Early student loan repayment is fair
by Matt Grist
There is a lot of nonsense being talked and tweeted about how the Government’s decision not to charge a penalty for early repayment of student loans is a victory for the rich and will mean lower-earning students paying more than rich ones. To follow this line of argument is to miss some fairly practical and very fundamental points about how the repayment settlement will work.
The first thing to say is that rich students won’t be paying less because they pay back their loans more quickly, they will pay less because they will simply not take out loans in the first place; they will pay upfront. There was a time when it might have made financial sense to take out student loans, invest them, then pay them back upon graduation. Not anymore. From the day you take the loan out you are charged inflation plus 3 per cent until the April following graduation when you will pay the rate of inflation, rising gradually to that plus 3 per cent at an annual income of £41,000. It makes no financial sense to borrow at somewhere around 7-8 per cent and invest the money – you’ll never get that kind of return from any kind of reliable investment.
So if it won’t be those with inherited wealth sloshing around the place that benefit from the no-penalty-charge policy, who will it be?
Well, anyone who earns more than £41,000 and pays off their loan early will save themselves the higher interest payments they would have made. Yet they will still have paid 3 per cent more interest prior to full repayment than someone earning £21k a year. Early repayers will also be helping the Treasury out by refilling its coffers more quickly, freeing up funding for more university places – itself a ‘progressive’ goal.
What’s more, imagine you inherit £30k from your grandmother. Should you be fined for being financially prudent and paying down your debt? We have legislated against banks penalising such prudence, why should the Government abide by different rules?
The worst piece of nonsense I have seen on this topic came from Liam Burns, president of the National Union of Students, who said:
“Ministers must come clean on student finance to ensure those on low and middle-incomes are not duped into chipping away at their outstanding debt … It rarely makes financial sense to do so, particularly for those who are seeking to get on the housing ladder or start a family.”
This is incredibly patronising – the implication being that low and middle earners are too lazy or stupid to visit moneysavingexpert.com and so can be ‘duped’, whereas wealthier graduates are too smart to fall into such a trap.
And this is perhaps the nub of the issue. Early repayment is a decision for individuals: the Government should not be deciding for people how they manage their debts. You may disagree with the idea of raised tuition fees and that is a perfectlly legitimate position to take. But there are far too many people contributing to this debate whose real beef is with higher earners having more disposable income. That is a beef with capitalism in general, not policy on student loans.