Opinion: Vince Cable right to abandon penalties on early student loan repayments

Vince Cable has done the right thing, for the right reasons.

The new student loan system requires well off graduates to pay a higher rate of interest on their loans – up to three percent above inflation. This helps to cover the government losses on loans to graduates who end up on low incomes – overwhelmingly women working part time after having children – as well as making the system more progressive.

Cable was worried that well off graduates would pay off their loan early, to avoid paying the interest charges. He commissioned his department to look into creating early repayment penalties. As the consultation said:

“We are committed to the progressive nature of the repayment mechanism. It is therefore important that those on the highest incomes after graduation are not able unfairly to buy themselves out of this progressive mechanism by paying off their loans early.”

Having looked at the evidence, the government has decided not to proceed. That is the right decision.

Surprisingly, people who make additional early repayments are not, typically, well off. The average person making an early repayment is aged 25 and earns less than £20,000 a year. The average repayment is £900. These people repay because they don’t like being in debt. Once in a while they find that they have £500 or £1000 spare and decide to pay off some of their student debt. To penalise these people would be bizarre.

The government could have applied the repayment penalty only to those earning (say) more than £40,000 a year. But a penalty like that would have affected only a small minority of borrowers. It would have been gesture politics. In any case, a rich person faced with paying interest at three percent above inflation every year, or a one off charge of five percent would still choose to repay. The penalty would raise little money and fail to change behaviour.

Finally, a penalty would have sent out a bizarre signal – that the government wanted people to stay in debt, so that it could make money from them. It is hard to see that as ethical, or in keeping with Cable’s long standing belief that debt has been too big a feature of the economy.

On this occasion, ministers consulted, looked at the evidence, and made the right decision. Wouldn’t it be great if they always behaved like that?

* Tim Leunig is Chief Economist at CentreForum. He served as an advisor to the Barker Review on Land Use, and is a former Inside Housing columnist.

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14 Comments

  • Language is important and so are definitions. Tuition fees are, by strict definition, regressive. Removing the early repayment charges makes the system more regressive.

    An unfair system has become more unfair and has moved further away from being a graduate tax.

  • Keith Browning 17th Feb '12 - 11:54am

    Surely tuition fees and the loan system only have two basic functions.

    1. To fund our system of higher education.

    2. Enable anyone with the ability and the desire to attend a University.

    People who then try to add the class war or financial niceties to these basic aims are only going to undermine what seems quite a simple system that might work.

    I am not in favour of tuition fees but the loan system does give access to ALL. I just wish the government and the party had explained it properly to the media.

    Well done Vince – let people decide on their own financial management.

    ‘Keep it simple stupid’ is always the best policy.

  • Richard Hill 17th Feb '12 - 1:10pm

    I’m very much for the “keep it simple” approach. Once you create one exception more exceptions will be thought of and, before most people realise, it we will become a very complex and expensive to manage system. It would soon cost everybody more and probably stop helping the people who needed it the most because of its complexity, compare it with the benifit system.
    I think that most of the people that pay it back early will just be hard working individuals that want to clear their dept,why punish them for some vague idealistic dream?

  • Though of course this does make it even harder to pretend that this is really a graduate tax in all but name.

  • So now it is not just a tax on being brainy and young. It is a tax on being brainy, young AND less well off!

    It is the perfect tax to clobber Lib Dem voters with while leaving tory voter’s pockets unaffected!

  • Old Codger Chris 17th Feb '12 - 5:21pm

    A Graduate Tax would have been the simple solution. And better as a concept than Debt.

  • So 25 year olds earning 20k happen to find themselves with a spare £1000 … they might not be well off but its fair bet that their family is. Not many 25 year olds earning 20k have that kind of spare cash.

  • >On this occasion, ministers consulted, looked at the evidence, and made the right decision. Wouldn’t it be great if they always behaved like that?

    Lets hope Cable is consistent and follows through by refusing to appoint Ebdon, as advised by the BIS committee…

  • Ian: The “official” answer to your question is in Vince Cable’s message that we covered last year – https://www.libdemvoice.org/vince-why-im-saying-no-to-the-graduate-tax-21535.html

  • There is a £450m a year reason NOT to support a graduate tax:

    All European students would be able to study in the UK, and not pay a penny towards their education unless they decided to live here afterwards. There are currently 65k EU undergrads in UK universities, which means the UK taxpayer would have to pay £450m each year to cover their tuition fees (based on £7k cost).

    Once UK univs were free, we would expect this number to rise, perhaps substantially. So the real cost of moving to a grad tax would be over half a billion a year. I think everyone can think of better things to do with that money.

  • I agree with this article, and I am frankly embarrassed to hear news reports saying that it was the Lib Dems who wanted to impose early repayment charges and the Tories who opposed them.

    Whether or not you support a graduate tax, and my own preference is for a tax on high earners ie no tuition fees at all, the early repayment charges coupled with a potentially penal rate of interest were always illiberal, and the sort of thing that if offered by a commercial lender would have been struck down as grossly unfair if not downright dishonest.

  • So we are all in it together. Still!

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