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Principle, not principal

January 29, 2011 Leave a comment Go to comments

There is much to be disgruntled with when it comes to the coalition government plan for university funding. I cannot better a number of criticisms made by Stefan Collini in the London Review of Books, which you should be able to read here.

But the one thing I am pretty unconcerned with is the increase in tuition fees. If a student loan was like a commercial loan, I would agree that this increase would be a bad thing. With a commercial loan, you are incurring a liability which you have to service no matter how onerous that may be. If you have a £200,000 mortgage and lose your job, payments still have to be made. You can’t say ‘give me six months and I’ll be able to get it to you’, it’s just tough luck. Debt can be frightening because it creates a predetermined nominal liability which you will have to pay no matter what. I am extremely fortunate to be completely debt-free, bringing with it considerable freedom when it comes to deciding what I want to do with my life.

However, I cannot emphasize enough that a student loan is not like normal commercial debt. It is repaid with a 9% tax over £15,000 (to rise to £21,000 with the new plan), which you pay until you have paid off the principal with any accrued interest. Any remaining debt is forgiven after 30 years. What this means is that high earners will pay significantly more money to the government in a short space of time, whereas low earners pay much less per year and will likely do so until the debt is forgiven. With the change, everyone will pay less per year and for slightly longer (unless you wouldn’t have paid off after 30 years anyway).

Now, to me this is probably not the fairest way fund universities. That 9% tax for graduates with fairly unspectacular earnings will take a big chunk out of the paychecks of those who do not initially earn very much but earn more as they get older. Those that come out of university with well-paying jobs will have already paid it off by that point. So I think it is safe to say the system isn’t fair. But I think the fear that potential students have that they ‘cannot afford’ university is the result of sloppy thinking and, frankly, terrible marketing. If you can’t afford the payment, you don’t have to make it! The financial liability you are assuming by going to university is a tax, and the role of the principal and interest is to determine how long you have to pay the tax for. That’s it.

To see how it is misleading to think about the liability as a loan, consider the recent rise in the top rate of tax from 40% to 50% for income over £150,000. Now, suppose actually what happened was the government said to everyone in the country you now have to pay a £100bn poll tax in order to stay in the country. But it’s OK, the government will lend you the money, with interest to be calculated at the RPI. But, instead of it being a normal commercial loan, we’ve decided that you just pay an additional 10% on income over £150,000 until you pay back the loan (which will be never).

This is functionally equivalent to increasing the top rate of tax by 10%.

So you see how irrelevant the principal is until you consider the actual payment profile. I simply cannot find it utterly beyond the pale to make what is effectively a tax cut (for a single year, at least) in exchange for having to pay that tax for more years of your life. Any unfairness in the payment profile positively pales in comparison to the other flaws in the proposal, as pointed out by Collini and numerous others. I submit that the outrage in the government’s plan be directed not to the principal of the loan, but towards the incoherence of the principles on which it is ostensibly based.

Categories: Policy
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  1. April 12, 2012 at 10:36 am

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