Monday, July 11, 2011

Prepayments on student tuition fees

There is pleasure (but not much) to be had from the spectacle of a Government department caught up in a web of its own contradictions. The Dept of Business, Innovation and Skills (BIS) is currently consulting on whether there should be a scheme for early repayment of tuition fees, and what should the rules be.

Recall that the current plan is that interest on student loans is to be charged at Retail Price Index plus 3%. BIS say:
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. That is why we are consulting on potential early repayment mechanisms – similar to those paid by people who pre-pay their mortgages.
This quote is an admission that the Government is rubbing its hands at the prospect of lots of lovely interest being paid on their loans, and don’t want to let people pay them off early. The word “progressive” has been hijacked to refer to a scheme for keeping us all in debt for as long as possible. (Should people who can buy houses without mortgages be prohibited from “unfairly” buying them without incurred interest payments?)

Digging deeper into the consultation document, we get:
These mechanisms would need to ensure that graduates on modest incomes who strive to pay off their loans early through regular payments are not penalised. For example, a five per cent levy might be charged on additional repayments each year over a specified amount such as £1,000 or £3,000. Alternatively, those on higher incomes (e.g. over £60,000) who made an additional repayment could be required to pay a five per cent levy on this sum.

Further down, they admit that there’s a case in favour of allowing early repayments, in that “It allows graduates on modest incomes to pay off their loans early.” Here they flat-out contradict themselves by admitting that people should actually be encouraged to pay their debts. Provided, that is, you’re on a “modest income” — if someone who could actually afford to repay tries to do so, well, that would just not be cricket.

I could go on, but there’s no need to; for anyone who wants to read further criticism there are some good responses on the web site; I recommend the comment by Tim Leunig.

1 comment:

Richard Baron said...

This is a classic case of a government department (or two - the Treasury will be in on this one) trying to achieve everything at once. They want their money back eventually, they want to lend at a rate that is higher than the rate at which the Crown can borrow, but they also want to build in progressivity.

If you could do everything at once, you might end up with the optimal outcome, given your policy objectives. But you might not, and in any case, when you build more and more objectives into the design of a single policy instrument, they start to interfere with one another (as with welcoming early repayment from some but deterring it from others).

So a much more sensible approach is to separate the objectives, and to use separate instruments to achieve them. Make the loan system simply a lending operation, and get progressivity through the income tax system.

The overall result is likely to be sub-optimal, although you may achieve optima in lending and in progressivity considered separately. But that is life. It is a big mistake in government not to accept imperfection.