This piece first appeared in The Daily Telegraph on 23 November 2002
The text here may not be identical to the published text

Degrees of difficulty over funding studies

New loans scheme could mean students pay back too much

Students who graduated since September 2001 will never know exactly how much they owe on their student loan and may continue to have money deducted from their pay for a year or more after the loan is paid off.

The problem lies in the new system of student support which began for anyone entering higher education from September 1 1998. Most of those people will have graduated in September 2001, though some students – including those who gave up their studies early and teachers doing one year PGCE courses – will have been repaying their loan under the new system for more than two years – and may have repaid it already without knowing.

The new Student Support Scheme works completely differently from the original student loans which began in 1990. Under the old system – now renamed ‘Mortgage Style Loans’ – the student has a debt to the Student Loans Company which is repaid at a fixed amount once they graduate and earn more than around £1752 gross a month. The Student Loans Company could always tell graduates how much they owed, could quickly give them an early settlement figure, and knew at once when the loan was paid off.

The new system is completely different. Student loan repayments begin at the start of the tax year in the April after the student graduates or leaves their course. So the first graduates under the new system started paying their loan off in April this year. Once their gross pay is more than £833 in a month or £192 in a week their employer is obliged to deduct 9% of the excess and pass it to the Inland Revenue along with tax and National Insurance contributions. No money is paid to the Student Loans Company. At the end of each tax year the Inland Revenue does its sums and in July or August informs the SLC how much each graduate has paid towards their loan during the tax year. The SLC then adds interest on to the loan each day and deducts the payments as they are made to come up with a final outstanding balance on the loan at the end of the tax year – the previous April 5. It then sends an Annual Statement to each graduate during September, by which time the figure for the outstanding loan up to six months out of date and will be eighteen months out of date before the next statement is received. The result is that the SLC can never tell a graduate how much he or she owes and cannot give them a precise settlement figure if they want to clear their debt.

The SLC admits it cannot give ex-students a current balance and recommends they should work out the amount themselves. Its website advises "By totalling the deductions shown on your pay slips from the balance shown on your latest annual statement you will be able to calculate your current balance". That advice is wrong – it omits the addition of interest to the total which can be significant. Someone who graduated in September 2001 with the maximum three year loan of £11,605 and earning a salary of £17,000 would start paying off the debt in April 2002 and in the five months to August pay off around £260. However, they would have been charged interest over the whole year at 2.3% – almost exactly the same amount as they had paid off. So following the SLC guidance they would expect their loan to be reduced by £260. In fact it would not have changed at all.

There are even bigger problems ahead. Because the SLC does not know from day to day how much students owe, it cannot be precise about when the loan is paid off. Calculations by The Daily Telegraph show that someone who studied in London for three years and graduated this year with the maximum loan of £13,165 who got a job at once on a salary of £20,000 which rose by 5% each year would pay off their loan around July 2012. But nothing would be done until the Inland Revenue had done its calculations in April 2013, told the SLC in July 2013 and by the time the student, the Inland Revenue, and then the employer had been informed to stop deducting the money, more than £2000 too much would have been collected. Similar problems face anyone who wants to pay off their loan – or whose parents want to do so. At no stage can the SLC confirm how much that will cost.

The Department for Education and Skills has told the Daily Telegraph that it is working with the SLC to devise a system "to enable borrowers to work out what they owe at any one time and the likely date to send a stop notice to the Inland Revenue to stop/minimise employer over-collection." No date is set for its introduction.

The interest charged on all student loans is set each from 1 September each year at the rate of inflation the previous March. From 1 September this year that is 1.3% and prior to that it was 2.3%.

At then end of March 2001, the student loans company cost £35mn a year to run and employed just over 550 staff. It administered nearly £8bn of student debt.

More information from Student Loans Company

23 November 2002

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