Student loans: the scope for a more progressive loan scheme in Scotland

The various things governments in the UK do to subsidise the student loan scheme benefit different groups of students in different ways.

Nicholas Barr and colleagues at the LSE have argued persuasively  that the income threshold and, particularly,  the write-off period for student loans have a progressive effect, by reducing the repayments taken from lower-income graduates, while by contrast the interest rate subsidy most benefits higher earners.  To summarise a complex set of arguments worth reading in full, that’s  essentially because if you never repay your original loan in full, it is irrelevant how much interest it has racked up: you’ll never have to deal with that.  By contrast if you earn enough to pay off the whole loan, you will notice the difference between lower and higher interest rates.  This is likeliest to apply to higher earners.

Barr’s arguments about the interest rate possibly apply less strongly  in Scotland.  That’s partly because graduates here are more likely to have to repay all their borrowing, because the total amounts borrowed are not as high as now expected in England.  Also, because we expect students from the poorest homes to take on a disproportionate  share of the debt,  a higher interest rate will tend to hit that group hardest.   But the point that  investing in a higher threshold or a shorter write-off period will  benefit future  lower earners most remains one worth taking seriously.

How does the Scottish version of the scheme compare, on those terms?  It has in fact the least progressive combination of factors in the UK.  Like Northern Ireland, Scotland has kept to a lower repayment threshold. But it also has the longest period before write-offs of any part of the UK (35 years).  Meantime, again like NI, it involves the highest interest rate subsidy.  The effects of this are shown in some modelling produced by the Scottish Parliament Information Centre SP13-78, which demonstrated that at the moment at lowest two earnings deciles, a Scottish graduate borrowing £16,000 will end up paying back more than an English student who borrowed £36,000.

That happens because, for example,  at an income of £20,000 the Scottish graduate is paying back just over £20 pcm  (9% of earnings over £16,910, over 12 months) and the English one £0  (because they are earning below their higher threshold, of £21,000).  At £25,000 the Scottish student is paying around £60 pcm: the English one around £30 pcm  (9% of earnings over £21,000, over 12 months).  Combined with a faster write-off, a low-earning English graduate is therefore more sheltered from repayment.

Moving to a higher  threshold and/or writing off loans sooner – as in  the Plan 2 loan scheme – would be more progressive.  Both would put up the cost of the scheme. However, as noted here, there is plenty of room in the RAB charge assigned to Scotland to absorb some extra cost. It’s hard to estimate what would be the effect on the RAB of  a higher threshold or a shorter write-off period: but at first sight these things ought to be affordable.

As far the technical issues go, the Scottish Government ought to be able to choose to move to the threshold for Plan 2.  Shortening  the write-off period also ought to be fully within its gift.

The interest rate would also simply be a matter for it to negotiate with the Student Loans Company.   On Barr’s arguments, there would also be a case for looking again at the relatively high interest rate subsidy, to counter-balance the cost of other changes, but perhaps not until we have sorted out the regressive underlying distribution of debt.  Noting that higher interest rates are used in some other countries, including Sweden, Barr offers various alternative models to the current interest rate arrangements.

Addressing Scotland’s unusually regressive graduate debt distribution would involve finding cash funds for student grants on a scale it is hard to see materialising any time soon.

But non-cash resources appear to be available now  which could be used to improve the protection for low earners in the Scottish version of the student loan scheme.  It would at least be good to know what it would cost to do that.

Scotland is not wholly exempt from engaging with the bigger debate about the long-term effects on public finances of using student loans,  how much reliance can safely be put on the system without storing up significant  problems for the future  and how loans subsidies for full-time students in higher education should be prioritised over other types of spend.  England, it might be said, is stress testing that model right now.  The devolved administrations have been more cautious, but unable to ignore entirely the way loans help plug immediate gaps in their budgets.  At the level of the overall budget, making a bit more use of student loan looks like reasonable choice in Scotland, Wales and Northern Ireland (even if the way we have chosen to distribute that debt in Scotland is problematic). But that’s no reason to avoid subjecting our own use of student loans to a bit of critical scrutiny.