loan management company Erudio has been writing to former students and inviting them to settle their debts, simply by paying some of the money they owe. It sounds like a good deal, but because of the rules surrounding student finance, those who take advantage of the offer may lose out financially.
The Student Debt Problem
According to a highly critical report on student finance by the House of Lords Economic Affairs Committee, the student debt loan book is set to rise to around £1 trillion by 2044. And as the Committee pointed out in June, a high percentage of that sum will never be repaid because debts are written off after a fixed period. For instance, in the case of students who attended university from 2012 onwards, any remaining debt is wiped off the slate after 30 years. The Economic Affairs Committee warns that as lending to students continues to rise the taxpayer will ultimately have to foot the bill for any underpayment.
So it’s perhaps not surprising that student loan administrators are keen to ensure that as much money as possible is repaid.
Which brings us back to Erudio. The company’s offer is aimed at students who borrowed between 1990 and 1998 when a very different system was in place. Today, the amount that a student repays is dictated by income bands. In the 1990s, however, the monthly repayments were fixed, regardless of the former student’s earnings. There were, however, a couple of sweeteners. Borrowers would not be required to make a monthly payment if their incomes fell below a certain threshold.
Despite statistics showing that graduates earn more, many students from that era are not earning above the threshold that triggers repayment – currently set at £30,737 – and have therefore repaid little or nothing.
It is to this group that Erudio has been writing, offering borrowers a chance to essentially close their accounts by paying around half the outstanding liability. News of the offer has been bubbling up on social media sites, such as Mumsnet and Twitter over the last couple of months as recipients shared details of letters received from Erudio. And last week, the Money Saving Expert website confirmed that it had seen a number of these communications.
A Good Deal
Whether this represents a good deal or not depends partly on how much – if anything – former students have already paid and what they are likely to pay before the loan times out.
Under the rules covering this generation of student loans, the debt will be written off either 25 years after the final tranche of money was received, or when the borrower turns 50, whichever is the soonest. For those who took out the loans aged 40 or over, the loan is cancelled at the age of sixty.
Given that the loans date back to the 90s, many borrowers in this group are getting close to the point when their loans will be written off anyway, Thus settling on the basis of half the remaining liability could actually mean paying out more than is strictly necessary.
And there may be the second downside. Partial settlement agreements normally show up on credit scores, which could affect the ability of the borrower to secure finance – including student finance – in the future.
Money Saving Expert recommends anyone receiving a letter from Erudio, should think very carefully about whether it makes financial sense to opt for a partial settlement. The offer has also had a mixed response on social media.
Erudio is a private company that took over the management of 1990-98 student debt in 2013 and it has not escaped controversy. In May of this year, the Guardian newspaper reported that borrowers who deferred payment – due to earnings below the threshold – were told their details might be passed to credit reference agencies. This was not the practice of the Student Loan Company, which was the previous owner of the debt. It only passed on details in the event of an actual default.
Behind all this, is the bigger question of whether or not the student loan system as a whole is sustainable.
As the House of Lords Committee report has pointed out, the reformed regime – introduced by Chancellor George Osborne – allowed students to borrow for both living costs, plus fees up to £9,000. Unlike the alternative – a graduate tax to pay for higher education – a continuing system of loans looked good on the government’s books.
“Because of the accounting methods of the Treasury, it was possible for George Osborne to appear to increase funding for higher education by £3bn but at the same time cut his deficit by .8bn,” said committee chairman Lord Forsyth.
The sting in the tail for taxpayers is that unpaid loans will not show up on the Government’s accounts until the debts have actually been written off at some stage in the future. At that point, the difference between what is owed and what has been paid back will have to be accounted for. The upshot is, the financing of higher education could hit a crisis point.
And in the meantime, students borrowing under the new system have seen interest rates rise to 6.3%, well above the rate of less than 2.0% at which the government can borrow. The situation may ease for the next generation of students if the government accepts the recommendation of the Higher Education Commission that fees should be capped at £6,500. Lower fees should reduce debt levels, although it that wouldn’t necessarily mean that the repayment terms (in terms of income thresholds and write off periods) would be any more benign.
The search for a fair system of student finance continues.