Martin: Student loan statements are dangerous & misleading – so check out our redesign
MoneySavingExpert.com and the Russell Group of universities are piloting a proposed redesign of the student loan statement and are calling on parents, students, graduates and those in the higher education sector to test it and give feedback.
MSE and the Russell Group, which represents 24 UK universities, believe that this change should substantially enhance understanding of the student loan system for graduates and their families. We plan to present our findings to Government in the hope it will change the current student loan statements.
Currently, students simply receive a statement of their outstanding 'debt' and the interest that is being added. As an example, a low-earning graduate on a Plan 2 loan (for students in England and Wales who started university after 2012) would receive a statement with £50,000 of 'debt' on it, and would see it growing by £1,500 a year in interest. But in reality, a graduate earning under £25,000 would not have to make any repayments at all.
Instead, the redesigned Plan 2 statement focuses on the actual repayments that students have made, and what they are likely to repay in the future.
Martin: 'The current statement is misleading'
Martin Lewis, founder of MoneySavingExpert.com, said: "The student loan statement is misleading and dangerous. For most university leavers, their outstanding 'debt' is one of the least important figures, yet the statement only lists this and the interest added, panicking many into poor decisions that cost some £1,000s.
"In practice, university leavers repay 9% of everything earned above £25,000 for 30 years, unless they clear the debt before that. So whether you owe £10,000, £50,000 or £3 million, if you earn £30,000, you repay £450 a year. The only impact the 'debt's' size has is whether you'll clear what you owe before it wipes.
"And it's predicted that 83% of university leavers will keep paying for the full 30 years. Therefore, for most these loans work more like 9% extra tax than a debt. I'm not saying it's cheap, just that this is the practical financial reality – in fact, it's how most mortgage lenders and others assess these loans.
"I've long said the system should be renamed 'graduate contribution', a more accurate description, and our new statement shows this reality. The excessive focus on the language of 'debt' has disastrous consequences. It both inures young people to other, more dangerous borrowing and can mis-prioritise their finances.
"One woman told me her fear of the growing interest on her statement meant she used an inheritance to overpay thousands. Yet she was in a low-earning profession, with little likelihood of clearing much of the debt. Her overpayments were unlikely to have any impact on her future repayments, so she had effectively flushed her inheritance down the loo. If we are going to tell our youth that they're in debt, we must also educate them on what that actually means."
What will the new statement look like?
You can see a full pilot of the proposed redesign on this link.
The statement will start by saying: "This is your annual graduate contributions statement."
It will also include a section labelled "predictions of your likely future contributions", which will project how much the borrower could pay back and an "estimated contributions duration". This is the maximum length of time you can expect to make further payments over, because after a certain period of time, the amount you owe is wiped.
What happens next?
The survey will close at 5pm on 12 March. We will then analyse the results and refine the design further based on feedback.
Along with the Russell Group, we then plan to present our findings to Government, in the hope it will change the current student loan statements.
What does the Russell Group say?
Sarah Stevens, head of policy at the Russell Group, said: "The language of 'loans' and 'debt' can be misleading and difficult for students and their families to navigate.
"Because of the income-contingent features of the student finance system, tuition fee and maintenance loans do not resemble normal, commercial loans. Yet the way information on student finances is presented masks this: the current statement graduates receive every year emphasises the rapid accrual of interest on loans, but does not mention the Government's pledge to cover any amount that a graduate's salary does not enable them to repay.
"At the moment, a graduate's statement shows total 'debt', along with monthly interest which they will probably never pay back in full. This can be disheartening. The new approach we are proposing with MSE would be for statements to focus on a graduate's monthly repayments, and – based on their estimated earnings trajectory – the amount they are likely to actually repay overall.
"Changing the mechanics of how information is communicated to prospective students and graduates should help ensure that student debt is properly understood and avoid disadvantaged young people being wrongly put off university because they assume they cannot afford it.
"With the Government reviewing arrangements for student finance, we hope that action to better communicate how the current system works could also help ensure the wider debate on fees and funding is better informed."